filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Quintiles Transnational Holdings Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, management used the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2014, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
| /s/ Thomas H. Pike | /s/ Kevin K. Gordon | |
| Thomas H. Pike | Kevin K. Gordon | |
| Chief Executive Officer | Executive Vice President and Chief Financial Officer | |
| (Principal Executive Officer_)_ | (Principal Financial Officer) |
February 12, 2015
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Quintiles Transnational Holdings Inc.:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Quintiles Transnational Holdings Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our audits (which was an integrated audit in 2014). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 12, 2015
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
| Service revenues | $ | 4,165,822 | $ | 3,808,340 | $ | 3,692,298 | ||||||
| Reimbursed expenses | 1,294,176 | 1,291,205 | 1,173,215 | |||||||||
| Total revenues | 5,459,998 | 5,099,545 | 4,865,513 | |||||||||
| Costs of revenue, service costs | 2,684,106 | 2,471,426 | 2,459,367 | |||||||||
| Costs of revenue, reimbursed expenses | 1,294,176 | 1,291,205 | 1,173,215 | |||||||||
| Selling, general and administrative | 882,338 | 860,510 | 817,755 | |||||||||
| Restructuring costs | 8,988 | 14,071 | 18,741 | |||||||||
| Income from operations | 590,390 | 462,333 | 396,435 | |||||||||
| Interest income | (3,410 | ) | (3,937 | ) | (3,067 | ) | ||||||
| Interest expense | 100,589 | 123,508 | 134,371 | |||||||||
| Loss on extinguishment of debt | — | 19,831 | 1,275 | |||||||||
| Other (income) expense, net | (8,978 | ) | (185 | ) | (3,572 | ) | ||||||
| Income before income taxes and equity in earnings (losses) of unconsolidated affiliates | 502,189 | 323,116 | 267,428 | |||||||||
| Income tax expense | 150,056 | 95,965 | 93,364 | |||||||||
| Income before equity in earnings (losses) of unconsolidated affiliates | 352,133 | 227,151 | 174,064 | |||||||||
| Equity in earnings (losses) of unconsolidated affiliates | 4,368 | (1,124 | ) | 2,567 | ||||||||
| Net income | 356,501 | 226,027 | 176,631 | |||||||||
| Net (income) loss attributable to noncontrolling interests | (118 | ) | 564 | 915 | ||||||||
| Net income attributable to Quintiles Transnational Holdings Inc. | $ | 356,383 | $ | 226,591 | $ | 177,546 | ||||||
| Earnings per share attributable to common shareholders: | ||||||||||||
| Basic | $ | 2.78 | $ | 1.83 | $ | 1.53 | ||||||
| Diluted | $ | 2.72 | $ | 1.77 | $ | 1.51 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 127,994 | 124,147 | 115,710 | |||||||||
| Diluted | 131,083 | 127,862 | 117,796 |
The accompanying notes are an integral part of these consolidated financial statements.
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands) | ||||||||||||
| Net income | $ | 356,501 | $ | 226,027 | $ | 176,631 | ||||||
| Unrealized (losses) gains on marketable securities, net of income taxes of ($376), $2,016 and $258 | (600 | ) | 3,225 | 400 | ||||||||
| Unrealized (losses) gains on derivative instruments, net of income taxes of ($1,767), ($751) and ($4,392) | (5,067 | ) | 358 | (6,306 | ) | |||||||
| Foreign currency translation, net of income taxes of ($2,101), ($2,465) and $2,964 | (47,807 | ) | (22,663 | ) | (8,983 | ) | ||||||
| Defined benefit plan adjustments, net of income taxes of ($2,981), ($131) and ($1,444) | (7,237 | ) | 2,278 | (3,172 | ) | |||||||
| 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 $4,022, $4,991 and $1,313 | 4,608 | 8,089 | 2,188 | |||||||||
| Amortization of prior service costs and losses included in net income, net of income taxes of $275, $389 and $446 | 468 | 655 | 723 | |||||||||
| Comprehensive income | 297,789 | 217,969 | 161,481 | |||||||||
| Comprehensive (income) loss attributable to noncontrolling interests | (121 | ) | 551 | 889 | ||||||||
| Comprehensive income attributable to Quintiles Transnational Holdings Inc. | $ | 297,668 | $ | 218,520 | $ | 162,370 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands, except per share data) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 867,358 | $ | 778,143 | ||||
| Restricted cash | 2,882 | 2,712 | ||||||
| Trade accounts receivable and unbilled services, net | 975,255 | 924,205 | ||||||
| Prepaid expenses | 44,628 | 42,801 | ||||||
| Deferred income taxes | 118,515 | 92,115 | ||||||
| Income taxes receivable | 45,357 | 16,171 | ||||||
| Other current assets and receivables | 92,088 | 89,541 | ||||||
| Total current assets | 2,146,083 | 1,945,688 | ||||||
| Property and equipment, net | 190,297 | 199,578 | ||||||
| Investments in debt, equity and other securities | 34,503 | 40,349 | ||||||
| Investments in and advances to unconsolidated affiliates | 31,508 | 22,927 | ||||||
| Goodwill | 464,434 | 409,626 | ||||||
| Other identifiable intangibles, net | 280,243 | 298,054 | ||||||
| Deferred income taxes | 35,972 | 32,864 | ||||||
| Deposits and other assets | 122,792 | 117,711 | ||||||
| Total assets | $ | 3,305,832 | $ | 3,066,797 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 108,743 | $ | 100,616 | ||||
| Accrued expenses | 733,644 | 761,189 | ||||||
| Unearned income | 543,305 | 538,585 | ||||||
| Income taxes payable | 55,694 | 35,778 | ||||||
| Current portion of long-term debt and obligations held under capital leases | 826 | 10,433 | ||||||
| Other current liabilities | 29,688 | 35,646 | ||||||
| Total current liabilities | 1,471,900 | 1,482,247 | ||||||
| Long-term debt and obligations held under capital leases, less current portion | 2,292,491 | 2,035,586 | ||||||
| Deferred income taxes | 61,797 | 37,541 | ||||||
| Other liabilities | 183,656 | 178,908 | ||||||
| Total liabilities | 4,009,844 | 3,734,282 | ||||||
| Commitments and contingencies (Note 1) | ||||||||
| Shareholders’ deficit: | ||||||||
| Common stock and additional paid-in capital, 300,000 shares authorized, $0.01 par value, 124,129 and 129,652 shares issued and outstanding at December 31, 2014 and 2013, respectively | 143,828 | 478,144 | ||||||
| Accumulated deficit | (788,798 | ) | (1,145,181 | ) | ||||
| Accumulated other comprehensive loss | (59,091 | ) | (376 | ) | ||||
| Deficit attributable to Quintiles Transnational Holdings Inc.’s shareholders | (704,061 | ) | (667,413 | ) | ||||
| Noncontrolling interests | 49 | (72 | ) | |||||
| Total shareholders’ deficit | (704,012 | ) | (667,485 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 3,305,832 | $ | 3,066,797 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands) | ||||||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 356,501 | $ | 226,027 | $ | 176,631 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 121,013 | 107,504 | 98,288 | |||||||||
| Amortization of debt issuance costs and discount | 6,688 | 21,825 | 9,237 | |||||||||
| Share-based compensation | 30,001 | 22,826 | 25,926 | |||||||||
| Gain on disposals of property and equipment, net | (975 | ) | (1,153 | ) | (541 | ) | ||||||
| (Earnings) loss from unconsolidated affiliates | (4,346 | ) | 1,004 | (2,499 | ) | |||||||
| (Gain) loss on investments, net | (4,797 | ) | (183 | ) | 70 | |||||||
| (Benefit from) provision for deferred income taxes | (6,168 | ) | (24,236 | ) | 16,595 | |||||||
| Excess income tax benefits from share-based award activities | (20,303 | ) | (16,204 | ) | (465 | ) | ||||||
| Change in operating assets and liabilities: | ||||||||||||
| Accounts receivable and unbilled services | (78,630 | ) | (151,681 | ) | (60,255 | ) | ||||||
| Prepaid expenses and other assets | (40,832 | ) | (18,576 | ) | (27,013 | ) | ||||||
| Accounts payable and accrued expenses | 45,804 | 107,047 | 58,345 | |||||||||
| Unearned income | 19,943 | 71,852 | 54,502 | |||||||||
| Income taxes payable and other liabilities | 7,855 | 47,319 | (13,120 | ) | ||||||||
| Net cash provided by operating activities | 431,754 | 393,371 | 335,701 | |||||||||
| Investing activities: | ||||||||||||
| Acquisition of property, equipment and software | (82,650 | ) | (88,347 | ) | (71,336 | ) | ||||||
| Acquisition of businesses, net of cash acquired | (92,201 | ) | (144,970 | ) | (43,197 | ) | ||||||
| Proceeds from disposition of property and equipment | 1,611 | 2,021 | 2,729 | |||||||||
| Purchase of equity securities | — | — | (13,204 | ) | ||||||||
| Proceeds from sale of equity securities | 5,861 | 60 | 70 | |||||||||
| Investments in and advances to unconsolidated affiliates, net of payments received | (4,472 | ) | (7,353 | ) | (3,646 | ) | ||||||
| Proceeds from (payments made for) sale of investment in unconsolidated affiliates | — | 2,335 | (577 | ) | ||||||||
| Other | (1,263 | ) | 78 | (3,072 | ) | |||||||
| Net cash used in investing activities | (173,114 | ) | (236,176 | ) | (132,233 | ) | ||||||
| Financing activities: | ||||||||||||
| Proceeds from issuance of debt | 275,000 | 2,060,755 | 2,441,017 | |||||||||
| Payment of debt issuance costs | (1,455 | ) | (2,607 | ) | (9,728 | ) | ||||||
| Repayment of debt | (30,157 | ) | (2,444,600 | ) | (1,995,472 | ) | ||||||
| Proceeds from revolving credit facility | 150,000 | — | — | |||||||||
| Repayment of revolving credit facility | (150,000 | ) | — | — | ||||||||
| Principal payments on capital lease obligations | (2,612 | ) | (3,812 | ) | (5,407 | ) | ||||||
| Contingent consideration paid | (3,000 | ) | — | — | ||||||||
| Issuance of common stock | — | 525,000 | 3,116 | |||||||||
| Payment of common stock issuance costs | (105 | ) | (35,439 | ) | — | |||||||
| Stock issued under employee stock purchase and option plans | 35,228 | 12,539 | 350 | |||||||||
| Repurchase of common stock | (415,131 | ) | (6,434 | ) | (13,363 | ) | ||||||
| Repurchase of stock options | (8,415 | ) | (50,649 | ) | — | |||||||
| Excess income tax benefits from share-based award activities | 20,303 | 16,204 | 465 | |||||||||
| Dividends paid to common shareholders | — | — | (567,851 | ) | ||||||||
| Net cash (used in) provided by financing activities | (130,344 | ) | 70,957 | (146,873 | ) | |||||||
| Effect of foreign currency exchange rate changes on cash | (39,081 | ) | (17,737 | ) | (5,166 | ) | ||||||
| Increase in cash and cash equivalents | 89,215 | 210,415 | 51,429 | |||||||||
| Cash and cash equivalents at beginning of period | 778,143 | 567,728 | 516,299 | |||||||||
| Cash and cash equivalents at end of period | $ | 867,358 | $ | 778,143 | $ | 567,728 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
| (Accumulated Deficit) | Accumulated Other Comprehensive (Loss) Income | Common Stock | Additional Paid-In Capital | Noncontrolling Interests | Total | |||||||||||||||||||
| (in thousands, except share data) | ||||||||||||||||||||||||
| Balance, December 31, 2011 (115,966,141 shares) | $ | (994,415 | ) | $ | 22,871 | $ | 1,160 | $ | — | $ | 788 | $ | (969,596 | ) | ||||||||||
| Issuance of common stock (306,025 shares) | — | — | 3 | 3,463 | — | 3,466 | ||||||||||||||||||
| Repurchase of common stock (508,656 shares) | — | — | (5 | ) | (13,358 | ) | — | (13,363 | ) | |||||||||||||||
| Share-based compensation | — | — | — | 25,774 | — | 25,774 | ||||||||||||||||||
| Income tax benefits from share-based award activities | — | — | — | 465 | — | 465 | ||||||||||||||||||
| Cash dividends paid to common shareholders | (554,903 | ) | — | — | (12,948 | ) | — | (567,851 | ) | |||||||||||||||
| Investment by noncontrolling interest | — | — | — | — | 580 | 580 | ||||||||||||||||||
| Net income | 177,546 | — | — | — | (915 | ) | 176,631 | |||||||||||||||||
| Unrealized gain on marketable securities, net of tax | — | 400 | — | — | — | 400 | ||||||||||||||||||
| Unrealized loss on derivative instruments, net of tax | — | (6,306 | ) | — | — | — | (6,306 | ) | ||||||||||||||||
| Reclassification adjustments, net of tax | — | 2,911 | — | — | — | 2,911 | ||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | (3,172 | ) | — | — | — | (3,172 | ) | ||||||||||||||||
| Foreign currency translation, net of tax | — | (9,009 | ) | — | — | 26 | (8,983 | ) | ||||||||||||||||
| Balance, December 31, 2012 (115,763,510 shares) | (1,371,772 | ) | 7,695 | 1,158 | 3,396 | 479 | (1,359,044 | ) | ||||||||||||||||
| Issuance of common stock (14,041,620 shares) | — | — | 141 | 537,398 | — | 537,539 | ||||||||||||||||||
| Stock issuance costs | — | — | — | (35,439 | ) | — | (35,439 | ) | ||||||||||||||||
| Repurchase of common stock (153,223 shares) | — | — | (2 | ) | (6,432 | ) | — | (6,434 | ) | |||||||||||||||
| Repurchase of stock options | — | — | — | (59,064 | ) | — | (59,064 | ) | ||||||||||||||||
| Share-based compensation | — | — | — | 20,784 | — | 20,784 | ||||||||||||||||||
| Income tax benefits from share-based award activities | — | — | — | 16,204 | — | 16,204 | ||||||||||||||||||
| Net income | 226,591 | — | — | — | (564 | ) | 226,027 | |||||||||||||||||
| Unrealized gain on marketable securities, net of tax | — | 3,225 | — | — | — | 3,225 | ||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | — | 358 | — | — | — | 358 | ||||||||||||||||||
| Reclassification adjustments, net of tax | — | 8,744 | — | — | — | 8,744 | ||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | 2,278 | — | — | — | 2,278 | ||||||||||||||||||
| Foreign currency translation, net of tax | — | (22,676 | ) | — | — | 13 | (22,663 | ) | ||||||||||||||||
| Balance, December 31, 2013 (129,651,907 shares) | (1,145,181 | ) | (376 | ) | 1,297 | 476,847 | (72 | ) | (667,485 | ) | ||||||||||||||
| Issuance of common stock (2,068,608 shares) | — | — | 21 | 35,281 | — | 35,302 | ||||||||||||||||||
| Stock issuance costs | — | — | — | (105 | ) | — | (105 | ) | ||||||||||||||||
| Repurchase of common stock (7,591,175 shares) | — | — | (76 | ) | (415,055 | ) | — | (415,131 | ) | |||||||||||||||
| Share-based compensation | — | — | — | 25,315 | — | 25,315 | ||||||||||||||||||
| Income tax benefits from share-based award activities | — | — | — | 20,303 | — | 20,303 | ||||||||||||||||||
| Net income | 356,383 | — | — | — | 118 | 356,501 | ||||||||||||||||||
| Unrealized loss on marketable securities, net of tax | — | (600 | ) | — | — | — | (600 | ) | ||||||||||||||||
| Unrealized loss on derivative instruments, net of tax | — | (5,067 | ) | — | — | — | (5,067 | ) | ||||||||||||||||
| Reclassification adjustments, net of tax | — | 1,999 | — | — | — | 1,999 | ||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | (7,237 | ) | — | — | — | (7,237 | ) | ||||||||||||||||
| Foreign currency translation, net of tax | — | (47,810 | ) | — | — | 3 | (47,807 | ) | ||||||||||||||||
| Balance, December 31, 2014 (124,129,340 shares) | $ | (788,798 | ) | $ | (59,091 | ) | $ | 1,242 | $ | 142,586 | $ | 49 | $ | (704,012 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The Company
Conducting business in approximately 100 countries with approximately 32,600 employees, Quintiles Transnational Holdings Inc. (together with its subsidiaries, the “Company”) is a provider of pharmaceutical development services and commercial outsourcing services that helps its biopharmaceutical customers, as well as customers in the broader healthcare industry, to make decisions regarding drug development, commercialization and drug therapy choices. The Company also offers a number of services designed to address the outcomes and analytical needs of the broader healthcare industry.
Reclassifications
Certain immaterial prior period amounts have been reclassified to conform to the current period presentation. These changes had no effect on previously reported total revenues, net income, comprehensive income or shareholders’ deficit.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company and its subsidiaries. Amounts pertaining to the noncontrolling ownership interests held in third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as noncontrolling interests. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. These estimates are based on historical experience and various other assumptions believed reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.
Foreign Currencies
The Company’s financial statements are reported in United States dollars and, accordingly, fluctuations in exchange rates will affect the translation of its revenues and expenses denominated in foreign currencies into United States dollars for purposes of reporting its consolidated financial results. Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to the accumulated other comprehensive income (loss) (“AOCI”) component of shareholders’ deficit. The Company is subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of a transaction. The Company earns revenue from its service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company’s profitability with respect to such contracts. Other (income) expense, net includes foreign currency net losses for 2014, 2013 and 2012 of approximately $4.9 million, $4.0 million and $1.1 million, respectively.
Cash Equivalents, Restricted Cash and Investments
The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents. The Company’s restricted cash primarily consisted of amounts collateralizing standby letters of credit issued in favor of certain suppliers and health insurance funds. Investments in marketable equity securities are classified as available-for-sale and measured at fair market value with net unrealized gains and losses recorded in the AOCI component of shareholders’ deficit until realized. The fair market value is based on the closing price as quoted by the respective stock exchange. In addition, the Company has investments in equity securities of companies for which there are not readily available market values and for which the Company does not exercise significant influence or control; such investments are accounted for using the cost method. Any gains or losses from the sales of investments or other-than-temporary declines in fair value are computed by specific identification.
Equity Method Investments
The Company’s investments in and advances to unconsolidated affiliates are accounted for under the equity method if the Company exercises significant influence or has an investment in a limited partnership that is considered to be greater than minor. These investments and advances are classified as investments in and advances to unconsolidated affiliates on the accompanying consolidated balance sheets. The Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in earnings of unconsolidated affiliates on the accompanying consolidated statements of income. The Company reviews its investments in and advances to unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Derivatives
The Company uses derivative instruments to manage exposures to interest rates and foreign currencies. The Company also holds freestanding warrants. Derivatives are recorded on the balance sheet at fair value at each balance sheet date utilizing pricing models for non-exchange-traded contracts. At inception, the Company designates whether or not the derivative instrument is an effective hedge of an asset, liability or firm commitment which is then classified as either a cash flow hedge or a fair value hedge. If determined to be an effective cash flow hedge, changes in the fair value of the derivative instrument are recorded as a component of AOCI until realized. We include the impact from these hedges in the same line item as the hedged item on the consolidated statements of cash flows. Changes in fair value of effective fair value hedges are recorded in earnings as an offset to the changes in the fair value of the related hedged item. Hedge ineffectiveness, if any, is immediately recognized in earnings. Changes in the fair values of derivative instruments that are not an effective hedge are recognized in earnings. The Company has entered, and may in the future enter, into derivative contracts (swaps, forwards, calls or puts, warrants, for example) related to its debt, investments in marketable equity securities and forecasted foreign currency transactions.
Billed and Unbilled Services and Unearned Income
In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, which may or may not correspond to the timing of the performance of services under the contract. Unbilled services arise when services have been rendered for which revenue has been recognized but the customers have not been billed.
In some cases, payments received are in excess of revenue recognized. Payments received in advance of services being provided are deferred as unearned income on the consolidated balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized, the unearned income balance is reduced by the amount of the revenue recognized during the period.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts is determined based on a variety of factors that affect the potential collectability of the related receivables, including length of time the receivables are past due, customer credit ratings, financial stability of the customer, specific one-time events and past customer history. In addition, in circumstances where the Company is made aware of a specific customer’s inability to meet its financial obligations, a specific allowance is established. The accounts are individually evaluated on a regular basis and appropriate reserves are established as deemed appropriate based on the above criteria.
Receivables Financing Facility
Advances received under the Company’s receivables financing facility are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. The Company services the collateralized accounts receivable and the cash flows for the underlying receivables are included in cash provided by operating activities. The collateralized accounts receivable are included in trade accounts receivable and unbilled services, net.
Business Combinations
Business combinations are accounted for using the acquisition method, and accordingly, the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree are recorded at their estimated fair values on the date of the acquisition. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. When a business combination involves contingent consideration, the Company recognizes a liability equal to the estimated fair value of the contingent consideration obligation at the date of the acquisition. Subsequent changes in the estimated fair value of the contingent consideration are recognized in earnings in the period of the change.
Long-Lived Assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life or the lease term, if related to leased property, as follows:
| Buildings and leasehold improvements | 3 - 40 years | |||
| Equipment | 3 - 10 years | |||
| Furniture and fixtures | 5 - 10 years | |||
| Motor vehicles | 3 - 5 years |
Definite-lived identifiable intangible assets are amortized primarily using an accelerated method that reflects the pattern in which the Company expects to benefit from the use of the asset over its estimated remaining useful life as follows:
| Trademarks and trade names | 3 - 7 years | |||
| Product licensing and distribution rights | 1 year | |||
| Non-compete agreements | 1 - 4 years | |||
| Contract backlog and customer relationships | 1 - 11 years | |||
| Software and related assets | 3 - 10 years |
Goodwill and indefinite-lived identifiable intangible assets, which consist of certain trade names, are not amortized but evaluated for impairment annually, or more frequently if events or changes in circumstances indicate an impairment.
Included in software and related items is the capitalized cost of internal-use software used in supporting the Company’s business. Qualifying costs incurred during the application development stage are capitalized and amortized over their estimated useful lives. The Company recognized $33.1 million, $32.2 million and $27.4 million of amortization expense in 2014, 2013 and 2012, respectively, related to software and related assets.
The carrying values of property, equipment and intangible and other long-lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flow projections, the Company will record an impairment charge to reduce carrying values to estimated fair value. There were no events, facts or circumstances in 2014, 2013 and 2012 that resulted in any impairment charges to the Company’s property, equipment, intangible or other long-lived assets.
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the customer; (3) the collection of the fees is probable; and (4) the arrangement consideration is fixed or determinable. The Company’s arrangements are primarily service contracts that range in duration from a few months to several years. Most contracts may be terminated upon 30 to 90 days notice by the customer, however, in the event of termination, contract provisions typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract.
In some cases, contracts provide for consideration that is contingent upon the occurrence of uncertain future events. The Company recognizes contingent revenue when the contingency has been resolved and all other criteria for revenue recognition have been met. The Company treats cash payments to customers as incentives to induce the customers to enter into such a service agreement with the Company. The related asset is amortized as a reduction of revenue over the period the services are performed. The Company records revenues net of any tax assessments by governmental authorities, such as value added taxes, that are imposed on and concurrent with specific revenue generating transactions. The Company does not recognize revenue with respect to start-up activities including contract and scope negotiation, feasibility analysis and conflict of interest review associated with contracts. The costs for these activities are expensed as incurred.
For the arrangements that include multiple elements, arrangement consideration is allocated to units of accounting based on the relative selling price. The best evidence of selling price of a unit of accounting is vendor-specific objective evidence (“VSOE”), which is the price the Company charges when the deliverable is sold separately. When VSOE is not available to determine selling price, management uses relevant third-party evidence (“TPE”) of selling price, if available. When neither VSOE nor TPE of selling price exists, management uses its best estimate of selling price considering all relevant information that is available without undue cost and effort.
The majority of the Company’s contracts within the Product Development segment are service contracts for clinical research that represent a single unit of accounting. The Company recognizes revenue on its clinical research services contracts as services are performed primarily on a proportional-performance basis, generally using output measures that are specific to the service provided. Examples of output measures include among others, number of investigators enrolled, number of site initiation visits and number of monitoring visits completed. Revenue is determined by dividing the actual units of work completed by the total units of work required under the contract and multiplying that ratio by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of the agreed upon services to be provided. Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in contract value. Once the customer has agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is recognized, as described above. To the extent that contracts involve multiple elements, the Company follows the allocation methodology described above and recognizes revenue for each unit of accounting on a proportional performance basis.
The Company derives the majority of its revenues in its Integrated Healthcare Services segment from providing commercialization services on a fee-for-service basis to customers within the biopharmaceutical industry. Fees on these arrangements are billed based on a contractual per-diem or hourly rate basis. The Company recognizes revenue on commercialization services contracts primarily on a time and materials basis. Some of the Company’s commercialization contracts are multiple element arrangements, with elements including recruiting, training and deployment of sales representatives. The nature of the terms of these multiple element arrangements will vary based on the customized needs of the Company’s customers. For contracts that have multiple elements, the Company follows the allocation methodology described above and recognizes revenue for each unit of accounting on a time and materials basis. The Company’s commercialization contracts sometimes include variable fees that are based on a percentage of product sales (royalty payments). The Company recognizes revenue on royalty payments when the variable components become fixed or determinable and all other revenue recognition criteria have been met, which generally only occurs upon the sale of the underlying product(s) and upon the Company’s receipt of information necessary to make a reasonable estimate.
Reimbursed Expenses
The Company includes reimbursed expenses in total revenues and costs of revenue as the Company is deemed to be the primary obligor in the applicable arrangements. These costs include such items as payments to investigators and travel expenses for the Company’s clinical monitors and sales representatives.
Expenses
Costs of revenue include reimbursed expenses, compensation and benefits for billable employees, depreciation of assets used in generating revenue and other expenses directly related to service contracts such as courier fees and laboratory supplies for the Company’s laboratory services, professional services and travel expenses. Selling, general and administrative expenses primarily include costs related to administrative functions such as compensation and benefits, travel, professional services, training and expenses for advertising, information technology, facilities and depreciation and amortization.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. Investment policies have been implemented that limit purchases of marketable securities to investment grade securities. Substantially all service revenues for Product Development and Integrated Healthcare Services are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company’s customers. The Company does not require collateral or other securities to support customer receivables. Credit losses have been immaterial and reasonably within management’s expectations. No customer accounted for 10.0% or more of consolidated service revenues in 2014, 2013 or 2012.
Research and Development Costs
Research and development costs consist primarily of employee compensation and related expenses and information technology contract services. The following is a summary of the research and development expenses (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Internally developed software applications and computer technology | $ | 4,980 | $ | 3,955 | $ | 9,907 | ||||||
| Funding of customer’s research and development activity | 811 | 1,000 | — | |||||||||
| Collaboration agreement with HUYA | — | — | 519 | |||||||||
| $ | 5,791 | $ | 4,955 | $ | 10,426 | |||||||
In January 2010, the Company entered into a collaboration agreement with a related party, HUYA Bioscience International, LLC (“HUYA”), to fund up to $2.3 million of its research and development activity for a specific compound. The funding consisted of $1.0 million in cash which was paid and expensed in 2010 and $1.3 million of services provided by the Company, which have been fully provided. In return for the $2.3 million in funding, the Company had the potential to receive additional consideration which contractually may not exceed $16.5 million excluding interest if certain events were to occur. In February 2015, the Company and HUYA agreed to terminate the collaboration agreement. In connection with the termination, HUYA agreed to pay the Company $5.0 million to satisfy all of HUYA’s various payment obligations under the collaboration agreement.
Advertising Costs
Advertising costs, which include the development and production of advertising materials and the communication of these materials, are charged to expense as incurred. The Company incurred approximately $16.0 million, $14.8 million and $14.5 million in advertising expense in 2014, 2013 and 2012, respectively.
Restructuring Costs
Restructuring costs, which primarily include termination benefits and facility closure costs, are recorded at estimated fair value. Key assumptions in determining the restructuring costs include the terms and payments that may be negotiated to terminate certain contractual obligations and the timing of employees leaving the Company.
Contingencies
The Company records accruals for claims, suits, investigations and proceedings when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews claims, suits, investigations and proceedings at least quarterly and records or adjusts accruals related to such matters to reflect the impact and status of any settlements, rulings, advice of counsel or other information pertinent to a particular matter. Legal costs associated with contingencies are charged to expense as incurred.
The Company is party to legal proceedings incidental to its business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters has a reasonable possibility of having a material adverse effect to the Company’s financial statements.
Income Taxes
Income tax expense includes United States federal, state and international income taxes. Certain items of income and expense are not reported in income tax returns and financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. Beginning in 2013, the undistributed earnings of most of the Company’s foreign subsidiaries are considered to be indefinitely reinvested outside of the United States. Accordingly, a deferred income tax liability has not been provided related to those undistributed earnings. Interest and penalties related to unrecognized income tax benefits are recognized as a component of income tax expense as discussed further in Note 16.
Employee Stock Compensation
The Company accounts for share-based compensation for stock options and stock appreciation rights (“SARs”) under the fair value method and uses the Black-Scholes-Merton model to estimate the value of such share-based awards granted to its employees and non-executive directors. Expected volatility is based upon the historical volatility of a peer group for a period equal to the expected term, as the Company does not have adequate history to calculate its own volatility and believes the expected volatility will approximate the historical volatility of the peer group. Prior to the completion of the Company’s initial public offering (“IPO”) on May 14, 2013, the expected dividends were based on the historical dividends paid by the Company, excluding dividends that resulted from activities that the Company deemed to be one-time in nature. Following the IPO, the Company
does not currently anticipate paying dividends. The expected term represents the period of time the grants are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of the grant.
The Company accounts for its share-based compensation for restricted stock units (“RSUs”) based on the closing market price of the Company’s common stock on the date of grant.
The Company recognized share-based compensation expense of $30.0 million, $22.8 million and $25.9 million in 2014, 2013 and 2012, respectively. Share-based compensation expense is included in selling, general and administrative expenses on the accompanying consolidated statements of income based upon the classification of the employees who were granted the share-based awards. The associated future income tax benefit recognized was $7.6 million, $8.1 million and $6.9 million in 2014, 2013 and 2012, respectively. As of December 31, 2014, there was approximately $38.4 million of total unrecognized share-based compensation expense related to outstanding non-vested share-based compensation arrangements, which the Company expects to recognize over a weighted average period of 1.5 years.
Earnings Per Share
The calculation of earnings per share is based on the weighted average number of common shares or common stock equivalents outstanding during the applicable period. The dilutive effect of common stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share. Potentially dilutive securities include outstanding stock options, shares to be purchased under the Company’s employee stock purchase plan (see Note 17) and unvested RSUs.
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. Accounts Receivable and Unbilled Services
Accounts receivable and unbilled services consist of the following (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Trade: | ||||||||
| Billed | $ | 444,941 | $ | 408,959 | ||||
| Unbilled services | 532,312 | 516,942 | ||||||
| 977,253 | 925,901 | |||||||
| Allowance for doubtful accounts | (1,998 | ) | (1,696 | ) | ||||
| $ | 975,255 | $ | 924,205 | |||||
Substantially all of the Company’s trade accounts receivable and unbilled services are due from companies in the pharmaceutical, biotechnology, medical device and healthcare industries and are a result of contract research, sales, marketing, healthcare consulting and health information management services provided by the Company on a global basis. The percentage of accounts receivable and unbilled services by region is as follows:
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Americas: | ||||||||
| United States | 55 | % | 53 | % | ||||
| Other | 2 | 2 | ||||||
| Americas | 57 | 55 | ||||||
| Europe and Africa: | ||||||||
| United Kingdom | 23 | 25 | ||||||
| Other | 11 | 12 | ||||||
| Europe and Africa | 34 | 37 | ||||||
| Asia-Pacific: | ||||||||
| Japan | 4 | 4 | ||||||
| Other | 5 | 4 | ||||||
| Asia-Pacific | 9 | 8 | ||||||
| 100 | % | 100 | % | |||||
3. Investments—Debt, Equity and Other Securities
The following is a summary of the Company’s debt, equity and other securities (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Marketable securities | $ | 831 | $ | 7,668 | ||||
| Cost method | 33,672 | 32,681 | ||||||
| $ | 34,503 | $ | 40,349 | |||||
Investments in Marketable Securities:
The following is a summary of available-for-sale securities (in thousands):
| December 31, 2014 | December 31, 2013 | |||||||||||||||||||||||
| Available-for-Sale Securities | Amortized Cost | Gross Unrealized Loss | Market Value | Amortized Cost | Gross Unrealized Gains | Market Value | ||||||||||||||||||
| Marketable equity | $ | 1,103 | $ | (272 | ) | $ | 831 | $ | 1,960 | $ | 5,708 | $ | 7,668 |
The Company recognized a $5.0 million gain from the sale of marketable equity securities in 2014. The Company did not recognize any gains from the sale of marketable equity securities in 2013 and 2012. The Company did not recognize any losses from the sale of marketable equity securities in 2014, 2013 and 2012.
The net after-tax adjustment to unrealized holding gains (losses) on available-for-sale securities included in the AOCI component of shareholders’ deficit was ($170,000), $3.5 million and $284,000 in 2014, 2013 and 2012, respectively.
The Company’s policy is to continually review declines in fair value of marketable equity securities for declines that may be other than temporary. As part of this review, the Company considers the financial statements of the investee, analysts’ reports, duration of the decline in fair value and general market factors. The
Company did not recognize any such losses in 2014, 2013 and 2012. At December 31, 2014, the marketable equity security was in an unrealized loss position. This investment has been in an unrealized loss position for less than one year as of December 31, 2014 and is expected to recover its value.
Investments—Cost Method
The Company has investments in equity securities of companies for which there are not readily available market values and for which the Company does not exercise significant influence or control. These investments are accounted for using the cost method. Below is a summary of the Company’s portfolio of cost method investments (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Equity investments | $ | 32,516 | $ | 32,516 | ||||
| Convertible notes | 1,156 | 165 | ||||||
| $ | 33,672 | $ | 32,681 | |||||
On February 25, 2011, the Company and the Samsung Group entered into an agreement to form a joint venture intended to provide biopharmaceutical contract manufacturing services in South Korea. The Company committed to invest up to $30.0 million for a noncontrolling interest and has funded all of this commitment. As of December 31, 2014 and 2013, the Company has an approximately 3.0% and 5.1%, respectively, ownership interest in the joint venture.
In December 2011, the Company and Intarcia Therapeutics (“Intarcia”) entered into an alliance to develop a new therapy for type 2 diabetes whereby Intarcia will use the Company to conduct Phase III pivotal trials and a cardiovascular outcomes trial. Under the alliance, the Company provided Intarcia a customer incentive of $12.5 million and acquired $5.0 million of preferred stock of Intarcia. The customer incentive is being amortized in proportion to the revenues earned as a reduction of revenue recorded under the service arrangements. As of December 31, 2014 and 2013, the customer incentive of $7.1 million and $10.7 million, respectively, was recorded in deposits and other assets on the accompanying consolidated balance sheets. The $5.0 million investment in preferred stock of Intarcia is recorded in “investments—debt, equity and other securities” on the accompanying consolidated balance sheets.
The Company reviews the carrying value of each individual investment at each balance sheet date to determine whether or not an other-than-temporary decline in fair value has occurred. The Company employs alternative valuation techniques including the following: (i) the review of financial statements including assessments of liquidity, (ii) the review of valuations available to the Company prepared by independent third parties used in raising capital, (iii) the review of publicly available information including press releases and (iv) direct communications with the investee’s management, as appropriate. If the review indicates that such a decline in fair value has occurred, the Company adjusts the carrying value to the estimated fair value of the investment and recognizes a loss for the amount of the adjustment.
4. Investments in and Advances to Unconsolidated Affiliates
The Company accounts for its investments in and advances to unconsolidated affiliates under the equity method of accounting and records its pro rata share of its losses or earnings from these investments in equity in (losses) earnings of unconsolidated affiliates. The following is a summary of the Company’s investments in and advances to unconsolidated affiliates (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| NovaQuest Pharma Opportunities Fund III, L.P. | $ | 22,633 | $ | 11,792 | ||||
| Oxford Cancer Biomarkers | — | 4,141 | ||||||
| Cenduit™ | 8,271 | 6,431 | ||||||
| Other | 604 | 563 | ||||||
| $ | 31,508 | $ | 22,927 | |||||
NovaQuest Pharma Opportunities Funds
In November 2010, the Company committed to invest up to $60 million as a limited partner in NovaQuest Pharma Opportunities Fund III, L.P. (“the Fund”). In November 2013, the Company sold $10.0 million of this commitment, thus, reducing the total commitment to $50.0 million. The Company had funded approximately $2.9 million of this commitment which had a carrying value of approximately $2.2 million. The Company received approximately $2.3 million for the funded portion of the commitment it sold. As of December 31, 2014, the Company has approximately $25.0 million of remaining funding commitments to the Fund. As of December 31, 2014 and 2013, the Company has a 10.9% ownership interest in the Fund.
In February 2015, the Company committed to invest up to $20 million as a limited partner in a new private equity fund, NovaQuest Pharma Opportunities Fund IV, L.P.
Oxford Cancer Biomarkers
In January 2012, the Company invested approximately $4.7 million in Oxford Cancer Biomarkers (“OCB”). The Company has a 30.0% ownership interest in Oxford Cancer Biomarkers. During 2014, the Company recognized a loss of $3.5 million due to a decline in fair value of OCB that was deemed by management to be other than temporary.
Cenduit™
In May 2007, the Company and Thermo Fisher Scientific Inc. (“Thermo Fisher”) completed the formation of a joint venture, Cenduit™. The Company contributed its Interactive Response Technology operations in India and the United States. Thermo Fisher contributed its Fisher Clinical Services Interactive Response Technology operations in three locations—the United Kingdom, the United States and Switzerland. Additionally, each company contributed $3.5 million in initial capital. The Company and Thermo Fisher each own 50% of Cenduit™.
5. Derivatives
As of December 31, 2014, the Company held the following derivative positions: (i) freestanding warrants to purchase shares of common stock of third parties, (ii) forward exchange contracts to protect against foreign exchange movements for certain forecasted foreign currency cash flows related to service contracts and (iii) interest rate swaps to hedge the exposure to variability in interest payments on variable interest rate debt. The Company does not use derivative financial instruments for speculative or trading purposes.
As of December 31, 2014, the Company had freestanding warrants to purchase shares of third parties’ common stock. No quoted price is available for the warrants. Accordingly, the Company uses various valuation techniques to value the warrants, including the present value of estimated expected future cash flows, option-
pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying common stock, the exercise price of the warrants, the expected time to exercise the warrants, the estimated price volatility of the underlying common stock over the life of the warrants and the restrictions on the transferability of or ability to exercise the warrants. The Company did not sell any warrants in 2014, 2013 or 2012.
As of December 31, 2014, the Company had 13 open foreign exchange forward contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2015 with notional amounts totaling $76.0 million. As of December 31, 2013, the Company had 12 open foreign exchange forward contracts to hedge certain forecasted foreign currency transactions which occurred in 2014 with notional amounts totaling $60.8 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 first nine 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 AOCI component of shareholders’ deficit. These hedges are highly effective. As of December 31, 2014 and 2013, the Company had recorded gross unrealized losses of $4.6 million and gains of $3.95 million, respectively, related to foreign exchange forward contracts. Upon expiration of the hedge instruments in 2015, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in AOCI into earnings. The unrealized losses are included in other current liabilities and the unrealized gains are included in other current assets on the accompanying consolidated balance sheets as of December 31, 2014 and 2013, respectively.
As of December 31, 2011, the Company, through its acquired subsidiary, Outcome Sciences, Inc. (“Outcome”), had open foreign exchange forward contracts to protect against the effects of foreign currency fluctuations on certain foreign currency cash flow transactions occurring in 2012. The derivative instruments that matured in 2012 had not been designated as hedges and, as a result, changes in the fair value were recorded as other (income) expense, net. The Company recognized $588,000 of losses related to these foreign exchange forward contracts as other (income) expense, net on the accompanying consolidated statement of income for the year ended December 31, 2012. All of these contracts matured in 2012.
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 deemed to be highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in the AOCI component of shareholders’ deficit. As of December 31, 2014 and 2013, the unrealized losses included in AOCI were $14.4 million and $24.8 million, respectively. 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 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 44.8% of the Company’s variable rate debt under its senior secured credit facilities at December 31, 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 consolidated balance sheets to which they were recorded are summarized in the following table (in thousands):
| December 31, | ||||||||||
| Balance Sheet Classification | 2014 | 2013 | ||||||||
| Foreign exchange forward contracts | Other current assets | $ | — | $ | 3,950 | |||||
| Foreign exchange forward contracts | Other current liabilities | $ | 4,635 | $ | — | |||||
| Interest rate swaps | Other current liabilities | $ | 14,424 | $ | 24,805 |
The effect of the Company’s cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Foreign exchange forward contracts | $ | (8,585 | ) | $ | 3,485 | $ | 2,327 | |||||
| Interest rate swaps | 10,381 | 9,202 | (9,524 | ) | ||||||||
| Total | $ | 1,796 | $ | 12,687 | $ | (7,197 | ) | |||||
6. 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 December 31, 2014 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable equity securities | $ | 831 | $ | — | $ | — | $ | 831 | ||||||||
| Warrants | — | — | 4 | 4 | ||||||||||||
| Total | $ | 831 | $ | — | $ | 4 | $ | 835 | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange forward contracts | $ | — | $ | 4,635 | $ | — | $ | 4,635 | ||||||||
| Interest rate swaps | — | 14,424 | — | 14,424 | ||||||||||||
| Contingent consideration | — | — | 1,452 | 1,452 | ||||||||||||
| Total | $ | — | $ | 19,059 | $ | 1,452 | $ | 20,511 | ||||||||
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of December 31, 2013 (in thousands):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable equity securities | $ | 7,668 | $ | — | $ | — | $ | 7,668 | ||||||||
| Foreign exchange forward contracts | — | 3,950 | — | 3,950 | ||||||||||||
| Warrants | — | — | 211 | 211 | ||||||||||||
| Total | $ | 7,668 | $ | 3,950 | $ | 211 | $ | 11,829 | ||||||||
| Liabilities: | ||||||||||||||||
| Interest rate swaps | $ | — | $ | 24,805 | $ | — | $ | 24,805 | ||||||||
| Contingent consideration | — | — | 13,014 | 13,014 | ||||||||||||
| Total | $ | — | $ | 24,805 | $ | 13,014 | $ | 37,819 | ||||||||
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 year ended December 31 (in thousands):
| Warrants—Deposits and Other Assets | Contingent Consideration—Accrued Expenses and Other Liabilities | |||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||
| Balance as of January 1 | $ | 211 | $ | 29 | $ | 12 | $ | 13,014 | $ | 3,521 | $ | 6,165 | ||||||||||||
| Initial estimate of contingent consideration | — | — | — | — | 14,300 | 1,990 | ||||||||||||||||||
| Contingent consideration paid | — | — | — | (3,000 | ) | — | — | |||||||||||||||||
| Revaluations included in earnings | (207 | ) | 182 | 17 | (8,562 | ) | (4,807 | ) | (4,634 | ) | ||||||||||||||
| Balance as of December 31 | $ | 4 | $ | 211 | $ | 29 | $ | 1,452 | $ | 13,014 | $ | 3,521 | ||||||||||||
The revaluations for the warrants and the contingent consideration are recognized in other (income) expense, net on the accompanying consolidated statements of income.
Non-recurring Fair Value Measurements
Certain assets are carried on the accompanying 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 December 31, 2014, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $809.8 million were identified as Level 3. These assets are comprised of cost and equity method investments of $65.2 million, goodwill of $464.4 million and other identifiable intangibles, net of $280.2 million.
The Company has unfunded cash commitments totaling approximately $25.0 million related to its cost and equity method investments as of December 31, 2014.
Cost and Equity Method Investments—The inputs available for valuing investments in non-public portfolio companies are generally not easily observable. The valuation of non-public investments requires significant judgment by the Company due to the absence of quoted market values, inherent lack of liquidity and the long-term nature of such assets. When a triggering event occurs, the Company considers a wide range of available market data when assessing the estimated fair value. Such market data includes observations of the trading multiples of public companies considered comparable to the private companies being valued as well as publicly disclosed merger transactions involving comparable private companies. In addition, valuations are adjusted to account for company-specific issues, the lack of liquidity inherent in a non-public investment and the fact that comparable public companies are not identical to the companies being valued. Such valuation adjustments are necessary because in the absence of a committed buyer and completion of due diligence similar to that performed in an actual negotiated sale process, there may be company-specific issues that are not fully known that may affect value. Further, a variety of additional factors are reviewed by the Company, including, but not limited to, financing and sales transactions with third parties, current operating performance and future expectations of the particular investment, changes in market outlook and the third party financing environment. Because of the inherent uncertainty of valuations, estimated valuations may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
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.
Definite-lived Intangible Assets—If a triggering event occurs, the Company determines the estimated fair value of definite-lived intangible assets by determining the present value of the expected cash flows.
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.
7. Property and Equipment
The major classes of property and equipment were as follows (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Land, buildings and leasehold improvements | $ | 185,940 | $ | 184,726 | ||||
| Equipment | 240,227 | 222,858 | ||||||
| Furniture and fixtures | 54,615 | 55,741 | ||||||
| Motor vehicles | 15,443 | 17,801 | ||||||
| 496,225 | 481,126 | |||||||
| Less accumulated depreciation | (305,928 | ) | (281,548 | ) | ||||
| $ | 190,297 | $ | 199,578 | |||||
8. Goodwill and Identifiable Intangible Assets
As of December 31, 2014, the Company has approximately $280.2 million of identifiable intangible assets, of which approximately $109.7 million, relating to a trade name, is deemed to be indefinite-lived and, accordingly, is not being amortized. Amortization expense associated with identifiable definite-lived intangible assets was as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Amortization expense | $ | 58,457 | $ | 51,450 | $ | 46,440 |
Estimated amortization expense for existing identifiable intangible assets is expected to be approximately $57.5 million, $41.8 million, $28.7 million, $17.9 million and $12.2 million for the years ending December 31, 2015, 2016, 2017, 2018 and 2019, respectively. Estimated amortization expense can be affected by various factors, including future acquisitions or divestitures of product and/or licensing and distribution rights or impairments.
The following is a summary of identifiable intangible assets (in thousands):
| As of December 31, 2014 | As of December 31, 2013 | |||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
| Definite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Product licensing and distribution rights and customer relationships | $ | 123,227 | $ | (54,413 | ) | $ | 68,814 | $ | 115,895 | $ | (35,027 | ) | $ | 80,868 | ||||||||||
| Trademarks, trade names and other | 18,571 | (6,399 | ) | 12,172 | 52,053 | (37,450 | ) | 14,603 | ||||||||||||||||
| Software and related assets | 260,052 | (170,471 | ) | 89,581 | 232,468 | (139,561 | ) | 92,907 | ||||||||||||||||
| $ | 401,850 | $ | (231,283 | ) | $ | 170,567 | $ | 400,416 | $ | (212,038 | ) | $ | 188,378 | |||||||||||
| Indefinite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Trade name | $ | 109,676 | $ | — | $ | 109,676 | $ | 109,676 | $ | — | $ | 109,676 | ||||||||||||
Accumulated amortization of identifiable intangible assets includes the impact of amortization expense, foreign exchange fluctuations and disposals of software and related assets.
The following is a summary of goodwill by segment for the years ended December 31, 2014 and 2013 (in thousands):
| Product Development | Integrated Healthcare Services | Consolidated | ||||||||||
| Balance as of December 31, 2012 | $ | 237,757 | $ | 64,672 | $ | 302,429 | ||||||
| Acquisition | 116,542 | — | 116,542 | |||||||||
| Impact of foreign currency fluctuations | (3,155 | ) | (6,190 | ) | (9,345 | ) | ||||||
| Balance as of December 31, 2013 | 351,144 | 58,482 | 409,626 | |||||||||
| Acquisition | — | 62,778 | 62,778 | |||||||||
| Impact of foreign currency fluctuations and other | (4,536 | ) | (3,434 | ) | (7,970 | ) | ||||||
| Balance as of December 31, 2014 | $ | 346,608 | $ | 117,826 | $ | 464,434 | ||||||
9. Accrued Expenses
Accrued expenses consist of the following (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Compensation, including bonuses, fringe benefits and payroll taxes | $ | 403,250 | $ | 437,138 | ||||
| Restructuring | 6,083 | 5,474 | ||||||
| Interest | 274 | 278 | ||||||
| Contract related | 255,530 | 240,548 | ||||||
| Other | 68,507 | 77,751 | ||||||
| $ | 733,644 | $ | 761,189 | |||||
10. Credit Arrangements
The following is a summary of the Company’s revolving credit facilities at December 31, 2014:
| Facility | Interest Rates | |
| $400.0 million (first lien revolving credit facility) | One month London Interbank Offer Rate (“LIBOR”), (0.17% at December 31, 2014) plus 2.50% to 2.75% depending upon the Company’s total leverage ratio | |
| $25.0 million (receivables financing facility) | LIBOR Market Index Rate, (0.17% at December 31, 2014) plus 0.85% to 1.35% depending upon the Company’s debt rating | |
| £10.0 million (approximately $15.6 million) general banking facility with a European headquartered bank | Bank’s base rate (0.5% at December 31, 2014) plus 1% |
During 2014, the Company borrowed and repaid $150.0 million from its first lien revolving credit facility. The Company did not have any outstanding borrowings under any of the revolving credit facilities at December 31, 2014 or 2013. At December 31, 2014, there were bank guarantees totaling approximately £4.2 million (approximately $6.5 million) issued against the availability of the general banking facility with a European headquartered bank through their operations in the United Kingdom.
Long-term debt consists of the following (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Term Loan B-3 due 2018 ((the greater of three month LIBOR or 1.25%) plus 2.50%, or 3.75% at December 31, 2014) | $ | 2,030,606 | $ | 2,060,756 | ||||
| Receivables financing facility due 2018 ((LIBOR 0.17%) plus 1.05%, or 1.22% at December 31, 2014) | 275,000 | — | ||||||
| Other notes payable | — | 7 | ||||||
| 2,305,606 | 2,060,763 | |||||||
| Less: unamortized discount | (12,379 | ) | (14,975 | ) | ||||
| Less: current portion | (750 | ) | (10,307 | ) | ||||
| $ | 2,292,477 | $ | 2,035,481 | |||||
Contractual maturities of long-term debt at December 31, 2014 are as follows (in thousands):
| 2015 | $ | 750 | ||
| 2016 | 20,600 | |||
| 2017 | 20,600 | |||
| 2018 | 2,263,656 | |||
| $ | 2,305,606 | |||
The estimated fair value of the long-term debt, which is primarily based on rates in which the debt is traded among banks, was approximately $2.3 billion and $2.1 billion at December 31, 2014 and 2013, respectively.
Senior Secured Credit Agreement
On June 8, 2011, the Company, through its wholly owned subsidiary, Quintiles Transnational Corp. (“Quintiles Transnational”), entered into the initial credit agreement governing the Quintiles Transnational senior secured credit facilities under which the Company was permitted to borrow up to $2.225 billion. The credit facility arrangements were amended in October 2012, December 2012, December 2013 and November 2014, as described below, and initially consisted of two components: a $225.0 million first lien revolving credit facility due in 2016 and a $2.0 billion first lien Term Loan B due in 2018 (the “Term Loan B”).
On December 20, 2012, the Term Loan B was repaid with the proceeds of a new Term Loan B-2 (see below), together with cash on hand.
October 2012 Debt Issuance
On October 22, 2012, the Company entered into an amendment to the credit agreement to provide (i) a new Term Loan B-1 (the “Term Loan B-1”) with a syndicate of banks for an aggregate principal amount of $175.0 million due 2018, (ii) a one-year extension of the maturity date of its existing $225.0 million senior secured revolving credit facility (to 2017) and (iii) a $75.0 million increase in its existing $225.0 million senior secured revolving credit facility (the “Increased Revolving Facility”), which would also mature in 2017. Annual maturities on the Term Loan B-1 were 1% of the original principal amount until December 31, 2017, with the balance of the Term Loan B-1 to be repaid at final maturity on June 8, 2018. In the fourth quarter of 2012, the proceeds from the Term Loan B-1, together with approximately $73 million of cash on hand, were used to (i) pay a dividend to the Company’s shareholders totaling approximately $241.7 million, (ii) pay a bonus to certain option holders totaling approximately $2.4 million and (iii) pay approximately $4.0 million of fees and related expenses. Other terms and covenants of the Term Loan B-1 and the Increased Revolving Facility were and are the same as the terms and covenants of the Company’s Term Loan B and the senior secured revolving credit facility prior to the amendment.
In May 2013, the Company used $50.0 million of cash to pay down indebtedness under the Term Loan B-1. In connection with the pay down of indebtedness, the Company recognized a $1.0 million loss on extinguishment of debt which included approximately $930,000 of unamortized debt issuance costs and $112,000 of unamortized discount.
On December 20, 2013, the Term Loan B-1 was repaid with the proceeds of a new Term Loan B-3 (see below).
2012 Refinancing Transaction
On December 20, 2012, the Company entered into an amendment to the credit agreement to provide a new Term Loan B-2 (the “Term Loan B-2”) with a syndicate of banks for an aggregate principal amount of $1.975 billion due in 2018. Annual maturities on the Term Loan B-2 were $20.0 million through December 31, 2017 with the balance of the Term Loan B-2 to be repaid at final maturity on June 8, 2018. Other terms and covenants of the Term Loan B-2 were the same as the terms and covenants of our Term Loan B prior to the amendment.
The Company used the proceeds from the Term Loan B-2, together with cash on hand, to repay the remaining outstanding balance on the Company’s then-existing Term Loan B and related fees and expenses. In 2012, the Company recognized a $1.3 million loss on extinguishment of debt which included approximately $634,000 of unamortized debt issuance costs, approximately $631,000 of unamortized discount and approximately $10,000 of related fees and expenses.
On December 20, 2013, the Term Loan B-2 was repaid with the proceeds of a new Term Loan B-3 (see below).
2013 Refinancing Transaction
On December 20, 2013, the Company entered into an amendment to its senior secured credit agreement to provide a new Term Loan B-3 (the “Term Loan B-3”) with a syndicate of banks for an aggregate principal amount of $2.061 billion due in 2018. The proceeds from the Term Loan B-3 were used to repay the then outstanding balances of the Term Loan B-1 and Term Loan B-2 and related fees and expenses. Quarterly principal payments on the Term Loan B-3 are $5.15 million, which commenced on September 30, 2014 and continue through March 31, 2018, with the balance of the Term Loan B-3 to be repaid at final maturity on June 8, 2018. Optional prepayments of the Term Loan B-3 are applied to reduce principal payments in direct order of maturity. The credit facility arrangements are collateralized by substantially all of the assets of Quintiles Transnational and the assets of Quintiles Transnational’s domestic subsidiaries, including 100% of the equity interests of substantially all of Quintiles Transnational’s domestic subsidiaries, and 65% of the equity interests of substantially all of the first-tier foreign subsidiaries of Quintiles Transnational and its domestic subsidiaries (in each case other than certain excluded subsidiaries as defined in the credit agreement). Beginning with fiscal year ending December 31, 2014, the Company is required to apply 50% of excess cash flow (as defined in the credit agreement), subject to a reduction to 25% or 0% depending upon Quintiles Transnational’s total leverage ratio, for prepayment of the Term Loan B-3, with any such prepayment to be applied, first, in direct order of maturities, to reduce the Term Loan B-3 principal payments due within eight quarters of such prepayment, then on a pro rata basis to reduce the other principal payments due prior to the maturity date, and then to reduce the principal payments due on the maturity date. The amendment also provided additional flexibility for the Company to enter into certain securitization financing transactions such as the receivables financing facility transaction we entered into in December 2014. Other than a lower interest rate, other terms and covenants of the Term Loan B-3 are the same as the terms and covenants of our Term Loan B-1 and Term Loan B-2 prior to the amendment.
In connection with this amendment to the credit agreement, in 2013 the Company recognized a $3.3 million loss on extinguishment of debt which included approximately $1.6 million of unamortized debt issuance costs, approximately $1.6 million of unamortized discount and approximately $25,000 of related fees and expenses.
2014 Revolving Credit Facility Amendment
On November 7, 2014, the Company entered into an amendment to its senior secured credit agreement that increased its first lien revolving credit facility from $300.0 million to $400.0 million and extended the maturity date for most of the first lien revolving credit facility by six months. The $100.0 million increase will mature in December 2017 along with $282.5 million of the existing $300.0 million first lien revolving credit facility. In addition, the maturity date for the aggregate of $382.5 million of the first lien revolving credit facility may be further extended to June 2019 without lender consent in connection with certain extensions of the maturity date of the Term Loan B-3 under the senior secured credit facilities. The maturity date for the remaining $17.5 million of the existing $300.0 million first lien revolving credit facility was not altered and continues to be June 2017. The other terms of the senior secured credit agreement were not altered by the amendment.
Receivables Financing Facility
On December 5, 2014, the Company entered into a four-year arrangement to securitize certain of its accounts receivable. Under the receivables financing facility, certain of the Company’s accounts receivable are sold on a non-recourse basis by certain of its consolidated subsidiaries to another of its consolidated subsidiaries, a bankruptcy-remote special purpose entity (“SPE”). The SPE obtained a term loan and revolving loan commitment from a third party lender, secured by liens on the assets of the SPE, to finance the purchase of the accounts receivable, which included a $275.0 million term loan and a $25.0 million revolving loan commitment. The revolving loan commitment may be increased by an additional $35.0 million as amounts are repaid under the term loan. Quintiles Transnational has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under the receivables financing facility. The assets of the SPE are not available to satisfy any of the Company’s obligations or any obligations of its subsidiaries. As of December 31, 2014, $25.0 million of revolving loans were available under the receivables financing facility.
The Company used the proceeds from the term loan under the receivables financing facility to repay in full the amount outstanding on the revolving credit facility under its senior secured credit agreement ($150.0 million), to repay $25.0 million of the Term Loan B-3 under its senior secured credit agreement, to pay related fees and expenses and the remainder was used for general working capital purposes.
Other Long-Term Debt
In February 2012, the Company executed a new term loan facility with a syndicate of banks for an aggregate principal amount of $300.0 million due February 26, 2017 (the “Holdings Term Loan”). The Company used the proceeds from the Holdings Term Loan, together with cash on hand, to (1) pay a dividend to its shareholders in March 2012 totaling approximately $326.1 million, (2) pay a bonus to certain option holders totaling approximately $8.9 million and (3) pay related expenses.
In May 2013, the Company used $308.9 million of cash to pay all amounts outstanding under the $300.0 million Holdings Term Loan (including accrued interest and related fees and expenses). In connection with the repayment of debt, the Company recognized a $15.5 million loss on extinguishment of debt which included approximately $4.7 million of unamortized debt issuance costs, $4.7 million of unamortized discount and $6.1 million of related fees and expenses.
Debt Issuance Costs and Covenants
In connection with the long-term debt agreements, the Company had net debt issuance costs of approximately $10.2 million and $12.6 million as of December 31, 2014 and 2013, respectively, included in deposits and other assets in the accompanying consolidated balance sheets. The debt issuance costs are being amortized as a component of interest expense using the effective interest method over the term of the related debt arrangements, which range from five years to seven years.
The Company’s long-term debt agreements contain usual and customary restrictive covenants that, among other things, place limitations on its ability to declare dividends and make other restricted payments; prepay, redeem or purchase debt; incur liens; make loans and investments; incur additional indebtedness; amend or otherwise alter debt and other material documents; engage in mergers, acquisitions and asset sales; transact with affiliates; and engage in businesses that are not related to the Company’s existing business. In 2014, 2013 and 2012, the Company was in compliance with its debt covenants.
11. Leases
The Company leases facilities under operating leases, many of which contain renewal and escalation clauses. The Company also leases certain equipment under operating leases. The leases expire at various dates through 2029 with options to cancel certain leases at various intervals. Rental expenses under these agreements were $114.6 million, $125.6 million and $117.6 million in 2014, 2013 and 2012, respectively. The Company leases certain assets, primarily vehicles, under capital leases. Capital lease amortization is included with costs of revenues and accumulated depreciation on the accompanying financial statements.
The following is a summary of future minimum payments under capital and operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2014 (in thousands):
| Capital Leases | Operating Leases | |||||||
| 2015 | $ | 80 | $ | 91,129 | ||||
| 2016 | 16 | 71,992 | ||||||
| 2017 | — | 53,043 | ||||||
| 2018 | — | 34,183 | ||||||
| 2019 | — | 19,916 | ||||||
| Thereafter | — | 80,839 | ||||||
| Total minimum lease payments | 96 | $ | 351,102 | |||||
| Amounts representing interest | (6 | ) | ||||||
| Present value of net minimum payments | 90 | |||||||
| Current portion | (76 | ) | ||||||
| Long-term capital lease obligations | $ | 14 | ||||||
12. Shareholders’ Deficit
Initial Public Offering
On May 9, 2013, the Company’s common stock began trading on the New York Stock Exchange (“NYSE”) under the symbol “Q.” On May 14, 2013, the Company completed its IPO of its common stock at a price to the public of $40.00 per share. The Company issued and sold 13,125,000 shares of common stock in the IPO. The selling shareholders offered and sold 14,111,841 shares of common stock in the IPO, including 3,552,631 shares that were offered and sold by the selling shareholders pursuant to the full exercise of the underwriters’ option to purchase additional shares. The IPO raised proceeds to the Company of approximately $489.5 million, after deducting underwriting discounts, commissions and related expenses. The Company did not receive any of the proceeds from the sale of the shares sold by the selling shareholders.
Preferred Stock
The Company is authorized to issue 1.0 million shares of preferred stock, $0.01 per share par value. No shares of preferred stock were issued and outstanding as of December 31, 2014 or 2013.
Equity Repurchase Program
On October 30, 2013, the Company’s Board of Directors (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 has used and intends to continue to use cash on hand to fund the Repurchase Program. The Repurchase Program does not obligate the Company to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it could be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined by the Company’s management based on a variety of factors such as the market price of the Company’s common stock, the Company’s corporate requirements, and overall market conditions. Purchases of the Company’s 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. The Company may also repurchase shares of its common stock pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act, which would permit shares of the Company’s common stock to be repurchased when the Company might otherwise be precluded from doing so by law. Repurchases of vested in-the-money employee stock options were made through transactions between the Company and its employees (other than its 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.
In 2013, repurchases under the Repurchase Program resulted in a $65.5 million charge to equity consisting of (i) the repurchase of approximately 153,200 shares of common stock for an aggregate purchase price of $6.4 million (representing an average price per share of $42.01), and (ii) the repurchase of 2.0 million vested in-the-money employee stock options at fair value for an aggregate purchase price of $59.1 million (representing an average market price per share of $43.42 and an average exercise price per option of $13.74). The Company repurchased 300 shares of its common stock for $47.51 per share for an aggregate purchase price of approximately $14,000 in 2014 under the Repurchase Program. As of December 31, 2014, the Company has remaining authorization under the Repurchase Program to repurchase up to $59.5 million of its common stock.
Other Equity Repurchases
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.
On November 10, 2014, the Company completed the repurchase of 4,303,666 shares of its common stock for $58.09 per share, which was the price per share the underwriter paid to selling shareholders, for an aggregate purchase price of approximately $250.0 million. The Company funded this repurchase transaction with a combination of cash on hand and a $150.0 million draw on its revolving credit facility. This repurchase transaction was separate from and in addition to the Repurchase Program.
Dividends
In October 2012, the Board declared a $2.09 per share dividend to shareholders of record on October 24, 2012. The dividend totaled approximately $241.7 million and was paid on November 1, 2012.
In February 2012, the Board declared a $2.82 per share dividend to shareholders of record on February 29, 2012. The dividend totaled approximately $326.1 million and was paid on March 9, 2012.
13. Management Fees
In January 2008, pursuant to a management agreement with affiliates of certain of the Company’s shareholders, the Company agreed to pay an annual management service fee of $5.0 million in the aggregate to (i) GF Management Company, LLC (“GFM”); (ii) Bain Capital Partners, LLC; (iii) TPG Capital, LP; (iv) 3i Corporation; (v) Cassia Fund Management Pte Ltd; and (vi) Aisling Capital, LLC (“Aisling Capital”). Of this amount, Aisling Capital received $150,000 annually for so long as the Company’s Investment Committee included a member nominated by Aisling Capital. The remaining approximately $4.9 million of the annual management service fee was paid to the other managers each year, in advance and in equal quarterly installments, in proportion to each manager’s (or such manager’s affiliates’) respective share ownership in the Company. The annual management service fee was subject to upward adjustment each year effective as of March 31 based on any increase in the Consumer Price Index for the preceding calendar year. The initial term of the management agreement extended through December 31, 2010, after which it automatically renewed for an additional year unless written notice was provided or other conditions were met. In 2013, the management agreement was terminated, and the Company paid a $25.0 million fee in connection with the termination. In 2013 and 2012, the Company expensed $27.7 million and $5.3 million, respectively, in management fees under this agreement.
14. Business Combinations
Encore Health Resources
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.
Novella Clinical Inc.
On September 16, 2013, the Company completed the acquisition of Novella Clinical Inc. (“Novella”) through the purchase of 100% of Novella’s outstanding stock for approximately $146.6 million in cash (net of approximately $26.2 million of acquired cash) plus potential annual earn-out payments totaling up to $21.0 million contingent upon the achievement of certain revenue and net new business targets for approximately three years following closing. The Company initially recognized a liability of approximately $14.3 million as the estimated acquisition date fair value of the earn-out. Changes in the fair value of the earn-out subsequent to the acquisition date are recognized in earnings in the period of the change. Novella has operations primarily in the United States and Europe and is a clinical research organization focused primarily on emerging oncology customers as well as those in the medical device and diagnostics sectors. As part of its Product Development segment, the Company acquired Novella to complement its clinical service offerings through its focus on emerging companies and by adding expertise in oncology and medical devices.
Expression Analysis, Inc.
On August 10, 2012, the Company completed the acquisition of Expression Analysis, Inc. (“EA”) through the purchase of 100% of EA’s outstanding stock for $39.7 million in cash and contingent consideration in the form of a potential earn-out payment of up to $3.5 million. The earn-out payment was contingent upon the achievement of certain revenue and earnings targets during the 24 month period following closing. The Company initially recognized a liability of approximately $2.0 million as the estimated acquisition date fair value of the earn-out. Changes in the fair value of the earn-out subsequent to the acquisition date were recognized in earnings in the period of the change. EA, based in the United States, provides genomic sequencing, gene expression, genotyping and bioinformatics services to biopharmaceutical companies, diagnostic test developers, government agencies and academic laboratories. The Company acquired EA to complement its current laboratory services by adding expertise in genetic sequencing and advanced bioinformatics.
Accounting for Acquisitions
Acquisitions are accounted for as business combinations 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. In connection with the Novella and EA acquisitions, the Company recorded goodwill, primarily attributable to the assembled workforce of Novella and EA and expected synergies, which was assigned to the Product Development segment and is not deductible for income tax purposes. Pro forma information is not presented as the operations of the acquired businesses are not significant to the overall operations of the Company. Acquisition-related expenses were immaterial and are also not presented. The following table summarizes the estimated fair value of the net assets acquired at the date of the acquisitions (in thousands):
| Encore | Novella | EA | ||||||||||
| Assets acquired: | ||||||||||||
| Cash and cash equivalents | $ | 2,223 | $ | 26,190 | $ | 441 | ||||||
| Accounts receivable and unbilled services | 17,714 | 28,644 | 1,920 | |||||||||
| Other current assets | 443 | 1,441 | 2,952 | |||||||||
| Property and equipment | 289 | 9,616 | 4,731 | |||||||||
| Goodwill | 62,778 | 116,542 | 28,201 | |||||||||
| Other identifiable intangibles | 14,150 | 42,740 | 9,460 | |||||||||
| Deferred income tax asset—long-term | 396 | — | — | |||||||||
| Other long-term assets | — | 2,203 | — | |||||||||
| Liabilities assumed: | ||||||||||||
| Accounts payable and accrued expenses | (4,206 | ) | (12,716 | ) | (3,574 | ) | ||||||
| Unearned income | (31 | ) | (7,782 | ) | (411 | ) | ||||||
| Other current liabilities | — | (132 | ) | (101 | ) | |||||||
| Deferred income tax liability—long-term | — | (18,364 | ) | (1,707 | ) | |||||||
| Other long-term liabilities | — | (1,334 | ) | (226 | ) | |||||||
| Net assets acquired | $ | 93,756 | $ | 187,048 | $ | 41,686 | ||||||
The other identifiable intangible assets consisted of the following (in thousands):
| Encore | Novella | EA | ||||||||||
| Other identifiable intangibles | ||||||||||||
| Customer relationships | $ | 8,800 | $ | 20,800 | $ | 9,000 | ||||||
| Acquired backlog | 800 | 14,000 | 170 | |||||||||
| Trade names | 1,100 | 7,500 | 290 | |||||||||
| Non-compete agreements | 450 | 440 | — | |||||||||
| Software | 3,000 | — | — | |||||||||
| Total other identifiable intangibles | $ | 14,150 | $ | 42,740 | $ | 9,460 | ||||||
| Amortized over a weighted average useful life (in years) | 8 | 7 | 11 |
15. Restructuring
2014 Plan
In 2014, the Board approved restructuring plans of approximately $13 million to better align resources with the Company’s strategic direction, which resulted in a reduction of approximately 250 positions. During 2014, the Company recognized approximately $10.3 million of restructuring costs related to these plans including reversals. All of the restructuring costs are related to severance and lease costs. Of the $10.3 million in total restructuring costs recognized for these plans, approximately $7.3 million and $3.0 were related to activities in the Product Development and Integrated Healthcare Services segments, respectively.
2013 Plan
In February 2013, the Board approved a restructuring plan of up to $15.0 million to migrate the delivery of services, primarily in the Product Development segment, and to reduce anticipated overcapacity in selected areas, primarily in the Integrated Healthcare Services segment, which resulted in a reduction of approximately 400 positions. Since February 2013, the Company has recognized approximately $13.6 million of restructuring costs related to this plan including reversals. All of the restructuring costs are related to severance costs. Of the $13.6 million in total restructuring costs recognized for this plan, approximately $8.4 million, $4.7 million and $500,000 were related to activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.
2012 Plan
In May 2012, the Board approved a restructuring plan of up to $20.0 million to reduce anticipated overcapacity and to rationalize the number of non-billable support roles, which resulted in a reduction of approximately 280 positions, primarily in Europe. Since May 2012, the Company has recognized approximately $19.6 million of restructuring costs related to this plan including reversals. Of the $19.6 million in total restructuring costs recognized for this plan, $19.2 million and $400,000 were related to severance costs and lease costs, respectively. Of the $19.6 million in total restructuring costs recognized for this plan, approximately $11.8 million, $3.8 million and $4.0 million were related to activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.
The following amounts were recorded for the 2014 restructuring plan and the restructuring plans initiated in prior years (in thousands):
| Severance and Related Costs | Exit Costs | Total | ||||||||||
| Balance at December 31, 2012 | $ | 12,784 | $ | — | $ | 12,784 | ||||||
| Expense, net of reversals | 13,718 | 353 | 14,071 | |||||||||
| Payments | (21,324 | ) | (154 | ) | (21,478 | ) | ||||||
| Foreign currency translation | 98 | (1 | ) | 97 | ||||||||
| Balance at December 31, 2013 | 5,276 | 198 | 5,474 | |||||||||
| Expense, net of reversals | 8,421 | 567 | 8,988 | |||||||||
| Payments | (7,998 | ) | (160 | ) | (8,158 | ) | ||||||
| Foreign currency translation | (221 | ) | — | (221 | ) | |||||||
| Balance at December 31, 2014 | $ | 5,478 | $ | 605 | $ | 6,083 | ||||||
The reversals were due to changes in estimates primarily resulting from the redeployment of staff and higher than expected voluntary terminations. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. The Company expects the majority of the restructuring accruals at December 31, 2014 will be paid in 2015.
16. Income Taxes
The components of income before income taxes and equity in earnings of unconsolidated affiliates are as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Domestic | $ | 96,917 | $ | 68,425 | $ | 31,204 | ||||||
| Foreign | 405,272 | 254,691 | 236,224 | |||||||||
| $ | 502,189 | $ | 323,116 | $ | 267,428 | |||||||
The components of income tax expense attributable to continuing operations are as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Current expense (benefit): | ||||||||||||
| Federal | $ | 58,403 | $ | 38,573 | $ | 18,236 | ||||||
| State | 4,618 | (4,309 | ) | 1,384 | ||||||||
| Foreign | 95,010 | 83,744 | 58,712 | |||||||||
| 158,031 | 118,008 | 78,332 | ||||||||||
| Deferred (benefit) expense: | ||||||||||||
| Federal and state | (4,549 | ) | (15,807 | ) | 16,023 | |||||||
| Foreign | (3,426 | ) | (6,236 | ) | (991 | ) | ||||||
| (7,975 | ) | (22,043 | ) | 15,032 | ||||||||
| $ | 150,056 | $ | 95,965 | $ | 93,364 | |||||||
The differences between the Company’s consolidated income tax expense attributable to continuing operations and the expense computed at the 35% United States statutory income tax rate were as follows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Federal income tax expense at statutory rate | $ | 175,766 | $ | 113,091 | $ | 93,600 | ||||||
| State and local income taxes, net of federal benefit | 2,312 | (1,088 | ) | (914 | ) | |||||||
| Research and development | (16,765 | ) | (12,788 | ) | (17,096 | ) | ||||||
| Foreign nontaxable interest income | (10,217 | ) | (9,751 | ) | (7,864 | ) | ||||||
| Gain on note settlement | — | 10,794 | — | |||||||||
| United States taxes recorded on foreign earnings | 18,631 | (1,616 | ) | 23,236 | ||||||||
| Foreign rate differential | (30,734 | ) | (10,753 | ) | (8,396 | ) | ||||||
| Increase/(decrease) in valuation allowance | 1,713 | (178 | ) | 401 | ||||||||
| Effect of changes in apportionment and tax rates | 536 | (492 | ) | 1,872 | ||||||||
| Other | 8,814 | 8,746 | 8,525 | |||||||||
| $ | 150,056 | $ | 95,965 | $ | 93,364 | |||||||
Prior to June 2013, the Company had not considered the majority of the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. Management reevaluated this assertion following the IPO, as a portion of the IPO proceeds were used to pay down debt held in the United States as well as the fact the Company does not anticipate paying dividends in the foreseeable future, which had been significant in the past. Given the Company’s current debt balance, and related interest expense and the change in approach related to payment of dividends, the Company expects to be able to support the cash needs of the domestic subsidiaries without repatriating cash from the affected foreign subsidiaries. The Company expects to utilize the cash generated outside of the United States to fund growth outside of the United States. As a result of the assertion change, the Company recorded an $8.1 million income tax benefit in the second quarter of 2013 to reverse the deferred income tax liability previously recorded on undistributed foreign earnings prior to 2013 that are now considered indefinitely reinvested outside of the United States. Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $696.9 million at December 31, 2014. Approximately $244.2 million of this total is not considered to be indefinitely reinvested and would be taxable upon repatriation. The Company has recorded a deferred income tax liability, net of foreign income tax credits that would be generated upon repatriation, of $27.7 million as of December 31, 2014 associated with those earnings based upon the United States federal income tax rate. Upon distribution of those earnings in the form of dividends or otherwise, the Company would
be subject to both United States income taxes (subject to an adjustment for foreign tax credits, if available) and withholding taxes payable to the various countries in which the Company’s foreign subsidiaries are located. If the approximately $452.7 million of indefinitely reinvested earnings were repatriated to the United States, it would generate an estimated $61.2 million of additional tax liability for the Company.
The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax (liabilities) assets are presented below (in thousands):
| December 31, | ||||||||
| 2014 | 2013 | |||||||
| Deferred income tax liabilities: | ||||||||
| Undistributed foreign earnings | $ | (27,717 | ) | $ | (18,393 | ) | ||
| Depreciation and amortization | (65,614 | ) | (78,486 | ) | ||||
| Other | (15,346 | ) | (12,700 | ) | ||||
| Total deferred income tax liabilities | (108,677 | ) | (109,579 | ) | ||||
| Deferred income tax assets: | ||||||||
| Net operating loss, capital loss and tax credit carryforwards | 43,535 | 49,308 | ||||||
| Accrued expenses and unearned income | 34,048 | 31,067 | ||||||
| Employee benefits | 130,217 | 124,688 | ||||||
| Other | 17,784 | 20,215 | ||||||
| 225,584 | 225,278 | |||||||
| Valuation allowance for deferred income tax assets | (24,695 | ) | (29,501 | ) | ||||
| Total deferred income tax assets | 200,889 | 195,777 | ||||||
| Net deferred income tax assets | $ | 92,212 | $ | 86,198 | ||||
The Company has net operating loss and capital loss carryforwards of approximately $46.0 million in various entities within the United Kingdom which have no expiration date and has $40.3 million of net operating loss and capital loss carryforwards from various foreign jurisdictions which have different expiration periods. The Company has United States net operating loss carryforwards of $20.0 million, which were obtained through the acquisitions of Novella, EA, and Advion BioSciences, Inc. in 2013, 2012, and 2011, respectively, and expire through 2023. These losses are subject to IRC Section 382 limitations; however, management expects all losses to be utilized during the carryforward periods. In addition, the Company has approximately $43.1 million of United States state operating loss carryforwards which expire through 2034.
In 2014, the Company decreased its valuation allowance $4.8 million to $24.7 million at December 31, 2014 from $29.5 million at December 31, 2013. The valuation allowance is primarily related to loss carryforwards in various foreign and state jurisdictions.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in thousands):
| December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Balance at January 1 | $ | 54,936 | $ | 43,393 | $ | 41,371 | ||||||
| Additions based on tax positions related to the current year | 2,807 | 4,493 | 891 | |||||||||
| Additions for income tax positions of prior years | 1,588 | 12,854 | 2,230 | |||||||||
| Impact of changes in exchange rates | (376 | ) | (71 | ) | 118 | |||||||
| Settlements with tax authorities | (135 | ) | (1,052 | ) | (179 | ) | ||||||
| Reductions for income tax positions of prior years | (6,023 | ) | (3,520 | ) | (63 | ) | ||||||
| Reductions due to the lapse of the applicable statute of limitations | (11,976 | ) | (1,161 | ) | (975 | ) | ||||||
| Balance at December 31 | $ | 40,821 | $ | 54,936 | $ | 43,393 | ||||||
As of December 31, 2014, the Company had total gross unrecognized income tax benefits of $40.8 million associated with over 50 jurisdictions in which the Company conducts business. This amount includes $40.4 million of unrecognized benefits that, if recognized, would reduce the Company’s effective income tax rate. This amount excludes $4.8 million of accrued interest and penalties.
The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of income. In 2014, 2013 and 2012, the amount of interest and penalties recorded as an addition to income tax expense in the accompanying consolidated statements of income was $1.3 million, $843,000 and $796,000, respectively. As of December 31, 2014 and 2013, the Company accrued approximately $4.8 million and $3.6 million, respectively, of interest and penalties.
The Company believes that it is reasonably possible that a decrease of up to $19.1 million in gross unrecognized income tax benefits for federal, state and foreign exposure items may be necessary within the next 12 months due to lapse of statutes of limitations or uncertain tax positions being effectively settled. The Company believes that it is reasonably possible that a decrease of up to $1.1 million in gross unrecognized benefits for foreign items may be necessary within the next 12 months due to payments. For the remaining uncertain income tax positions, it is difficult at this time to estimate the timing of the resolution.
The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the tax years that remain open for examination by tax authorities in the most significant jurisdictions in which the Company operates:
| United States | 2001-2013 | |
| India | 2006-2014 | |
| Japan | 2008-2013 | |
| United Kingdom | 2013 |
In certain of the jurisdictions noted above, the Company operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that tax years are technically not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.
Due to the geographic breadth of the Company’s operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes which will be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of income tax regulations, it is possible that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates. In such an event, the Company will record additional income tax expense or income tax benefit in the period in which such resolution occurs.
The Company has a tax holiday for Quintiles East Asia Pte. Ltd. in Singapore through June 2015, provided the Company maintains specific levels of spending and employment. The income tax benefit of this holiday was approximately $2.4 million, $798,000 and $343,000 in 2014, 2013 and 2012, respectively. The Company also had a tax holiday for Outcome Europe Sarl in Switzerland for 2013 and 2012. The income tax benefit of this holiday was approximately $64,000 and $28,000 in 2013 and 2012 respectively. The tax holiday in 2014 increased earnings per share by approximately $0.02. The tax holidays in 2013 and 2012 did not have a notable impact on earnings per share.
17. Employee Benefit Plans
The Company has numerous employee retirement benefit plans, which cover substantially all eligible employees in the countries where the plans are offered either voluntarily or statutorily. Contributions are primarily discretionary, except in some countries where contributions are contractually required.
Defined Contribution Plans
Defined contribution or profit sharing style plans are offered in Austria, Belgium, Bulgaria, Canada, the Czech Republic, Denmark, Finland, France, Germany, Hungary, India, Ireland, Israel, Malaysia, the Netherlands, Poland, Slovakia, South Africa, Sweden, Switzerland, Thailand, the United States and the United Kingdom. In some cases these plans are required by local laws or regulations.
In the United States, the Company has a 401(k) Plan under which the Company matches employee deferrals at varying percentages, set at the discretion of the Board. In 2014, 2013 and 2012, the Company expensed $31.2 million, $26.1 million and $24.3 million, respectively, related to matching contributions.
Defined Benefit Plans
Defined benefit plans are offered in Austria, France, Germany, Greece, India, Israel, Japan, Mexico, Philippines, Poland, Turkey and the United Kingdom. The following table summarizes the components of pension expense related to these defined benefit plans (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Service cost | $ | 12,944 | $ | 13,227 | $ | 13,839 | ||||||
| Interest cost | 3,821 | 3,684 | 3,775 | |||||||||
| Expected return on plan assets | (4,277 | ) | (3,442 | ) | (2,822 | ) | ||||||
| Amortization of prior service costs | 107 | 336 | 411 | |||||||||
| Amortization of actuarial losses | 636 | 708 | 758 | |||||||||
| $ | 13,231 | $ | 14,513 | $ | 15,961 | |||||||
The Company expects to recognize approximately $996,000 in its pension expense in 2015 related to the amortization of net actuarial losses.
The weighted average assumptions used in determining pension expense were as follows:
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Discount rate | 3.01 | % | 3.06 | % | 3.32 | % | ||||||
| Rate of compensation increases | 4.36 | % | 4.74 | % | 4.96 | % | ||||||
| Expected return on plan assets | 5.21 | % | 5.33 | % | 5.23 | % |
The following table summarizes financial information about the Company’s defined benefit plans as measured on December 31 (in thousands):
| 2014 | 2013 | |||||||
| Projected benefit obligation January 1 | $ | 135,110 | $ | 130,323 | ||||
| Service costs | 12,944 | 13,227 | ||||||
| Interest cost | 3,821 | 3,684 | ||||||
| Expected return on plan assets | (4,277 | ) | (3,442 | ) | ||||
| Actuarial losses | 16,396 | 1,890 | ||||||
| Benefits paid | (7,409 | ) | (5,917 | ) | ||||
| Foreign currency fluctuations and other | (9,458 | ) | (4,655 | ) | ||||
| Projected benefit obligation December 31 | $ | 147,127 | $ | 135,110 | ||||
| Plan assets at fair value, January 1 | $ | 82,787 | $ | 68,258 | ||||
| Actual return on plan assets | 10,004 | 5,928 | ||||||
| Contributions | 8,594 | 8,620 | ||||||
| Benefits paid | (7,409 | ) | (5,917 | ) | ||||
| Foreign currency fluctuations and other | (5,556 | ) | 5,898 | |||||
| Plan assets at fair value, December 31 | $ | 88,420 | $ | 82,787 | ||||
| Unfunded balance | $ | 58,707 | $ | 52,323 | ||||
The accumulated benefit obligation for all defined benefit plans was approximately $127.9 million and $118.4 million as of December 31, 2014 and 2013, respectively.
As of December 31, 2014, the projected benefit obligation and accumulated benefit obligation for the defined benefit plans with accumulated benefit obligations in excess of plan assets were $83.4 million and $66.4 million, respectively, and were primarily related to unfunded plans. As of December 31, 2013, the projected benefit obligation and accumulated benefit obligation for the defined benefit plans with accumulated benefit obligations in excess of plan assets were $77.7 million and $63.6 million, respectively, and were primarily related to unfunded plans. As of December 31, 2014 and 2013, the projected benefit obligation exceeded the fair value of the plan assets for each defined benefit plan except for the defined benefit plan in the United Kingdom.
The following table summarizes the amounts recognized in the consolidated balance sheets related to the defined benefit plans as of December 31 (in thousands):
| 2014 | 2013 | |||||||
| Deposits and other assets | $ | 18,690 | $ | 18,835 | ||||
| Accrued expenses | 6,075 | 8,622 | ||||||
| Other long-term liabilities | 71,322 | 62,536 | ||||||
| AOCI | $ | (14,519 | ) | $ | (5,044 | ) |
The following table summarizes the amounts recognized in AOCI related to the defined benefit plans (in thousands):
| Prior Service Costs | Actuarial Net (Gain) Loss | Deferred Income Taxes | Total | |||||||||||||
| Balance as of December 31, 2012 | $ | (443 | ) | $ | (7,792 | ) | $ | 3,214 | $ | (5,021 | ) | |||||
| Reclassification adjustments included in pension expense: | ||||||||||||||||
| Amortization | 336 | 708 | (389 | ) | 655 | |||||||||||
| Amounts arising during the period: | ||||||||||||||||
| Tax rate adjustments | — | — | (26 | ) | (26 | ) | ||||||||||
| Actuarial changes in benefit obligation | — | 2,147 | 157 | 2,304 | ||||||||||||
| Balance as of December 31, 2013 | (107 | ) | (4,937 | ) | 2,956 | (2,088 | ) | |||||||||
| Reclassification adjustments included in pension expense: | ||||||||||||||||
| Amortization | 107 | 636 | (275 | ) | 468 | |||||||||||
| Amounts arising during the period: | ||||||||||||||||
| Actuarial changes in benefit obligation | — | (10,218 | ) | 2,981 | (7,237 | ) | ||||||||||
| Balance as of December 31, 2014 | $ | — | $ | (14,519 | ) | $ | 5,662 | $ | (8,857 | ) | ||||||
The following table summarizes the weighted average assumptions used in determining the pension obligations as of December 31:
| 2014 | 2013 | |||||||
| Discount rate | 2.46 | % | 3.01 | % | ||||
| Rate of compensation increases | 4.32 | % | 4.36 | % |
The discount rate represents the interest rate used to determine the present value of the future cash flows currently expected to be required to settle the Company’s defined benefit plan obligations. The discount rates are derived using weighted average yield curves on AA-rated corporate bonds. The cash flows from the Company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates.
The Company’s assumption for the expected return on plan assets was determined by the weighted average of the long-term expected rate of return on each of the asset classes invested as of the balance sheet date. For plan assets invested in government bonds, the expected return was based on the yields on the relevant indices as of the balance sheet date. There is considerable uncertainty for the expected return on plan assets invested in equity and diversified growth funds. The expected return on these plan assets was based on the expected return on long-term fixed interest rate government bonds as of the balance sheet date with a premium of 3% to 4% added to reflect the expected long-term returns expected from these types of investments.
The investment objective for defined benefit plan assets is to meet the plan’s benefit obligations and maintaining adequate funding, while minimizing the potential for future required Company contributions. The defined benefit plans in the United Kingdom, India and Israel are funded. The plan assets of the defined benefit plans in India and Israel are held in a fund which holds debt investments, primarily government bonds in accordance with local laws and regulations. The plan assets of the defined benefit plan in the United Kingdom, which are held in a trust, are primarily held in funds which hold investments in government bonds, equity investments and diversified growth funds. The equity investments are diversified to include domestic (United Kingdom) and global equity investments. A “horizon based” approach is used to determine the asset allocation. Funds intended to meet the plan’s benefit obligation payments in a horizon period are invested in low risk assets such as bond investments. Funds intended to meet the plan’s benefit obligation payments outside of the horizon period are invested in more volatile assets which are expected to provide a higher return such as equity investments and diversified growth funds. The target allocation percentage for 2015 is approximately 40-50% in bond investments, 35-45% in equity investments and 15-25% in diversified growth funds. However, the trustees may reallocate the plan assets between equity investments and bond investments depending upon the actual investment performances.
The Company’s plan assets have been identified within the fair value hierarchy as Level 2. Funds are valued using the net asset value reported by the managers of the funds. The following table summarizes the fair value of the Company’s defined benefit plans assets as of December 31, 2014 and 2013 (in thousands):
| 2014 | 2013 | |||||||
| Funds that hold debt investments primarily government bonds | $ | 47,473 | $ | 42,738 | ||||
| Funds that hold United Kingdom equity investments | 19,547 | 19,826 | ||||||
| Funds that hold global equity investments | 8,255 | 8,393 | ||||||
| Diversified growth fund | 12,569 | 11,169 | ||||||
| Other | 576 | 661 | ||||||
| Total | $ | 88,420 | $ | 82,787 | ||||
The Company estimates that it will make contributions totaling approximately $5.6 million to the defined benefit plans in 2015.
The following table summarizes the Company’s expected benefit payments under the defined benefit plans for each of the next five years and the aggregate of the five years thereafter (in thousands):
| 2015 | $ | 4,810 | ||
| 2016 | 4,541 | |||
| 2017 | 5,188 | |||
| 2018 | 5,884 | |||
| 2019 | 6,175 | |||
| Years 2020 through 2024 | 36,360 | |||
| $ | 62,958 | |||
Stock Incentive Plans
The stock incentive plans provide incentives to eligible employees, officers and directors in the form of non-qualified stock options, incentive stock options, SARs, restricted stock, RSUs, performance shares, performance units, covered annual incentive awards, cash-based awards and other share-based awards, in each case subject to the terms of the stock incentive plans. As of December 31, 2014, there were 8,369,995 shares available for future grants under the stock incentive plans.
The following assumptions were used to estimate the fair value of stock options and SARs:
| Year Ended December 31, | ||||||
| 2014 | 2013 | 2012 | ||||
| Expected volatility | 26 – 43% | 18 – 47% | 33 – 53% | |||
| Weighted average expected volatility | 36% | 40% | 40% | |||
| Expected dividends | 0.0% | 0.0 – 5.45% | 4.82% | |||
| Expected term (in years) | 1.5 – 6.7 | 0.25 – 6.4 | 2.0 – 7.0 | |||
| Risk-free interest rate | 0.28 – 2.21% | 0.04 – 2.24% | 0.29 – 1.31% |
Stock Options
The option price is determined by the Board at the date of grant and the options expire 10 years from the date of grant. The vesting schedule for options granted to employees is either (i) 20% per year beginning on the first anniversary of the date of grant; (ii) 25% per year beginning on the first anniversary of the date of grant; or (iii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant. In addition, an option to acquire 38,580 shares of the Company’s common stock was granted to the Company’s Chief Executive Officer on May 31, 2012 which vests monthly over three years. Options granted to our non-employee directors vest 34% on the first anniversary of the date of grant and 33% on the second and third anniversaries of the date of grant.
The Company’s stock option activity in 2014 is as follows:
| Year Ended December 31, | ||||||||||||
| Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| (in thousands) | ||||||||||||
| Outstanding at December 31, 2013 | 10,100,160 | $ | 23.00 | $ | 235,729 | |||||||
| Granted | 1,622,000 | $ | 52.82 | |||||||||
| Exercised | (2,022,576 | ) | $ | 16.37 | ||||||||
| Canceled | (574,630 | ) | $ | 32.91 | ||||||||
| Outstanding at December 31, 2014 | 9,124,954 | $ | 29.15 | $ | 271,216 | |||||||
The weighted average fair value per share of the options granted in 2014, 2013 and 2012 was $18.72, $14.39 and $6.34, respectively. The total intrinsic value of options exercised was approximately $77.3 million, $27.1 million and $4.6 million in 2014, 2013 and 2012, respectively. The Company received cash of approximately $33.1 million, $12.5 million and $2.5 million in 2014, 2013 and 2012, respectively, from options exercised.
Under the Repurchase Program discussed further in Note 12, in 2013 the Company repurchased 1,990,540 vested in-the-money employee stock options with an intrinsic value of $59.1 million.
Selected information regarding the Company’s stock options as of December 31, 2014 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Number of Options | Exercise Price Range | Weighted Average Exercise Price | Weighted Average Remaining Life (in Years) | Number of Options | Weighted Average Exercise Price | |||||||||||||||||
| 2,122,427 | $ | 4.70 - $15.88 | $ | 13.37 | 2.90 | 2,122,427 | $ | 13.37 | ||||||||||||||
| 2,290,827 | $ | 17.11 - $23.83 | $ | 21.42 | 6.60 | 1,220,640 | $ | 20.84 | ||||||||||||||
| 1,373,850 | $ | 24.59 - $30.07 | $ | 24.93 | 7.36 | 592,500 | $ | 24.80 | ||||||||||||||
| 1,523,750 | $ | 40.00 - $40.00 | $ | 40.00 | 8.15 | 282,000 | $ | 40.00 | ||||||||||||||
| 1,551,700 | $ | 42.74 - $53.26 | $ | 50.45 | 9.10 | 65,750 | $ | 43.54 | ||||||||||||||
| 262,400 | $ | 57.00 - $57.95 | $ | 57.42 | 9.91 | — | $ | — |
The weighted average remaining contractual life of the options outstanding and exercisable as of December 31, 2014 is 6.63 years and 4.86 years, respectively. The total aggregate intrinsic value of the exercisable stock options and the stock options expected to vest as of December 31, 2014 was approximately $267.3 million.
In connection with the November 2012 per share dividend discussed further in Note 12, the Board authorized a $2.09 per share reduction in the exercise price of certain non-vested and vested options outstanding on October 24, 2012. As such, the Company repriced 10,166,820 options previously granted to 228 employees and directors. The other terms, including the vesting schedules, remained unchanged. The aggregate incremental share-based compensation expense resulting from the modification of these outstanding stock options was approximately $11.4 million, of which approximately $9.2 million was recognized during the three months ended December 31, 2012, and the remaining $2.2 million is being recognized over the remaining vesting periods of the respective stock options.
In connection with the February 2012 per share dividend discussed further in Note 12, the Board authorized a $2.82 per share reduction in the exercise price of all non-vested options and certain vested options outstanding on February 29, 2012. As such, the Company repriced 5,561,700 options previously granted to 222 employees and directors. The other terms, including the vesting schedules, remained unchanged. The aggregate incremental share-based compensation expense resulting from the modification of these outstanding stock options was
approximately $7.1 million, of which approximately $4.5 million was recognized during the three months ended March 31, 2012, and the remaining $2.6 million is being recognized over the remaining vesting periods of the respective stock options.
Stock Appreciation Rights
The Company’s SARs require the Company to settle in cash an amount equal to the difference between the fair value of the Company’s common stock on the date of exercise and the grant price, multiplied by the number of SARs being exercised. These awards either (i) vest 25% per year or (ii) vest 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant.
The Company’s SAR activity in 2014 is as follows:
| Year Ended December 31, | ||||||||||||
| Number of SARs | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
| (in thousands) | ||||||||||||
| Outstanding at December 31, 2013 | 258,025 | $ | 35.26 | $ | 2,858 | |||||||
| Granted | 186,300 | $ | 53.50 | |||||||||
| Exercised | (15,349 | ) | $ | 28.76 | ||||||||
| Canceled | (10,175 | ) | $ | 37.96 | ||||||||
| Outstanding at December 31, 2014 | 418,801 | $ | 43.55 | $ | 6,417 | |||||||
As of December 31, 2014, 2013 and 2012, the weighted average fair value per share of the SARs granted was $27.17, $19.07 and $8.16, respectively. The Company paid approximately $408,000 and $83,000 to settle exercised SARs in 2014 and 2013, respectively. There were no SARs exercised in 2012.
The weighted average remaining contractual life of the SARs outstanding and exercisable as of December 31, 2014 is 8.6 years and 8.0 years, respectively. The total aggregate intrinsic value of the exercisable SARs and the SARs expected to vest as of December 31, 2014 was approximately $6.2 million.
In connection with the November 2012 per share dividend discussed further in Note 12, the Company’s Board authorized a $2.09 per share reduction in the exercise price of all non-vested cash-settled SARs outstanding on October 24, 2012.
Restricted Stock Units
The Company’s RSUs will settle in shares of the Company’s common stock within 45 days of the applicable vesting date. RSUs granted to employees vest 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant. RSUs granted to our non-employee directors vest 34% on the first anniversary of the date of grant and 33% on the second and third anniversaries of the date of grant.
The Company’s RSU activity in 2014 is as follows:
| Year Ended December 31, | ||||||||
| Number of RSUs | Weighted Average Grant-Date Fair Value | |||||||
| Non-vested at December 31, 2013 | 57,167 | $ | 44.62 | |||||
| Granted | 36,500 | $ | 47.87 | |||||
| Non-vested at December 31, 2014 | 93,667 | $ | 45.89 | |||||
As of December 31, 2014, there are 93,667 RSUs outstanding with an intrinsic value of approximately $5.5 million.
Employee Stock Purchase Plan
In November 2013, the Board approved an Employee Stock Purchase Plan (“ESPP”) which was approved by the Company’s shareholders in May 2014. Beginning in 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. During 2014, the offering periods under the ESPP began on March 1 and September 1. In November 2014, the ESPP was amended to change the start of the offering periods to begin on April 1 and October 1 of each year, beginning April 1, 2015. Participating employees 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 NYSE. The aggregate number of shares of the Company’s common stock that may be issued under the ESPP may not exceed 2,500,000 shares and no one employee may purchase any shares under the ESPP having a collective fair market value greater than $25,000 in any one calendar year. The shares available for purchase under the ESPP will be drawn from authorized but unissued shares of common stock. During 2014, the Company issued 46,032 shares of common stock for purchases under the ESPP.
Other
The Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees, and maintains other statutory indemnity plans as required by local laws or regulations.
As of December 31, 2014 and 2013, the Company has a severance accrual included in accrued expenses on the accompanying consolidated balance sheets of $6.3 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. In 2014, the Company recognized approximately $1.7 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 $1.7 million decrease from net reversals recognized for these cost reduction programs, approximately ($1.8) million, $100,000 and ($16,000) were related to activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively. The Company expects the majority of the severance accruals at December 31, 2014 will be paid in 2015.
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 | (1,665 | ) | ||
| Payments | (6,036 | ) | ||
| Foreign currency translation | (81 | ) | ||
| Balance at December 31, 2014 | $ | 6,274 | ||
18. Related Party Transactions
As the Company has done in prior years, the Company reimburses its Executive Chairman for business-related travel services he provides for himself and other Company employees with the use of his own airplane. In 2014, 2013 and 2012, the Company expensed approximately $1.8 million, $2.7 million and $4.2 million, respectively, for such business-related travel expenses. In the second quarter of 2013, the Company paid a $1.5 million fee in connection with the modification of the agreement for the business usage of the airplane that limits reimbursements to $2.5 million per year.
During 2014 and 2013, the Company entered into a number of contracts with HUYA, primarily in Asia, in which the Company will provide up to approximately $416,000 and $19.2 million, respectively, of services on a fee for services basis at arm’s length and at market rates. In 2014 and 2013, the Company provided approximately $2.3 million and $772,000, respectively, of services under these agreements.
During 2014, HUYA subleased office space in Japan from the Company. The nine month sublease ended in September 2014 and the Company recognized $76,000 in sublease income during 2014.
The Company has entered into other transactions with related parties including the funding of research and development costs for HUYA which is discussed in Note 1; investments in and advances to unconsolidated affiliates which are discussed in Note 4; and management fees which are discussed in Note 13.
19. Operations by Geographic Location
The table below presents the Company’s operations by geographical location. The Company attributes revenues to geographical locations based upon where the services are performed. The Company’s operations within each geographical region are further broken down to show each country which accounts for 10% or more of the totals (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Service revenues: | ||||||||||||
| Americas: | ||||||||||||
| United States | $ | 1,589,402 | $ | 1,351,160 | $ | 1,288,990 | ||||||
| Other | 194,597 | 181,814 | 180,568 | |||||||||
| Americas | 1,783,999 | 1,532,974 | 1,469,558 | |||||||||
| Europe and Africa: | ||||||||||||
| United Kingdom | 402,184 | 362,242 | 344,852 | |||||||||
| Other | 1,121,354 | 1,139,262 | 1,086,065 | |||||||||
| Europe and Africa | 1,523,538 | 1,501,504 | 1,430,917 | |||||||||
| Asia-Pacific: | ||||||||||||
| Japan | 471,831 | 438,882 | 500,280 | |||||||||
| Other | 386,454 | 334,980 | 291,543 | |||||||||
| Asia-Pacific | 858,285 | 773,862 | 791,823 | |||||||||
| Total service revenues | 4,165,822 | 3,808,340 | 3,692,298 | |||||||||
| Reimbursed expenses | 1,294,176 | 1,291,205 | 1,173,215 | |||||||||
| Total revenues | $ | 5,459,998 | $ | 5,099,545 | $ | 4,865,513 | ||||||
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| Property, equipment and software, net: | ||||||||
| Americas: | ||||||||
| United States | $ | 167,890 | $ | 168,380 | ||||
| Other | 1,774 | 2,146 | ||||||
| Americas | 169,664 | 170,526 | ||||||
| Europe and Africa: | ||||||||
| United Kingdom | 48,409 | 50,043 | ||||||
| Other | 15,782 | 18,246 | ||||||
| Europe and Africa | 64,191 | 68,289 | ||||||
| Asia-Pacific: | ||||||||
| Japan | 20,752 | 26,096 | ||||||
| Other | 25,271 | 27,574 | ||||||
| Asia-Pacific | 46,023 | 53,670 | ||||||
| Total property, equipment and software, net | $ | 279,878 | $ | 292,485 | ||||
20. 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.
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 GFM, 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:
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Service revenues | ||||||||||||
| Product Development | $ | 3,097,831 | $ | 2,919,730 | $ | 2,728,695 | ||||||
| Integrated Healthcare Services | 1,067,991 | 888,610 | 963,603 | |||||||||
| Total service revenues | 4,165,822 | 3,808,340 | 3,692,298 | |||||||||
| Costs of revenue, service costs | ||||||||||||
| Product Development | 1,820,937 | 1,752,800 | 1,683,340 | |||||||||
| Integrated Healthcare Services | 863,169 | 718,626 | 776,027 | |||||||||
| Total costs of revenue, service costs | 2,684,106 | 2,471,426 | 2,459,367 | |||||||||
| Selling, general and administrative | ||||||||||||
| Product Development | 631,678 | 604,663 | 567,500 | |||||||||
| Integrated Healthcare Services | 140,019 | 127,860 | 127,067 | |||||||||
| General corporate and unallocated | 110,641 | 127,987 | 123,188 | |||||||||
| Total selling, general and administrative | 882,338 | 860,510 | 817,755 | |||||||||
| Income from operations | ||||||||||||
| Product Development | 645,216 | 562,267 | 477,855 | |||||||||
| Integrated Healthcare Services | 64,803 | 42,124 | 60,509 | |||||||||
| General corporate and unallocated | (110,641 | ) | (127,987 | ) | (123,188 | ) | ||||||
| Restructuring costs | (8,988 | ) | (14,071 | ) | (18,741 | ) | ||||||
| Total income from operations | $ | 590,390 | $ | 462,333 | $ | 396,435 | ||||||
| As of December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Assets | ||||||||||||
| Product Development | $ | 2,786,692 | $ | 2,571,502 | $ | 2,016,605 | ||||||
| Integrated Healthcare Services | 330,689 | 299,284 | 351,656 | |||||||||
| General corporate and unallocated | 188,451 | 196,011 | 130,892 | |||||||||
| Total assets | $ | 3,305,832 | $ | 3,066,797 | $ | 2,499,153 | ||||||
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Expenditures to acquire long-lived assets | ||||||||||||
| Product Development | $ | 68,187 | $ | 69,375 | $ | 61,097 | ||||||
| Integrated Healthcare Services | 8,279 | 17,398 | 8,181 | |||||||||
| General corporate and unallocated | 6,184 | 1,574 | 2,058 | |||||||||
| Total expenditures to acquire long-lived assets | $ | 82,650 | $ | 88,347 | $ | 71,336 | ||||||
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Depreciation and amortization expense | ||||||||||||
| Product Development | $ | 95,168 | $ | 82,047 | $ | 68,825 | ||||||
| Integrated Healthcare Services | 20,821 | 20,475 | 24,366 | |||||||||
| General corporate and unallocated | 5,024 | 4,982 | 5,097 | |||||||||
| Total depreciation and amortization expense | $ | 121,013 | $ | 107,504 | $ | 98,288 | ||||||
21. Earnings Per Share
The following table reconciles the basic to diluted weighted average shares outstanding (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Basic weighted average common shares outstanding | 127,994 | 124,147 | 115,710 | |||||||||
| Effect of dilutive stock options and share awards | 3,089 | 3,715 | 2,086 | |||||||||
| Diluted weighted average common shares outstanding | 131,083 | 127,862 | 117,796 | |||||||||
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):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Weighted average shares subject to anti-dilutive share-based awards | 1,241 | 1,765 | 2,363 |
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.
22. Comprehensive Income
Below is a summary of the components of AOCI (in thousands):
| Foreign Currency Translation | Marketable Securities | Derivative Instrument | Defined Benefit Plan | Income Taxes | AOCI | |||||||||||||||||||
| Balance at December 31, 2011 | $ | 25,357 | $ | (191 | ) | $ | (26,345 | ) | $ | (4,788 | ) | $ | 28,838 | $ | 22,871 | |||||||||
| Other comprehensive (loss) income before reclassifications | (6,045 | ) | 658 | (10,698 | ) | (4,616 | ) | 2,614 | (18,087 | ) | ||||||||||||||
| Reclassification adjustments | — | — | 3,501 | 1,169 | (1,759 | ) | 2,911 | |||||||||||||||||
| Balance at December 31, 2012 | 19,312 | 467 | (33,542 | ) | (8,235 | ) | 29,693 | 7,695 | ||||||||||||||||
| Other comprehensive (loss) income before reclassifications | (25,141 | ) | 5,241 | (393 | ) | 2,147 | 1,331 | (16,815 | ) | |||||||||||||||
| Reclassification adjustments | — | — | 13,080 | 1,044 | (5,380 | ) | 8,744 | |||||||||||||||||
| Balance at December 31, 2013 | (5,829 | ) | 5,708 | (20,855 | ) | (5,044 | ) | 25,644 | (376 | ) | ||||||||||||||
| Other comprehensive (loss) income before reclassifications | (49,911 | ) | (976 | ) | (6,834 | ) | (10,218 | ) | 7,225 | (60,714 | ) | |||||||||||||
| Reclassification adjustments | — | (5,004 | ) | 8,630 | 743 | (2,370 | ) | 1,999 | ||||||||||||||||
| Balance at December 31, 2014 | $ | (55,740 | ) | $ | (272 | ) | $ | (19,059 | ) | $ | (14,519 | ) | $ | 30,499 | $ | (59,091 | ) | |||||||
Below is a summary of the (gains) losses reclassified from AOCI into the consolidated statements of income and the affected financial statement line item (in thousands):
| Reclassification Adjustments | Affected Financial Statement Line Item | Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||
| 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 | $ | 12,424 | $ | 12,582 | $ | 3,248 | |||||||
| Foreign exchange forward contracts | Service revenues | (3,794 | ) | 498 | 253 | |||||||||
| Total before income taxes | 8,630 | 13,080 | 3,501 | |||||||||||
| Income tax benefit | 4,022 | 4,991 | 1,313 | |||||||||||
| Total net of income taxes | $ | 4,608 | $ | 8,089 | $ | 2,188 | ||||||||
| Defined benefit plans: | ||||||||||||||
| Amortization of prior service costs | See Note 17 | $ | 107 | $ | 336 | $ | 411 | |||||||
| Amortization of actuarial losses | See Note 17 | 636 | 708 | 758 | ||||||||||
| Total before income taxes | 743 | 1,044 | 1,169 | |||||||||||
| Income tax benefit | 275 | 389 | 446 | |||||||||||
| Total net of income taxes | $ | 468 | $ | 655 | $ | 723 | ||||||||
23. Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information (in thousands):
| Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Interest paid | $ | 93,912 | $ | 115,494 | $ | 127,133 | ||||||
| Income taxes paid, net of refunds | 138,931 | 70,983 | 103,976 | |||||||||
| Non-cash Investing Activities: | ||||||||||||
| Acquisition of property and equipment utilizing capital leases | $ | 2,476 | $ | 3,761 | $ | 5,267 | ||||||
| Fair value of contingent consideration payable in connection with acquisitions | — | 14,300 | 1,990 |
24. Quarterly Financial Data (Unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations (in thousands, except per share data):
| 2014 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Service revenues | $ | 1,005,288 | $ | 1,035,476 | $ | 1,061,013 | $ | 1,064,045 | ||||||||
| Income from operations | 141,316 | 141,000 | 149,142 | 158,932 | ||||||||||||
| Net income | 90,214 | 85,110 | 92,733 | 88,444 | ||||||||||||
| Net (income) loss attributable to noncontrolling interests | (31 | ) | 10 | (79 | ) | (18 | ) | |||||||||
| Net income attributable to Quintiles Transnational Holdings Inc | $ | 90,183 | $ | 85,120 | $ | 92,654 | $ | 88,426 | ||||||||
| Basic earnings per share (1) | $ | 0.69 | $ | 0.66 | $ | 0.73 | $ | 0.70 | ||||||||
| Diluted earnings per share (1) | $ | 0.68 | $ | 0.64 | $ | 0.71 | $ | 0.69 | ||||||||
| 2013 | ||||||||||||||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Service revenues | $ | 927,435 | $ | 944,238 | $ | 932,727 | $ | 1,003,940 | ||||||||
| Income from operations | 115,165 | 94,897 | 125,259 | 127,012 | ||||||||||||
| Net income | 48,156 | 38,353 | 66,584 | 72,934 | ||||||||||||
| Net loss attributable to noncontrolling interests | 153 | 164 | 185 | 62 | ||||||||||||
| Net income attributable to Quintiles Transnational Holdings Inc | $ | 48,309 | $ | 38,517 | $ | 66,769 | $ | 72,996 | ||||||||
| Basic earnings per share (1) | $ | 0.42 | $ | 0.31 | $ | 0.52 | $ | 0.57 | ||||||||
| Diluted earnings per share (1) | $ | 0.41 | $ | 0.30 | $ | 0.50 | $ | 0.55 | ||||||||
| (1) | The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period. |
|---|
25. Subsequent Event
In February 2015, the Board approved a restructuring plan for approximately $30.0 million to align its resources and reduce overcapacity. These actions are expected to occur throughout 2015 and 2016, and are expected to consist of severance, facility closure and other exit related costs.
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