Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should read the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Quintiles IMS Holdings, Inc. (“QuintilesIMS”, the “Company”, “we”, “our” and/or “us”) is a leading worldwide integrated information and technology-enabled healthcare service provider, dedicated to helping its clients improve their clinical, scientific and commercial results. Formed through the merger (the “Merger”) of Quintiles Transnational Holdings Inc. (“Quintiles”) and IMS Health Holdings, Inc. (“IMS Health”) on October 3, 2016, QuintilesIMS’s more than 50,000 employees conduct operations in over 100 countries. Companies seeking to improve real-world patient outcomes through treatment innovations, care provision and access can utilize our broad range of healthcare information, technology and service solutions to drive new insights and approaches. Our solutions span clinical to commercial, bringing our clients an opportunity to realize the full potential of innovations and advanced healthcare outcomes.

Following the merger with IMS Health, we manage our business through three reportable segments, Commercial Solutions (substantially IMS Health’s legacy businesses plus Quintiles’ legacy Real-World Late Phase, Payer/Provider and Advisory businesses), Research & Development Solutions (substantially Quintiles’ legacy Product Development segment) and Integrated Engagement Services (substantially Quintiles’ legacy Integrated Healthcare Services segment). Historical segment reporting has been revised to reflect these changes to the Company’s segment structure.

For a description of our service offerings within our segments, refer to “Business” within Part I, Item 1, of this Annual Report of Form 10-K.

Industry Outlook

For information about the industry outlook and markets that we operate in, refer to “Our Market Outlook” within Part I, Item I of this Annual Report on Form 10-K.

Business Combinations

We have completed and will continue to consider strategic business combinations to enhance our capabilities and offerings in certain areas. In October 2016, we completed the merger with IMS Health to better serve our clients across their entire product lifecycle by (i) improving clinical trial design, recruitment, and execution; (ii) creating real-world information solutions based on the use of medicines by actual patients in normal situations; and (iii) increasing the efficiency of healthcare companies’ commercial organizations through enhanced analytics and outsourcing services. In July 2015, we combined our global clinical trials laboratory operations in our Research & Development Solutions segment with the clinical trials laboratory operations of Quest with the resulting combined business referred to as Q2 Solutions. We own 60% of Q2 Solutions and Quest owns the remaining 40%.

These transactions were accounted for as business combinations and the acquired results of operations are included in our consolidated financial information since the acquisition date with a non-controlling interest for

the portion which we do not own. See Note 15 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to these business combinations.

Sources of Revenue

Total revenues are comprised of revenues from the provision of our services and revenues from reimbursed expenses that are incurred while providing our services. We do not have any material product revenues. Our segment revenues expressed as a percent of 2016 revenues (excluding reimbursed expense revenue) are as follows:


Commercial Solutions	20.4	%
Research & Development Solutions	64.7	%
Integrated Engagement Services	14.9	%

Reimbursed expenses are comprised primarily of payments to physicians (investigators) who oversee clinical trials and travel expenses for our clinical monitors principally within our Research & Development Solutions segment and travel expenses for our sales representatives within our Integrated Engagement Services segment. Reimbursed expenses may fluctuate from period-to-period due, in part, to where we are in the lifecycle of the many contracts that are in progress at a particular point in time. As reimbursed expenses are pass-through costs to our clients with little to no profit and we believe that the fluctuations from period-to-period are not meaningful to our underlying performance, we do not provide any analysis of the fluctuations in these items or their impact on our financial results. We have collection risk on contractually reimbursable expenses, and, from time to time, are unable to obtain reimbursement from the client for costs incurred. When such an expense is not reimbursed, it is classified as costs of revenue on the consolidated statements of income.

Costs and Expenses

Our costs and expenses are comprised primarily of our costs of revenue, reimbursed expenses and selling, general and administrative expenses. Costs of revenue include compensation and benefits for billable employees and personnel involved in production, data management and delivery, and the costs of acquiring and processing data for our information offerings; costs of staff directly involved with delivering technology-related services offerings and engagements, related accommodations and the costs of data purchased specifically for technology services engagements; and other expenses directly related to service contracts such as courier fees, laboratory supplies, professional services and travel expenses. As noted above, reimbursed expenses are comprised principally of payments to investigators who oversee clinical trials and travel expenses for our clinical monitors and sales representatives. Selling, general and administrative expenses include costs related to sales, marketing, and administrative functions (including human resources, legal, finance and general management) for compensation and benefits, travel, professional services, training and expenses for information technology (“IT”), facilities and depreciation and amortization.

Foreign Currency Translation

In 2016, approximately 36% of our revenues were denominated in currencies other than the United States dollar. Because a large portion of our revenues and expenses are denominated in currencies other than the United States dollar and our financial statements are reported in United States dollars, changes in foreign currency exchange rates can significantly affect our results of operations. The revenue and expenses of our foreign operations are generally denominated in local currencies and translated into United States dollars for financial reporting purposes. Accordingly, exchange rate fluctuations will affect the translation of foreign results into United States dollars for purposes of reporting our consolidated results. As a result, we believe that providing the

impact of fluctuations in foreign currency rates on certain financial results can facilitate the analysis of period-to-period comparisons of business performance that excludes the effects of foreign currency rate fluctuations. The constant currency information assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results.

Consolidated Results of Operations

Year ended December 31, 2016 compared to the year ended December 31, 2015 and the year ended December 31, 2015 compared to the year ended December 31, 2014

Summary Results of Operations

The following tables present a summary of our results of operations:


	Year Ended December 31, 2015		Change						Year Ended December 31, 2016
(in millions)		Currency Impact		Constant Currency
Revenues	$	4,326	$	(6	)	$	1,044		$	5,364
Costs of revenue		2,705		(35	)		566			3,236
Selling, general and administrative expenses		815		(19	)		215			1,011
Depreciation and amortization		128		(3	)		164			289
Restructuring costs		30		1			40			71
Merger related costs		—		(1	)		88			87
Impairment charges		2		—			26			28

Income from operations	$	646	$	51		$	(55	)	$	642


	Year Ended December 31, 2014		Change					Year Ended December 31, 2015
(in millions)		Currency Impact		Constant Currency
Revenues	$	4,165	$	(211	)	$	372	$	4,326
Costs of revenue		2,664		(196	)		237		2,705
Selling, general and administrative expenses		781		(37	)		71		815
Depreciation and amortization		121		(4	)		11		128
Restructuring costs		9		(4	)		25		30
Impairment charges		—		—			2		2

Income from operations	$	590	$	30		$	26	$	646

Consolidated Results of Operations

For information regarding our results of operations for Commercial Solutions, Research & Development Solutions and Integrated Engagement Services, refer to “Segment Results of Operations” later in this section.

Revenues


							Change
	Year Ended December 31,						2016 vs. 2015					2015 vs. 2014
(dollars in millions)	2016		2015		2014		$		%			$		%
Revenues	$	5,364	$	4,326	$	4,165	$	1,038		24.0	%	$	161		3.9	%

2016 compared to 2015

In 2016, our revenues increased $1,038 million, or 24.0%, as compared to the same period in 2015. This increase was comprised of constant currency revenue growth of approximately $1,044 million, or 24.1%, and a negative impact of approximately $6 million from the effects of foreign currency fluctuations. The constant currency revenue growth was comprised of a $774 million increase in Commercial Solutions, which includes $806 million from the merger with IMS Health, partially offset by a decline in the legacy service offerings, a $336 million increase in Research & Development Solutions, which includes the incremental impact from the businesses that Quest contributed to Q2 Solutions, and a $66 million decrease in Integrated Engagement Services. The revenue contributed by the Merger in 2016 was negatively impacted by approximately $55 million as a result of adjusting the acquired IMS Health unearned income to fair value as required by purchase accounting.

2015 compared to 2014

In 2015, our revenues increased $161 million, or 3.9%, as compared to 2014. This increase was comprised of constant currency revenue growth of approximately $372 million, or 8.9%, and a negative impact of approximately $211 million from the effects of foreign currency fluctuations. The constant currency revenue growth was comprised of a $98 million increase in Commercial Solutions, which includes the impact from the Encore acquisition which closed in July 2014, a $239 million increase in Research & Development Solutions, which includes the incremental impact from the businesses that Quest contributed to Q2 Solutions, and a $35 million increase in Integrated Engagement Services.

Costs of Revenue, exclusive of Depreciation and Amortization


	Year Ended December 31,
(dollars in millions)	2016			2015			2014
Costs of revenue	$	3,236		$	2,705		$	2,664
% of revenues		60.3	%		62.5	%		64.0	%

2016 compared to 2015

When compared to 2015, costs of revenue in 2016 increased $531 million. This increase included a constant currency increase in expenses of approximately $566 million, or 20.9%, partially offset by a positive impact of approximately $35 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $406 million increase in Commercial Solutions, which includes $438 million from the merger with IMS Health, partially offset by a decline in the legacy service offerings, a $220 million increase in Research & Development Solutions, which includes the incremental impact from the businesses that Quest contributed to Q2 Solutions, and a $60 million decrease in Integrated Engagement Services.

2015 compared to 2014

When compared to 2014, costs of revenue in 2015 increased $41 million. This increase included a constant currency increase in expenses of approximately $238 million, or 8.9%, partially offset by a positive impact of approximately $197 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $71 million increase in Commercial Solutions, which included the impact from the Encore acquisition which closed in July 2014, a $146 million increase in Research & Development Solutions, which included the incremental impact from the businesses that Quest contributed to Q2 Solutions, and a $21 million increase in Integrated Engagement Services.

The decrease in costs of revenue as a percent of revenues for 2015 was primarily as a result of an improvement in constant currency profit margin in the Commercial Solutions, Research & Development Solutions and Integrated Engagement Services segments (as more fully described in the segment discussion later in this section). For 2015, this constant currency profit margin expansion was partially offset by the effect from a higher proportion of consolidated revenues being contributed by our lower margin Integrated Engagement Services segment when compared to 2014 as well as a negative impact from foreign currency fluctuations.

Selling, General and Administrative Expenses, exclusive of Depreciation and Amortization


	Year Ended December 31,
(dollars in millions)	2016			2015			2014
Selling, general and administrative expenses	$	1,011		$	815		$	781
% of revenues		18.8	%		18.8	%		18.8	%

2016 compared to 2015

The $196 million increase in selling, general and administrative expenses in 2016 included a constant currency increase of $215 million, or 26.4%, partially offset by a positive impact of approximately $19 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $151 million increase in Commercial Solutions, which includes $158 million from the merger with IMS Health, partially offset by a decline in the legacy service offerings, a $32 million increase in Research & Development Solutions, which includes the incremental impact from the businesses that Quest contributed to Q2 Solutions, a $3 million increase in Integrated Engagement Services, and a $29 million increase in general corporate and unallocated expenses, which includes $37 million from the merger with IMS Health. The constant currency increase in general corporate and unallocated expenses in 2016 was primarily due to higher stock-based compensation expense.

2015 compared to 2014

The $34 million increase in selling, general and administrative expenses in 2015 included a constant currency increase of $74 million, or 9.5%, partially offset by a positive impact of approximately $42 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $14 million increase in Commercial Solutions, which included the impact from the Encore acquisition which closed in July 2014, a $40 million increase in Research & Development Solutions, which included the incremental impact from the businesses that Quest contributed to Q2 Solutions, a $4 million increase in Integrated Engagement Services, and a $14 million increase in general corporate and unallocated expenses. The constant currency increase in general corporate and unallocated expenses in 2015 was primarily due to higher stock-based compensation expense and costs associated with the Q2 Solutions transaction.

Depreciation and Amortization


	Year Ended December 31,
(dollars in millions)	2016			2015			2014
Depreciation and amortization	$	289		$	128		$	121
% of revenues		5.4	%		3.0	%		2.9	%

2016 compared to 2015

The $161 million increase in depreciation and amortization in 2016 was primarily the result of the merger with IMS Health.

2015 compared to 2014

The $7 million increase in depreciation and amortization in 2015 included a constant currency increase of $11 million, or 9.0%, partially offset by a positive impact of approximately $4 million from the effects of foreign currency fluctuations. The constant currency growth was primarily due to the incremental impact from the businesses that Quest contributed to Q2 Solutions.

Restructuring Costs


	Year Ended December 31,
(in millions)	2016		2015		2014
Restructuring costs	$	71	$	30	$	9

During 2016, we recognized $71 million of restructuring charges, net of reversals for changes in estimates, under our existing restructuring plans. The remaining actions under these plans are expected to occur throughout 2017, and are expected to consist of severance, facility closure and other exit-related costs.

During 2015, we recognized $30 million of restructuring charges, net of reversals for changes in estimates, associated with both the February 2015 restructuring plan and the Q2 Solutions restructuring plan.

During 2014, we recognized $9 million of restructuring charges, net of reversals for changes in estimates, which was primarily related to our 2014 restructuring plans.

Merger Related Costs


	Year Ended December 31,
(in millions)	2016		2015		2014
Merger related costs	$	87	$	—	$	—

During 2016 we recognized $87 million of merger related costs. Merger related costs include the direct and incremental costs associated with the Merger such as (i) investment banking, legal, accounting and consulting fees, (ii) incremental compensation costs triggered under change in control provisions in executive employment agreements, (iii) compensation and related costs of employees 100% dedicated to merger-related integration activities and (iv) severance and other termination costs associated with employees whose positions became redundant as a result of the Merger.

Impairment Charges


	Year Ended December 31,
(in millions)	2016		2015		2014
Impairment charges	$	28	$	2	$	—

During 2016, we recognized $28 million of impairment losses for other than temporary declines in fair value of goodwill ($23 million) and identifiable intangible assets ($5 million) in our Encore reporting unit. See Note 17 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to impairment charges. During the fourth quarter of 2015, we exited a training facility in Japan, resulting in a $2 million impairment of the land and building.

Interest Income and Interest Expense


	Year Ended December 31,
(in millions)	2016			2015			2014
Interest income	$	(4	)	$	(4	)	$	(4	)
Interest expense	$	144		$	101		$	101

Interest income included interest received primarily from bank balances and investments.

Interest expense during 2016 was higher than 2015 due to an increase in the average debt outstanding, primarily as a result of the debt acquired from the Merger.

Interest expense during 2015 reflects the increase in the average debt outstanding, primarily as a result of the $275 million term loan that was issued under the receivables financing facility in December 2014 and our new senior secured credit agreement and senior notes, both of which are described in Liquidity and Capital Resources. This increase was offset by a decrease in the average rate of interest incurred on our debt as compared to 2014.

Loss on Extinguishment of Debt


	Year Ended December 31,
(in millions)	2016		2015		2014
Loss on extinguishment of debt	$	31	$	8	$	—

In the fourth quarter of 2016, we recognized a $31 million loss on extinguishment of debt related to the refinancing of our senior secured credit facilities. The loss on extinguishment of debt included an $8 million call premium, $9 million of unamortized debt issuance costs and $14 million of unamortized discount.

In May 2015, we recognized an $8 million loss on extinguishment of debt related to the refinancing of our senior secured credit facilities. The loss on extinguishment of debt included $1 million of unamortized debt issuance costs, $1 million of unamortized discount and $6 million of related fees and expenses.

See “—Liquidity and Capital Resources” for more information on these transactions.

Other (Income), Expense Net


	Year Ended December 31,
(in millions)	2016		2015		2014
Other (income), expense net	$	(8)	$	2	$	(8)

Other (income) expense, net for 2016 primarily consisted of a gain on the sale of a cost basis investment partially offset by foreign currency net losses.

Other (income), expense net for 2015 primarily consisted of $6 million of expense related to the change in fair value of contingent consideration related to an acquisition, partially offset by $5 million of foreign currency net gains.

Other (income), expense net for 2014 included income of approximately $9 million due to changes in the estimated fair value of contingent consideration from an acquisition as well as a gain from the sale of marketable equity securities of approximately $5 million, partially offset by other expenses, primarily consisting of $5 million of foreign currency net losses.

Income Tax Expense


	Year Ended December 31,
(dollars in millions)	2016			2015			2014
Income tax expense	$	345		$	159		$	149
Effective income tax rate		72.0	%		29.5	%		29.7	%

The increase in the 2016 effective income tax rate was due to a change in our permanent reinvestment assertion on the majority of our cumulative foreign earnings. Due to the Merger, we reevaluated our indefinite reinvestment assertion based on the need for cash in the United States, including funding the Repurchase Program and potential acquisitions. Accordingly, we changed our assertion with respect to $2,801 million of foreign earnings, including $1,865 million of IMS Health’s previously undistributed historical foreign earnings. We intend to use these acquired foreign earnings to fund cash needs in the United States. Deferred income taxes of $625 million were recorded in 2016 related to non-indefinitely reinvested foreign earnings. Of that amount, $373 million was recorded through purchase accounting related to IMS Health’s historical foreign earnings and the remainder of $252 million was recorded through deferred income tax expense.

The decrease in the 2015 effective income tax rate was due to an income tax benefit related to the reversal of uncertain tax positions for tax years whose statute of limitations expired in 2015 and also a change in the relative mix of the profitability between taxing jurisdictions. These benefits were partially offset by additional income tax expense related to an increase in the amount of current year earnings of our foreign subsidiaries not considered permanently reinvested.

Equity in Earnings (Losses) of Unconsolidated Affiliates


	Year Ended December 31,
(in millions)	2016		2015		2014
Equity in (losses) earnings of unconsolidated affiliates	$	(4)	$	8	$	5

Equity in earnings (losses) of unconsolidated affiliates primarily included (losses) earnings from our investment in NovaQuest Pharma Opportunities Fund III, L.P. (“Fund III”). The earnings from Fund III in 2014 were partially offset by losses and write-downs incurred on another equity method investment.

Net (Income) Loss Attributable to Non-controlling Interests


	Year Ended December 31,
(in millions)	2016		2015		2014
Net income attributable to non-controlling interests	$	(15)	$	(1)	$	—

Net income attributable to non-controlling interests in 2016 and 2015 primarily included Quest’s interest in Q2 Solutions.

Segment Results of Operations

Revenues and profit by segment are as follows (dollars in millions):


	Segment Revenues						Segment Profit									Segment Profit Margin
	2016		2015		2014		2016			2015			2014			2016			2015			2014
Commercial Solutions	$	1,096	$	323	$	230	$	236		$	19		$	4			21.5	%		5.9	%		1.7	%
Research & Development Solutions		3,472		3,159		3,050		942			824			744			27.1	%		26.1	%		24.4	%
Integrated Engagement Services		796		844		885		75			78			78			9.4	%		9.2	%		8.8	%

Total		5,364		4,326		4,165		1,253			921			826			23.4	%		21.3	%		19.8	%
General corporate and unallocated								(136	)		(115	)		(106	)
Depreciation and amortization								(289	)		(128	)		(121	)
Restructuring costs								(71	)		(30	)		(9	)
Merger related costs								(87	)		—			—
Impairment charges								(28	)		(2	)		—

Consolidated	$	5,364	$	4,326	$	4,165	$	642		$	646		$	590

Certain costs are not allocated to our segments and are reported as general corporate and unallocated expenses. These costs primarily consist of stock-based compensation, and expenses for corporate overhead functions such as senior leadership, finance, human resources, information technology, facilities and legal. We do not allocate depreciation and amortization, restructuring costs, merger related costs or impairment charges to our segments.

Commercial Solutions


										Change
(dollars in millions)	2016			2015			2014			2016 vs. 2015				2015 vs. 2014
Revenues	$	1,096		$	323		$	230		$	773	239.3	%	$	93	40.4	%
Costs of revenue		644			239			174			405	169.5			65	37.4
as a percentage of revenues		*58.8*	%		74.0	%		75.7	%
Selling, general and administrative expenses		216			65			52			151	232.3			13	25.0
as a percentage of revenues		*19.7*	%		20.1	%		22.6	%

Segment profit	$	236		$	19		$	4		$	217	1,142.1	%	$	15	375.0	%

as a percentage of revenues		*21.5*	%		5.9	%		1.7	%

Revenues

2016 compared to 2015

Commercial Solutions’ revenues were $1,096 million in 2016, an increase of $773 million over 2015, which includes the incremental impact from the Merger of $806 million. The constant currency revenue increase was due to the incremental impact from the Merger and from growth in real-world and late phase research services, partially offset by lower revenues from payer provider and advisory services. The revenue contributed by the Merger in 2016 was negatively impacted by approximately $55 million as a result of adjusting the acquired IMS Health unearned income to fair value as required by purchase accounting.

2015 compared to 2014

Commercial Solutions’ revenues were $323 million in 2015, an increase of $93 million, or 40.4%, over 2014. This increase was comprised of constant currency revenue growth of $98 million, or 42.7%, including $44 million from the Encore acquisition which closed in July 2014, partially offset by a negative impact of approximately $5 million due to the effects of foreign currency fluctuations. The increase in constant currency revenues was due to the impact from the Encore acquisition which closed in July 2014, as well as growth in real-world and late phase research services, partially offset by lower revenue from advisory services.

Costs of Revenue, exclusive of Depreciation and Amortization

2016 compared to 2015

Commercial Solutions’ costs of revenue increased approximately $405 million in 2016. This increase was comprised of a $407 million constant currency increase, which includes $438 million from the Merger, offset by lower costs in payer provider and advisory services due to lower revenue volumes, and $2 million due to the negative effects of foreign currency fluctuations.

2015 compared to 2014

Commercial Solutions’ costs of revenue increased approximately $65 million in 2015. This increase was comprised of a $71 million constant currency increase, or 41.1%, partially offset by a reduction of $6 million from the positive effects of foreign currency fluctuations. The constant currency increase for 2015 was due to the impact of the Encore acquisition and costs to support the growth in real-world and late phase research services.

Selling, General and Administrative Expenses, exclusive of Depreciation and Amortization

2016 compared to 2015

Commercial Solutions’ selling, general and administrative expenses increased approximately $151 million in 2016 as compared to 2015. This increase was primarily due to $158 million from the Merger, an increase in bad debt expense and cost reductions in various other areas.

2015 compared to 2014

Commercial Solutions’ selling, general and administrative expenses increased approximately $13 million, or 25.0%, in 2015 as compared to 2014. This increase was comprised of a $14 million constant currency increase, or 26.9%, partially offset by a reduction of $1 million from the positive effects of foreign currency fluctuations. The constant currency increase was primarily due to the impact from the Encore acquisition which closed in July 2014.

Research & Development Solutions


										Change
(dollars in millions)	2016			2015			2014			2016 vs. 2015				2015 vs. 2014
Revenues	$	3,472		$	3,159		$	3,050		$	313	9.9	%	$	109	3.6	%
Costs of revenue		1,953			1,779			1,764			174	9.8			15	0.9
as a percentage of revenues		*56.3*	%		56.3	%		57.8	%
Selling, general and administrative expenses		577			556			542			21	3.8			14	2.6
as a percentage of revenues		*16.6*	%		17.6	%		17.8	%

Segment profit	$	942		$	824		$	744		$	118	14.3	%	$	80	10.8	%

as a percentage of revenues		*27.1*	%		26.1	%		24.4	%

Backlog and Net New Business

Beginning with the third quarter of 2016, we began reporting net new business and backlog on an as-contracted basis (signed binding commitments and signed contracts during the period). We only report backlog and net new business for the Research & Development Solutions segment on a rolling basis for the last twelve months. Previously, net new business included non-binding written awards, which was consistent with industry practice. We believe the as-contracted method is a more precise approach as it requires a higher threshold and less judgment for backlog inclusion. Net new business totaled $4.3 billion for both the 12 months ended December 31, 2016 and 2015. Ending backlog was $9.5 billion at December 31, 2016, and we expect $2.9 billion of this backlog to convert to revenue in the next 12 months.

Net new business under sole provider arrangements is recorded over the life of the arrangement as projects are awarded. Consistent with our methodology for calculating net new business during a particular period, backlog represents, at a particular point in time, future service revenues from work not yet completed or performed under signed contracts. Once work begins on a project, service revenues are recognized over the duration of the project. Net new business and backlog denominated in foreign currencies are valued each month using the actual average foreign exchange rates in effect during the month.

We believe that backlog and net new business may not be consistent indicators of future revenues because they have been and likely will be affected by a number of factors, including the variable size and duration of projects, many of which are performed over several years, cancellations, and changes to the scope of work during the course of projects. Projects that have been delayed remain in backlog, but the timing of the revenue generated may differ from the timing originally expected. Additionally, projects may be terminated or delayed by the customer or delayed by regulatory authorities. In the event that a client cancels a contract, we typically would be entitled to receive payment for all services performed up to the cancellation date and subsequent client-authorized services related to terminating the canceled project. However, we typically do not have a contractual right to the full amount of the revenue reflected in our backlog or net new business contracts in the event of cancellation. For more details regarding risks related to our backlog, see Part I, Item IA, “Risk Factors—The relationship of backlog to revenues varies over time.”

Revenues

2016 compared to 2015

Research & Development Solutions’ revenues were $3,472 million in 2016, an increase of $313 million, or 9.9%, over 2015. This increase was comprised of constant currency revenue growth of $335 million, or 10.6%, partially offset by a negative impact of approximately $22 million from the effects of foreign currency fluctuations. The constant currency revenue growth primarily included volume-related increases in our services and the incremental impact from the businesses that Quest contributed to Q2 Solutions.

The volume-related revenue growth was related to increases in revenue from both our clinical solutions and services and our clinical trial support services. This growth was due largely to execution on the higher backlog in place as we entered the year. The 2016 growth was negatively impacted by $17 million of non-recurring revenue recognized in the second quarter of 2015 related to the early close out of a client arrangement. The constant currency revenue growth in 2016 was negatively impacted by $27 million of foreign currency exchange rate adjustments associated with client contracts and losses on foreign exchange forward contracts.

2015 compared to 2014

Research & Development Solutions’ revenues were $3,159 million in 2015, an increase of $109 million, or 3.6%, over 2014. This increase was comprised of constant currency revenue growth of $239 million, or 7.8%, partially offset by a negative impact of approximately $130 million from the effects of foreign currency fluctuations. The constant currency revenue growth included a volume-related increase in our services and the incremental impact from the businesses that Quest contributed to Q2 Solutions.

The volume-related revenue growth was related to an increase in revenue from both clinical solutions and services and clinical trial support services. This growth was due largely to execution on the higher backlog in place as we entered the year. In addition, we recognized $17 million of revenue in the second quarter of 2015 as a result of the release of deferred revenue upon the early close out of a client arrangement. The constant currency revenue growth in 2015 was negatively impacted by contract cancellations in 2014 as well as $28 million of foreign currency exchange rate adjustments associated with client contracts and losses on foreign exchange forward contracts

Costs of Revenue, exclusive of Depreciation and Amortization

2016 compared to 2015

Research & Development Solutions’ costs of revenue increased approximately $174 million in 2016 over 2015. This increase included constant currency growth of $219 million, or 12.3%, which includes the incremental impact from the businesses that Quest contributed to Q2 Solutions, partially offset by $45 million from the positive effects of foreign currency fluctuations.

The constant currency costs of revenue growth was primarily due to the impact from the Q2 Solutions transaction and an increase in compensation and related expenses. The increase in compensation and related expenses resulted from (i) an increase in billable headcount resulting from the higher volume of constant currency revenue, (ii) our continued investment in our global delivery network (“GDN”) which is a coordinated global delivery model that enables us to provide standardized, centrally-managed services from seven hub locations across five countries, (iii) annual merit increases and (iv) an increase in competition for qualified personnel in certain markets. The constant currency growth for 2016 also included a $12 million reserve for certain potentially non-reimbursable expenses. These increases in cost were partially offset by $17 million of expense recognized in the second quarter of 2015 related to the early close out of a client arrangement that did not recur in 2016 and a $15 million increase in the benefit from research and development credits received in Europe.

2015 compared to 2014

Research & Development Solutions’ costs of revenue increased approximately $15 million in 2015 over 2014. This increase included a constant currency increase of $146 million, or 8.3%, which included the incremental impact from the businesses that Quest contributed to Q2 Solutions, partially offset by $131 million from the positive effects of foreign currency fluctuations.

The constant currency costs of revenue growth was primarily due to the impact from the Q2 Solutions transaction and an increase in compensation and related expenses. The increase in compensation and related expenses resulted from an increase in billable headcount as a result of the ramp up of new projects as well as annual merit increases and an increase in competition for qualified personnel in certain markets. Also contributing to the constant currency increase was $17 million of expense recognized in the second quarter of 2015 as a result of the release of deferred contract costs upon the early close out of a client arrangement. Costs of revenue growth was partially offset by an $8 million increase in the benefit from research and development credits received in Europe. As a percent of revenues, Research & Development Solutions’ costs of revenue were 56.3% and 57.8% in 2015 and 2014, respectively. The decrease in costs of revenue as a percentage of revenues reflected a favorable impact from the effects of foreign currency fluctuations and a closer alignment of resources with project requirements, including cost efficiencies gained from restructuring actions taken in prior years, which more than offset the impact of the constant currency costs of revenue growth noted above.

Selling, General and Administrative Expenses, exclusive of Depreciation and Amortization

2016 compared to 2015

Research & Development Solutions’ selling, general and administrative expenses increased approximately $21 million, or 3.8%, in 2016 as compared to 2015. This increase was caused by constant currency growth of $32 million, partially offset by a reduction of $11 million from foreign currency fluctuations. As a percent of revenues, Research & Development Solutions’ selling, general and administrative expenses were 16.6% and 17.6% in 2016 and 2015, respectively. The constant currency increase was primarily due to the incremental impact from the businesses that Quest contributed to Q2 Solutions, higher compensation and related expenses due to annual merit increases and an increase in headcount and an increase in bad debt expense.

2015 compared to 2014

Research & Development Solutions’ selling, general and administrative expenses increased approximately $14 million, or 2.6%, in 2015 as compared to 2014. This increase was primarily caused by a constant currency increase of $40 million, which included the incremental impact from the businesses that Quest contributed to Q2 Solutions, partially offset by a reduction of $26 million from the positive effects of foreign currency fluctuations. As a percent of revenues, Research & Development Solutions’ selling, general and administrative expenses were 17.6% and 17.8% in 2015 and 2014, respectively. The constant currency increase was primarily due to the incremental impact from the businesses that Quest contributed to Q2 Solutions, higher compensation and related expenses due to annual merit increases and an increase in headcount.

Integrated Engagement Services


										Change
(dollars in millions)	2016			2015			2014			2016 vs. 2015					2015 vs. 2014
Revenues	$	796		$	844		$	885		$	(48	)	(5.7	)%	$	(41	)	(4.6	)%
Costs of revenue		639			687			726			(48	)	(7.0	)		(39	)	(5.4	)
as a percentage of revenues		*80.3*	%		81.4	%		82.0	%
Selling, general and administrative expenses		82			79			81			3		3.8			(2	)	(2.5	)
as a percentage of revenues		*10.3*	%		9.4	%		9.2	%

Segment profit	$	75		$	78		$	78		$	(3	)	(3.8	)%	$	—		0.0	%

as a percentage of revenues		*9.4*	%		9.2	%		8.8	%

Revenues

2016 compared to 2015

Integrated Engagement Services’ revenues were $796 million in 2016, a decrease of $48 million, or 5.7%, over 2015. This decrease was comprised of a constant currency revenue decrease of $67 million, or 7.9%, partially offset by a positive impact of approximately $19 million due to the effects of foreign currency fluctuations. The decline in constant currency revenues for 2016 was due to a decrease in commercial services in North America (primarily as a result of cancellations that occurred in 2015 and earlier this year), Japan and Europe. The decline in Europe was partially offset by a $10 million benefit from the acceleration of revenue due to a contract modification on a sales force arrangement that fixed a portion of the contract price that previously was not determinable until future sales-based royalties were known.

2015 compared to 2014

Integrated Engagement Services’ revenues were $844 million in 2015, a decrease of $41 million, or 4.6%, over 2014. This decrease was comprised of constant currency revenue growth of $35 million, or 4.0%, partially offset by a negative impact of approximately $76 million due to the effects of foreign currency fluctuations. The increase in constant currency revenues was due to an increase in commercial services in North America, partially offset by a decline in Europe due to the loss of revenue from an agreement to distribute pharmaceutical products in Italy that ended in the fourth quarter of 2014.

Costs of Revenue, exclusive of Depreciation and Amortization

2016 compared to 2015

Integrated Engagement Services’ costs of revenue decreased approximately $48 million in 2016. This decrease was comprised of a $60 million constant currency decrease, or 8.7%, partially offset by $11 million due to the positive effects of foreign currency fluctuations. The constant currency decrease for 2016 was due to a decrease in compensation and related expenses resulting from a decrease in billable headcount.

2015 compared to 2014

Integrated Engagement Services’ costs of revenue decreased approximately $39 million in 2015. This increase was comprised of a $21 million constant currency increase, or 2.9%, more than offset by a reduction of $60 million from the positive effects of foreign currency fluctuations. The constant currency increase for 2015 was due to an increase in compensation and related expenses resulting from an increase in billable headcount

needed to support the higher volume of constant currency revenue and annual merit increases. These increases in compensation and related expenses were partially offset by a decline in other expenses directly related to the agreement to distribute pharmaceutical products in Italy, which ended in the fourth quarter of 2014.

Selling, General and Administrative Expenses, exclusive of Depreciation and Amortization

2016 compared to 2015

Integrated Engagement Services’ selling, general and administrative expenses increased approximately $3 million in 2016 as compared to 2015. This increase was due to a higher level of bad debt expense.

2015 compared to 2014

Integrated Engagement Services’ selling, general and administrative expenses decreased approximately $2 million in 2015 as compared to 2014. This decrease was comprised of a $4 million constant currency increase, or 5.0%, partially offset by a reduction of $6 million from the positive effects of foreign currency fluctuations. The constant currency increase was primarily due to an increase in compensation and related expenses.

Liquidity and Capital Resources

Overview

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital expenditures, acquisitions, investments, debt service requirements, dividends, equity repurchases, adequacy of our revolving credit and receivables financing facilities and access to the capital markets.

We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which those funds can be accessed on a cost effective basis. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences; however, those balances are generally available without legal restrictions to fund ordinary business operations. We have and expect to transfer cash from those subsidiaries to the United States and to other international subsidiaries when it is cost effective to do so. Since the Merger, through December 31, 2016, we have transferred $615 million from foreign subsidiaries to the United States.

Due to the Merger, we reevaluated our indefinite reinvestment assertion based on the need for cash in the United States, including funding the Repurchase Program and potential acquisitions. Accordingly, we changed our assertion with respect to $2,801 million of foreign earnings, including $1,865 million of IMS Health’s previously undistributed historical foreign earnings. We intend to use these acquired foreign earnings to fund cash needs in the United States.

We had a cash balance of $1,198 million at December 31, 2016 ($237 million of which was in the United States), an increase from $977 million at December 31, 2015.

Based on our current operating plan, we believe that our available cash and cash equivalents, future cash flows from operations and our ability to access funds under our revolving credit and receivables financing facilities will enable us to fund our operating requirements and capital expenditures and meet debt obligations for at least the next 12 months. We regularly evaluate our debt arrangements, as well as market conditions, and from time to time we may explore opportunities to modify our existing debt arrangements or pursue additional financing arrangements that could result in the issuance of new debt securities by us or our affiliates. For example, in September 2016, IMS Health issued approximately $1,750 million in senior notes (as discussed below) and we used the proceeds to repay certain outstanding indebtedness, including our senior secured credit facilities, following the Merger. We may use our existing cash, cash generated from operations or dispositions of assets or businesses and/or proceeds from any new financing arrangements or issuances of debt or equity

securities to repay or reduce some of our outstanding obligations, to repurchase shares from our stockholders or for other purposes. As part of our ongoing business strategy, we also continually evaluate new acquisition, expansion and investment possibilities or other strategic growth opportunities, as well as potential dispositions of assets or businesses, as appropriate, including dispositions that may cause us to recognize a loss on certain assets. Should we elect to pursue any such transaction, we may seek to obtain debt or equity financing to facilitate those activities. Our ability to enter into any such potential transactions and our use of cash or proceeds is limited to varying degrees by the terms and restrictions contained in our existing debt arrangements. We cannot provide assurances that we will be able to complete any such financing arrangements or other transactions on favorable terms or at all.

Equity Repurchases

Since 2013, we have repurchased approximately $2,093 million of our equity securities as discussed further below.

Equity Repurchase Program

On October 30, 2013, our Board approved the Repurchase Program authorizing the repurchase of up to $125 million of either our common stock or vested in-the-money employee stock options, or a combination thereof. During 2015, our Board increased the stock repurchase authorization under the Repurchase Program by $600 million, which increased the total amount that has been authorized under the Repurchase Program to $725 million. On November 1, 2016, our Board increased the stock repurchase authorization under the Repurchase Program by $1.5 billion, which increased the total amount that has been authorized under the Repurchase Program to $2.225 billion. The Repurchase Program does not obligate us to repurchase any particular amount of common stock or vested in-the-money employee stock options, and may be modified, extended, suspended or discontinued at any time. The Repurchase Program for common stock does not have an end date. In 2016, we repurchased 14.3 million shares of our common stock at an average market price per share of $76.57 for an aggregate purchase price of $1,098 million under the Repurchase Program. From inception through December 31, 2016, we have repurchased a total of $1,678 million of our securities under the Repurchase Program, consisting of $59 million of stock options and $1,619 million of common stock. As of December 31, 2016, we have remaining authorization to repurchase up to $547 million of our common stock under the Repurchase Program. On February 12, 2017, our Board increased this authorization by $1.0 billion. Additional information regarding the Repurchase Program is presented in Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and Notes 14 and 27 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

In addition, from time to time, we have repurchased and may continue to repurchase common stock through private or other transactions outside of the Repurchase Program.

Other Equity Repurchases

On May 28, 2014, we completed the repurchase of 3.3 million shares of our common stock for $50.23 per share from TPG Quintiles Holdco, L.P., one of our existing stockholders, in a private transaction for an aggregate purchase price of approximately $165 million. The repurchase price per share of common stock was equal to 98% of the closing market price of our common stock on the NYSE on May 27, 2014 (which was $51.26). The repurchase of shares from our existing stockholder was authorized in compliance with our related party transactions approval policy. We funded this private repurchase transaction with cash on hand. This private repurchase transaction was separate from and in addition to the Repurchase Program.

On November 10, 2014, we completed the repurchase of 4.3 million shares of our common stock for $58.09 per share for an aggregate purchase price of approximately $250 million. We funded this repurchase transaction with a combination of cash on hand and a $150 million draw on our revolving credit facility which was subsequently repaid. This repurchase transaction was separate from and in addition to the Repurchase Program.

Debt

The following table presents a summary of debt refinancing activities just prior to and after the merger of Quintiles and IMS Health on October 3, 2016:


(in millions)	Legacy Quintiles		Legacy IMS Health		Refinancing Proceeds (Repayments)			QuintilesIMS
Senior Secured Credit Facilities:
Term Loans A and B due through 2022	$	1,389	$	—	$	(1,389	)	$	—
Term Loans A due 2021		—		—		1,350			1,350
Term Loans B due 2021		—		2,516		—			2,516
Term Loans A due 2019		—		884		(884	)		—
4.875% Senior Notes due 2023		800		—		—			800
5.0% Senior Notes due 2026		—		—		1,050			1,050
3.5% Senior Notes due 2024		—		—		698			698
4.125% Senior Notes due 2023		—		307		—			307
6.0% Senior Notes due 2020		—		500		(500	)		—
Receivables financing facility due 2018		275		—		—			275
Revolving Credit Facility		—		298		(298	)		—

Total debt refinancing activities	$	2,464	$	4,505	$	27		$	6,996

As of December 31, 2016, we had $7.2 billion of total indebtedness, excluding $656 million of additional available borrowings under our revolving credit facilities. The summary of debt refinancing activities presented in the above table do not reflect amounts drawn on our Revolving Credit Facility unrelated to the Merger during 2016. See Note 11 to our audited consolidated financial statements included elsewhere in the Annual Report on Form 10-K for additional details regarding our credit arrangements.

Senior Secured Credit Agreement and Senior Notes

At December 31, 2016, our senior secured credit facility provides financing of up to approximately $4,772 million, which consisted of $4,147 million principal amount of debt outstanding (as disclosed in Note 11 to our audited consolidated financial statements included elsewhere in the Annual Report on Form 10-K) and $625 million of commitments that expire in 2021. The revolving credit facility is comprised of a $450 million senior secured revolving facility available in U.S. Dollars, a $400 million senior secured revolving facility available in U.S. Dollars, Euros, Swiss Francs and other foreign currencies and a $150 million senior secured revolving facility available in U.S. Dollars and Yen. The term A loans and revolving credit facility mature in October 2021, while the term B loans mature in March 2021. Under certain circumstances, the maturity date of the term A loans and the senior secured revolving facility may be accelerated to 2020. We are required to make scheduled quarterly payments on the term A loans equal to 1.25% of the original principal amount, with the remaining balance paid at maturity. We are required to make scheduled quarterly payments on the term B loans equal to approximately 0.25% of the original principal amount, with the remaining balance paid at maturity. In addition, beginning with fiscal year ending December 31, 2017, we are required to apply 50% of excess cash flow (as defined in our senior secured credit facility), subject to a reduction to 25% or 0% depending upon our senior secured first lien net leverage ratio, for prepayment of the Term Loans, with any such prepayment to be applied toward principal payments due in subsequent quarters. We are also required to pay an annual commitment fee that ranges from 0.30% to 0.40% in respect of any unused commitments under the revolving credit facility. The senior secured credit facility is collateralized by substantially all of our assets and the assets of our material domestic subsidiaries including 100% of the equity interests of substantially all of our material domestic subsidiaries and 66% of the equity interests of substantially all of our first-tier material foreign subsidiaries and their domestic subsidiaries.

On October 3, 2016, we refinanced the term A loans due 2019 (approximately $884 million) assumed in the Merger with a term A loan facility due in 2021 for an aggregate principal amount of approximately $1,350 million comprised of both U.S. Dollar denominated term A loans and Euro denominated term A loans. Additionally, the revolving credit facility was refinanced to an aggregate principal amount equal to $1,000 million. The additional proceeds were used, in part, to fund the redemption on November 1, 2016 of $500 million of 6% Senior Notes due 2020 assumed in the Merger, at a redemption price equal to 101.5% of the aggregate outstanding principal amount plus accrued interest to the redemption date. We incurred a loss on extinguishment of debt of approximately $8 million related to the aggregate payments for make-whole premiums.

On September 28, 2016, IMS Health issued senior unsecured notes totaling principal amount of $1,750 million, which consisted of (i) $1,050 million of 5% senior notes due October 2026 (the “5% Dollar Notes”) and (ii) €625 million of 3.5% senior notes due October 2024 (the “3.5% Euro Notes” and, together with the 5% Dollar Notes, the “2016 Notes”). The proceeds of the 2016 Notes, which we assumed upon closing of the Merger, were used on October 3, 2016 to repay in full ($1,389 million) the term loans outstanding under the Quintiles Transnational senior secured credit facilities. Interest on the 2016 Notes is payable semi-annually, beginning on April 15, 2017. The notes are guaranteed on a senior unsecured basis by our wholly-owned domestic restricted subsidiaries (excluding IMS Japan K.K.) and, subject to certain exceptions, each of our future domestic subsidiaries that guarantees our other indebtedness or indebtedness of any of the guarantors. The 5% Dollar Notes and the 3.5% Euro Notes may be redeemed, either together or separately, prior to their final stated maturity, subject to a customary make-whole premium, at any time prior to October 15, 2021 with respect to the 5% Dollar Notes and October 15, 2019 with respect to the 3.5% Euro Notes (in each case subject to a customary “equity claw” redemption right) and thereafter subject to annually declining redemption premiums at any time prior to October 15, 2024 with respect to the 5% Dollar Notes and October 15, 2021 with respect to the 3.5% Euro Notes.

We also assumed in the Merger €275 million aggregate principal amount of its 4.125% Senior Notes due in April 2023 (the “4.125% Senior Notes”). Interest on the 4.125% Senior Notes is payable semi-annually each year and commenced on October 1, 2015. The 4.125% Senior Notes are guaranteed on a senior unsecured basis by IMS Health’s wholly-owned domestic subsidiaries that are guarantors under the senior secured credit facilities. We may redeem the 4.125% Senior Notes, in whole or in part, at any time prior to April 1, 2018 at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of redemption, plus a “make-whole” premium. On or after April 1, 2018, we may redeem all or a portion of the 4.125% Senior Notes at predetermined redemption prices set forth in the indenture governing the 4.125% Senior Notes plus accrued and unpaid interest to the date of redemption.

2015 Financing Transactions

On May 12, 2015, through its wholly-owned subsidiary, Quintiles Transnational, entered into new senior secured credit facilities, which consisted of a $500 million revolving credit facility and $1.45 billion of term loans. In addition, Quintiles Transnational issued $800 million of 4.875% senior secured notes due 2023 (the “4.875% Senior Notes”) in a private placement. The term loans, in the amount of $1,389 million, were repaid in full on October 3, 2016, as discussed above. Interest on the 4.875% Senior Notes is paid semiannually on May 15 and November 15 of each year until maturity. The Senior Notes are unsecured senior obligations of QuintilesIMS and are effectively subordinated in right of payment to all secured obligations of QuintilesIMS, to the extent of the value of any collateral. Also on May 12, 2015, an outstanding term loan was repaid with proceeds from the new credit facilities entered into that day and we recognized an $8 million loss on extinguishment of debt, which included $1 million of unamortized debt issuance costs, $1 million of unamortized discount and $6 million of related fees and expenses.

Receivables Financing Facility

On December 5, 2014, we entered into a four-year arrangement to securitize certain of our accounts receivable. Under the receivables financing facility, certain of our accounts receivable are sold on a non-recourse basis by certain of our consolidated subsidiaries to another of our 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 million term loan and a $25 million revolving loan commitment. The revolving loan commitment may be increased by an additional $35 million as amounts are repaid under the term loan. QuintilesIMS 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 our obligations or any obligations of our subsidiaries. As of December 31, 2016, the full $25 million of revolving loan commitment was available under the receivables financing facility.

We used the proceeds from the term loan under the receivables financing facility to repay in full the amount outstanding on the then outstanding revolving credit facility under its then outstanding senior secured credit agreement ($150 million), to repay $25 million of the then outstanding Term Loan B-3, to pay related fees and expenses and the remainder was used for general working capital purposes.

Restrictive Covenants

Our debt agreements provide for certain covenants and events of default customary for similar instruments, including a covenant not to exceed a specified ratio of consolidated senior secured net indebtedness to Consolidated EBITDA, as defined in the senior secured credit facility and a covenant to maintain a specified minimum interest coverage ratio. If an event of default occurs under any of the Company’s or the Company’s subsidiaries’ financing arrangements, the creditors under such financing arrangements will be entitled to take various actions, including the acceleration of amounts due under such arrangements, and in the case of the lenders under the revolving credit facility and New Term Loans, other actions permitted to be taken by a secured creditor. Our long-term debt arrangements contain usual and customary restrictive covenants that, among other things, place limitations on our ability to declare dividends. For additional information regarding these restrictive covenants, see Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy” and Note 11 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. At December 31, 2016, the Company was in compliance with the financial covenants under the Company’s financing arrangements.

Years ended December 31, 2016, 2015 and 2014

Cash Flow from Operating Activities


	Year Ended December 31,
(in millions)	2016		2015		2014
Net cash provided by operating activities	$	860	$	476	$	433

2016 compared to 2015

Cash provided by operating activities increased $384 million in 2016 as compared to 2015. The increase in cash provided by operating activities reflects the increase in net income as adjusted for non-cash items necessary to reconcile net income to cash provided by operating activities. Also contributing to the increase were lower payments for income taxes ($15 million), and lower cash used in days sales outstanding (“DSO”) and accounts payable and accrued expenses. The lower cash used in DSO reflects a two-day increase in DSO in 2016 compared to a seven-day increase in DSO in 2015. DSO can shift significantly at each reporting period depending on the timing of cash receipts under contractual payment terms relative to the recognition of revenue over a project lifecycle.

2015 compared to 2014

Cash provided by operating activities increased $43 million in 2015 as compared to 2014. The increase in cash provided by operating activities primarily reflects the increase in net income as adjusted for non-cash items necessary to reconcile net income to cash provided by operating activities. Also contributing to the increase was an increase in accounts payable and accrued expenses ($59 million) as well as lower payments for interest ($12 million) and income taxes ($18 million). These improvements in operating cash flow were partially offset by higher cash used in DSO. The higher cash used in DSO reflects a seven-day increase in DSO in 2015 compared to a two-day increase in DSO in 2014.

Cash Flow from Investing Activities


	Year Ended December 31,
(in millions)	2016		2015		2014
Net cash provided by (used in) investing activities	$	1,731	$	(67)	$	(173)

2016 compared to 2015

Cash provided by investing activities increased $1,798 million in 2016 as compared 2015. This increase was primarily related to cash from the acquisition of businesses, including the merger with IMS Health ($1,887 million) partially offset by higher cash used for the acquisition of property, equipment and software ($86 million).

2015 compared to 2014

Cash used in investing activities decreased $106 million in 2015 as compared to 2014. This decrease was primarily related to cash acquired in the Q2 Solutions transaction ($32 million) compared to cash used for the acquisition of businesses ($92 million) in 2014, partially offset by the termination of interest rate swaps in connection with the refinancing transaction in 2015 ($11 million) and higher cash used for investments.

Cash Flow from Financing Activities


	Year Ended December 31,
(in millions)	2016		2015		2014
Net cash used in financing activities	$	(2,284)	$	(249)	$	(130)

2016 compared to 2015

Cash used in financing activities increased $2,035 million in 2016 as compared to 2015. The increase in cash used in financing activities was primarily related to lower net borrowing under our credit facilities ($1,488 million) and higher cash used to repurchase common stock ($582 million).

2015 compared to 2014

Cash used in financing activities increased $119 million in 2015 as compared to 2014. The increase in cash used in financing activities in 2015 was primarily related to higher cash used to repurchase common stock ($100 million) and lower cash provided by debt issuances, net of repayments ($75 million), partially offset by higher cash from stock issued under employee stock purchase and option plans ($29 million), and an increase in the excess income tax benefits from stock-based award activities ($19 million).

Contingencies

We are exposed to certain known contingencies that are material to our investors. The facts and circumstances surrounding these contingencies and a discussion of their effect on us are in Note 13 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These contingencies may have a material effect on our liquidity, capital resources or results of operations. In addition, even where our reserves are adequate, the incurrence of any of these liabilities may have a material effect on our liquidity and the amount of cash available to us for other purposes.

We believe that we have made appropriate arrangements in respect of the future effect on us of these known contingencies. We also believe that the amount of cash available to us from our operations, together with cash from financing, will be sufficient for us to pay any known contingencies as they become due without materially affecting our ability to conduct our operations and invest in the growth of our business.

Contractual Obligations and Commitments

Below is a summary of our future payment commitments by year under contractual obligations as of December 31, 2016 (in millions):


	2017		2018 - 2019		2020 - 2021		Thereafter		Total
Long-term debt, including interest(1)	$	371	$	991	$	4,313	$	3,070	$	8,745
Operating leases		171		217		131		159		678
Data acquisition and telecommunication services		261		224		160		7		652
Purchase obligations(2)		28		20		4		—		52
Commitments to unconsolidated affiliates(3)		—		—		—		—		—
Benefit obligations(4)		33		42		47		141		263
Uncertain income tax positions(5)		2		—		—		—		2

Total	$	866	$	1,494	$	4,655	$	3,377	$	10,392

(1)	Interest payments on our debt are based on the interest rates in effect on December 31, 2016.

(2)	Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions.

(3)	We are currently committed to invest $70 million in private equity funds. As of December 31, 2016, we have funded approximately $51 million of these commitments and we have approximately $19 million remaining to be funded.

(4)

Amounts represent expected future benefit payments for our pension and postretirement benefit plans, as well as expected contributions for 2016 for our funded pension benefit plans. We made cash contributions totaling approximately $10 million to our defined benefit plans in 2016, and we estimate that we will make contributions totaling approximately $23 million in 2017. Due to the potential impact of future plan investment performance, changes in interest rates, changes in other economic and demographic assumptions and changes in legislation in foreign jurisdictions, we are not able to reasonably estimate the timing and amount of contributions that may be required to fund our defined benefit plans for periods beyond 2017.

(5)	As of December 31, 2016, our liability related to uncertain income tax positions was approximately $75 million, $73 million of which has not been included in the above table as we are unable to predict when these liabilities will be paid due to the uncertainties in the timing of the settlement of the income tax positions.

Application of Critical Accounting Policies

Note 1 to the audited consolidated financial statements provided elsewhere in this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidated financial statements. The preparation of our consolidated financial statements 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. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize 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 client, (3) the collection of fees is probable and (4) the arrangement consideration is fixed or determinable. We do 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 contracts in which portions of revenue are contingent upon the occurrence of uncertain future events we recognize the revenue only after it has been earned and the contingency has been resolved.

For 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 we charge when the deliverable is sold separately. When VSOE is not available to determine selling price, we use relevant third-party evidence (“TPE”) of selling price, if available. When neither VSOE nor TPE of selling price exists, we use our best estimate of selling price considering all relevant information that is available without undue cost and effort.

We derive the majority of our revenues in the Commercial Solutions segment from various information and technology service offerings. Our revenue arrangements may include multiple elements. A typical information offerings arrangement (primarily under fixed-price contracts) may include an ongoing subscription-based deliverable for which revenue is recognized ratably as earned over the contract period and/or a one-time delivery of data offerings for which revenue is recognized upon delivery, assuming all other criteria are met. Our subscription arrangements typically have terms ranging from one to three years and are generally non-cancelable and do not contain refund-type provisions. We also offer technology services offerings that enable our clients to make informed business decisions. Technology services offerings consist of a mix of small and large-scale services and consulting projects, multi-year outsourcing contracts and SaaS licenses. These arrangements typically have terms ranging from several weeks to three years, with a majority having terms of one year or less. Revenues for services engagements where deliverables occur ratably over time are recognized on a straight-line basis over the term of the arrangement. Revenues from time and material contracts are recognized as the services are provided. Revenues from fixed price ad hoc services and consulting contracts are recognized either over the contract term based on the ratio of the number of hours incurred for services provided during the period compared to the total estimated hours to be incurred over the entire arrangement (efforts based), or upon delivery (completed contract).

The majority of revenue in our Research & Development Solutions segment and Integrated Engagement Services segment is recognized based on objective contractual criteria and does not require significant estimates or judgments. However, at any point in time we are working on thousands of active client projects, which are governed by individual contracts. Most projects are customized based on the needs of the client, the type of services being provided, therapeutic indication of the drug, geographic locations and other variables. Project specific terms related to pricing, billing terms and the scope and type of services to be provided are generally negotiated and contracted on a project-by-project basis. Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in contract value. In such situations, we enter into

negotiations for a contract amendment to reflect the change in scope and the related price. Depending on the complexity of the amendment, the negotiation process can take from a few weeks for a simple adjustment to several months for a complex amendment. Management may authorize the project team to commence work on activities outside the contract scope while we negotiate and finalize the contract amendment. In these limited cases, if we are not able to obtain a contract amendment from the client, our profit margin on the arrangement may be impacted. This result occurs because our costs of delivery are expensed as they are incurred, while revenue is not recognized unless the client has agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and all other revenue recognition criteria are met. Most contracts are terminable upon 30 to 90 days notice by the client. Our risk of material loss in these situations is mitigated as these contracts generally require payment to us for expenses to wind down the clinical trial or project, fees earned to date and, in some cases, a termination fee or a payment of some portion of the fees or profits that could have been earned under the contract if it had not been terminated early. In addition, our contract terms provide for payment terms that generally correspond with performance of the services. Termination fees are included in revenues when realization is assured.

Accounts Receivable and Unbilled Services

Accounts receivable represents amounts billed to clients. Revenues recognized in excess of billings are classified as unbilled services. The realization of these amounts is based on the client’s willingness and ability to pay us. We have an allowance for doubtful accounts based on management’s estimate of probable losses we expect to incur resulting from a client failing to pay us. Our allowance for doubtful accounts, and losses from clients failing to pay us, have not been material to our results of operations. If any of these estimates change or actual results differs from expected results, then an adjustment is recorded in the period in which the amounts become reasonably estimable. These adjustments could have a material effect on our results of operations.

Investments in Unconsolidated Affiliates—Equity Method Investments

We have investments in unconsolidated affiliates that are accounted for under the equity method of accounting. Periodically, we review our investments for a decline in value which we believe may be other than temporary. Should we identify such a decline, we will record a loss through earnings to establish a new cost basis for the investment. These losses could have a material adverse effect on our results of operations.

Income Taxes

Certain items of income and expense are not recognized on our income tax returns and financial statements in the same year, which creates timing differences. The income tax effect of these timing differences results in (1) deferred income tax assets that create a reduction in future income taxes and (2) deferred income tax liabilities that create an increase in future income taxes. Recognition of deferred income tax assets is based on management’s belief that it is more likely than not that the income tax benefit associated with certain temporary differences, income tax operating loss and capital loss carryforwards and income tax credits, would be realized. We recorded a valuation allowance to reduce our deferred income tax assets for those deferred income tax items for which it was more likely than not that realization would not occur. We determined the amount of the valuation allowance based, in part, on our assessment of future taxable income and in light of our ongoing income tax strategies. If our estimate of future taxable income or tax strategies changes at any time in the future, we would record an adjustment to our valuation allowance. Recording such an adjustment could have a material effect on our financial position.

Income tax expense is based on the distribution of profit before income tax among the various taxing jurisdictions in which we operate, adjusted as required by the income tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate. We do not consider the undistributed earnings of most of our foreign subsidiaries to be

indefinitely reinvested outside of the United States. Accordingly, we have provided a deferred income tax liability related to those undistributed earnings. The associated foreign income taxes on our foreign earnings could be available as a credit in the United States on our income taxes. We recognize foreign tax credits to the extent that the recognition is supported by projected foreign source income.

Business Combinations

We use the acquisition method to account for business combinations, and accordingly, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree are recorded at their estimated fair values on the date of the acquisition. We use significant judgments, estimates and assumptions in determining the estimated fair value of assets acquired, liabilities assumed and non-controlling interest including expected future cash flows; discount rates that reflect the risk associated with the expected future cash flows; and estimated useful lives.

When a business combination involves contingent consideration, we recognize a liability equal to the estimated fair value of the contingent consideration obligation at the date of the acquisition. The estimate of fair value of a contingent consideration liability requires subjective assumptions to be made regarding future business results including revenues and net new business, discount rates that reflect the risk associated with the expected future cash flows and probabilities assigned to various potential business result scenarios. We reassess the estimated fair value of the contingent consideration each financial reporting period over the term of the arrangement. Any resulting changes are recognized in earnings and could have a material effect on our results of operations.

Goodwill, Tangible and Identifiable Intangible Assets

We have recorded and allocated to our reporting units the excess of the cost over the fair value of the net assets acquired, known as goodwill. The recoverability of the goodwill and indefinite-lived intangible assets are evaluated annually for impairment, or if and when events or circumstances indicate a possible impairment. We review the carrying values of other identifiable intangible assets if the facts and circumstances indicate a possible impairment. Goodwill and indefinite-lived intangible assets are not amortized, and other identifiable intangible assets are amortized over their estimated useful lives. We believe that the risk of an impairment to goodwill or indefinite-lived intangible assets is currently very low.

For goodwill, we perform 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 estimated fair value is less than the book value for the respective reporting unit, we apply a two-step impairment test in which we determine 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, we perform the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. We determine 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. The inherent subjectivity of applying a discounted cash flow and market comparables approach to valuing our assets and liabilities could have a significant impact on our analysis. Any future impairment could have a material adverse effect on our financial condition or results of operations.

For indefinite-lived intangible assets, we perform 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, we determine 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. Any future impairment could have a material adverse effect on our financial condition or results of operations.

We review the carrying values of property and equipment 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 flows over the remaining depreciation or amortization period, we will reduce carrying values to estimated fair value. The inherent subjectivity of our estimates of future cash flows could have a significant impact on our analysis. Any future write-offs of long-lived assets could have a material adverse effect on our financial condition or results of operations.

Stock-based Compensation

We measure compensation cost for most stock-based payment awards (stock options and stock appreciation rights) granted to employees and non-employee directors at fair value using the Black-Scholes-Merton option-pricing model. Stock-based compensation expense includes stock-based awards granted to employees and non-employee directors and has been reported in selling, general and administrative expenses in our consolidated statements of income based upon the classification of the individuals who were granted stock-based awards.

The Black-Scholes-Merton option-pricing model requires the use of subjective assumptions, including share price volatility, the expected life of the award, risk-free interest rate and the fair value of the underlying common shares on the date of grant. In developing our assumptions, we take into account the following:

	•		We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future award grants;

	•		We determine the risk-free interest rate by reference to implied yields available from United States Treasury securities with a remaining term equal to the expected life assumed at the date of grant;

	•		We estimate the dividend yield to be zero as we do not currently anticipate paying any future dividends;

	•		We estimate the average expected life of the award based on our historical experience; and

	•		We estimate forfeitures based on our historical analysis of actual forfeitures.

Pensions and Other Postretirement Benefits

We provide retirement benefits to certain employees, including defined benefit pension plans and postretirement medical plans. The determination of benefit obligations and expense is based on actuarial models. In order to measure benefit costs and obligations using these models, critical assumptions are made with regard to the discount rate, expected return on plan assets, cash balance crediting rate, lump sum conversion rate and the assumed rate of compensation increases. In addition, retiree medical care cost trend rates are a key assumption used exclusively in determining costs for our postretirement health care and life insurance benefit plans. Management reviews these critical assumptions at least annually. Other assumptions involve demographic factors such as the turnover, retirement and mortality rates. Management reviews these assumptions periodically and updates them when its experience deems it appropriate to do so.

The discount rate is the rate at which the benefit obligations could be effectively settled and is determined annually by management. For United States plans, the discount rate is based on results of a modeling process in

which the plans’ expected cash flow (determined on a projected benefit obligation basis) is matched with spot rates developed from a yield curve comprised of high-grade (Moody’s Aa and above, or Standard and Poor’s AA and above) non-callable corporate bonds to develop the present value of the expected cash flow, and then determining the single rate (discount rate) which when applied to the expected cash flow derives that same present value. In the United Kingdom specifically, the discount rate is set based on the yields on a universe of high quality non-callable corporate bonds denominated in the British Pound, appropriate to the duration of plan liabilities. For the other non-United States plans, the discount rate is based on the current yield of an index of high quality corporate bonds. As a sensitivity measure, a 25 basis point increase in the discount rate for either our United States plan or our United Kingdom plans, absent any offsetting changes in other assumptions, would result in less than $1 million increase in pension expense within the Consolidated Statements of Income.

Under the United States qualified retirement plan, participants have a notional retirement account that increases with pay and investment credits. The rate used to determine the investment credit (cash balance crediting rate) varies monthly. At retirement, the account is converted to a monthly retirement benefit.

In selecting an expected return on plan asset assumption, we consider the returns being earned by each plan investment category in the fund, the rates of return expected to be available for reinvestment and long-term economic forecasts for the type of investments held by the plan. The actual return on plan assets will vary from year to year versus this assumption. We believe it is appropriate to use long-term expected forecasts in selecting the expected return on plan assets. As such, there can be no assurance that our actual return on plan assets will approximate the long-term expected forecasts. As a sensitivity measure, a 25 basis point change in the expected return on assets (“EROA”) assumption for our United States plan, absent any offsetting changes in other assumptions, would result in a less than $1 million increase or decrease in pension expense. For our United Kingdom plans, a 25 basis point change in the EROA assumption, absent any offsetting changes in other assumptions, would result in a less than $1 million increase or decrease in pension expense. While we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement obligations and future expense.

We utilize a corridor approach to amortizing unrecognized gains and losses in the pension and postretirement plans. Amortization occurs when the accumulated unrecognized net gain or loss balance exceeds the criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess unrecognized gain or loss balance is then amortized using the straight-line method over the average remaining service-life of active employees expected to receive benefits. At December 31, 2016, the weighted-average remaining service-life of active employees was approximately 13 years.

Foreign Currency

We have significant investments in non-United States countries. Therefore, changes in the value of foreign currencies affect our Consolidated Financial Statements when translated into United States Dollars. For all operations outside the United States where we have designated the local currency as the functional currency, assets and liabilities are translated using end-of-period exchange rates; revenues, expenses and cash flows are translated using average rates of exchange prevailing during the period the transactions occurred. Translation gains and losses are included as an adjustment to the accumulated other comprehensive income (loss) component of stockholders’ deficit. In addition, gains and losses from foreign currency transactions, such as those resulting from the settlement and revaluation of third-party and intercompany foreign receivables and payables, are included in the determination of net income (loss).

For operations in countries that are considered to be highly inflationary or where the United States Dollar is designated as the functional currency, monetary assets and liabilities are remeasured using end-of-period exchange rates, whereas non-monetary accounts are remeasured using historical exchange rates, and all remeasurement and transaction adjustments are recognized in other expense (income), net.

Recently Issued Accounting Standards

Information relating to recently issued accounting standards is included in Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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