filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of IQVIA Holdings Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2017, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
| /s/ Ari Bousbib | /s/ Michael R. McDonnell | |
| Ari Bousbib Chairman, Chief Executive Officer and President (Principal Executive Officer) | Michael R. McDonnell Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
February 16, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of IQVIA Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of IQVIA Holdings Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, cash flows and stockholders’ equity (deficit) for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 16, 2018
We have served as the Company’s auditor since 2002.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | 2017 | 2016 | 2015 | |||||||||
| Revenues | $ | 8,060 | $ | 5,364 | $ | 4,326 | ||||||
| Reimbursed expenses | 1,679 | 1,514 | 1,411 | |||||||||
| Total revenues | 9,739 | 6,878 | 5,737 | |||||||||
| Costs of revenue, exclusive of depreciation and amortization | 4,622 | 3,236 | 2,705 | |||||||||
| Costs of revenue, reimbursed expenses | 1,679 | 1,514 | 1,411 | |||||||||
| Selling, general and administrative expenses | 1,605 | 1,011 | 815 | |||||||||
| Depreciation and amortization | 1,011 | 289 | 128 | |||||||||
| Restructuring costs | 63 | 71 | 30 | |||||||||
| Merger related costs | — | 87 | — | |||||||||
| Impairment charges | 40 | 28 | 2 | |||||||||
| Income from operations | 719 | 642 | 646 | |||||||||
| Interest income | (7 | ) | (4 | ) | (4 | ) | ||||||
| Interest expense | 346 | 144 | 101 | |||||||||
| Loss on extinguishment of debt | 19 | 31 | 8 | |||||||||
| Other expense (income), net | 30 | (8 | ) | 2 | ||||||||
| Income before income taxes and equity in earnings (losses) of unconsolidated affiliates | 331 | 479 | 539 | |||||||||
| Income tax (benefit) expense | (987 | ) | 345 | 159 | ||||||||
| Income before equity in earnings (losses) of unconsolidated affiliates | 1,318 | 134 | 380 | |||||||||
| Equity in earnings (losses) of unconsolidated affiliates | 10 | (4 | ) | 8 | ||||||||
| Net income | 1,328 | 130 | 388 | |||||||||
| Net income attributable to non-controlling interests | (19 | ) | (15 | ) | (1 | ) | ||||||
| Net income attributable to IQVIA Holdings Inc. | $ | 1,309 | $ | 115 | $ | 387 | ||||||
| Earnings per share attributable to common stockholders: | ||||||||||||
| Basic | $ | 6.01 | $ | 0.77 | $ | 3.15 | ||||||
| Diluted | $ | 5.88 | $ | 0.76 | $ | 3.08 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 217.8 | 149.1 | 123.0 | |||||||||
| Diluted | 222.6 | 152.0 | 125.6 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 1,328 | $ | 130 | $ | 388 | ||||||
| Comprehensive income (loss) adjustments: | ||||||||||||
| Unrealized gains (losses) on derivative instruments, net of income tax expense (benefit) of $1, $3 and ($4) | 4 | (7 | ) | (9 | ) | |||||||
| Defined benefit plan adjustments, net of income tax expense of $3, $11 and $— | 5 | 23 | — | |||||||||
| Foreign currency translation, net of income tax benefit of ($201), ($9) and ($5) | 614 | (513 | ) | (60 | ) | |||||||
| Reclassification adjustments: | ||||||||||||
| (Gains) losses on derivative instruments included in net income, net of income tax expense of $—, $7 and $6 | (1 | ) | 21 | 12 | ||||||||
| Amortization of actuarial losses and prior service costs included in net income | 1 | 1 | 1 | |||||||||
| Comprehensive income (loss) | 1,951 | (345 | ) | 332 | ||||||||
| Comprehensive (income) loss attributable to non-controlling interests | (26 | ) | 1 | 3 | ||||||||
| Comprehensive income (loss) attributable to IQVIA Holdings Inc. | $ | 1,925 | $ | (344 | ) | $ | 335 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | 2017 | 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 959 | $ | 1,198 | ||||
| Trade accounts receivable and unbilled services, net | 1,993 | 1,707 | ||||||
| Prepaid expenses | 146 | 123 | ||||||
| Income taxes receivable | 47 | 34 | ||||||
| Investments in debt, equity and other securities | 46 | 40 | ||||||
| Other current assets and receivables | 259 | 235 | ||||||
| Total current assets | 3,450 | 3,337 | ||||||
| Property and equipment, net | 440 | 406 | ||||||
| Investments in debt, equity and other securities | 8 | 13 | ||||||
| Investments in unconsolidated affiliates | 70 | 69 | ||||||
| Goodwill | 11,850 | 10,727 | ||||||
| Other identifiable intangibles, net | 6,591 | 6,390 | ||||||
| Deferred income taxes | 98 | 89 | ||||||
| Deposits and other assets | 235 | 177 | ||||||
| Total assets | $ | 22,742 | $ | 21,208 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 322 | $ | 250 | ||||
| Accrued expenses | 1,664 | 1,493 | ||||||
| Unearned income | 733 | 774 | ||||||
| Income taxes payable | 72 | 76 | ||||||
| Current portion of long-term debt | 103 | 92 | ||||||
| Other current liabilities | 10 | 20 | ||||||
| Total current liabilities | 2,904 | 2,705 | ||||||
| Long-term debt, less current portion | 10,122 | 7,108 | ||||||
| Deferred income taxes | 918 | 2,133 | ||||||
| Other liabilities | 440 | 402 | ||||||
| Total liabilities | 14,384 | 12,348 | ||||||
| Commitments and contingencies (Note 1) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock and additional paid-in capital, 400.0 shares authorized at December 31, 2017 and 2016, $0.01 par value, 249.5 and 248.3 shares issued at December 31, 2017 and 2016, respectively | 10,782 | 10,602 | ||||||
| Retained earnings (accumulated deficit) | 655 | (399 | ) | |||||
| Treasury stock, at cost, 41.4 and 12.9 shares at December 31, 2017 and 2016, respectively | (3,374 | ) | (1,000 | ) | ||||
| Accumulated other comprehensive income (loss) | 46 | (570 | ) | |||||
| Equity attributable to IQVIA Holdings Inc.’s stockholders | 8,109 | 8,633 | ||||||
| Non-controlling interests | 249 | 227 | ||||||
| Total stockholders’ equity | 8,358 | 8,860 | ||||||
| Total liabilities and stockholders’ equity | $ | 22,742 | $ | 21,208 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2017 | 2016 | 2015 | |||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 1,328 | $ | 130 | $ | 388 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 1,011 | 289 | 128 | |||||||||
| Amortization of debt issuance costs and discount | 9 | 30 | 9 | |||||||||
| Amortization of accumulated other comprehensive loss on terminated interest rate swaps | 3 | 3 | 8 | |||||||||
| Stock-based compensation | 106 | 80 | 38 | |||||||||
| Impairment of goodwill, identifiable intangible and long-lived assets | 40 | 28 | 2 | |||||||||
| Gain on disposals of property and equipment, net | (1 | ) | (1 | ) | (1 | ) | ||||||
| (Earnings) loss from unconsolidated affiliates | (10 | ) | 8 | (8 | ) | |||||||
| (Gain) loss on investments, net | (8 | ) | (13 | ) | 1 | |||||||
| (Benefit from) provision for deferred income taxes | (1,216 | ) | 135 | 18 | ||||||||
| Excess income tax benefits from stock-based award activities | — | (41 | ) | (39 | ) | |||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable and unbilled services | (142 | ) | (62 | ) | (246 | ) | ||||||
| Prepaid expenses and other assets | (54 | ) | (8 | ) | 15 | |||||||
| Accounts payable and accrued expenses | 90 | 160 | 104 | |||||||||
| Unearned income | (104 | ) | 52 | 54 | ||||||||
| Income taxes payable and other liabilities | (82 | ) | 70 | 5 | ||||||||
| Net cash provided by operating activities | 970 | 860 | 476 | |||||||||
| Investing activities: | ||||||||||||
| Acquisition of property, equipment and software | (369 | ) | (164 | ) | (78 | ) | ||||||
| Net cash (paid for) assumed from acquisition of businesses | (854 | ) | 1,887 | 32 | ||||||||
| Disposition of business, net of cash disposed | 12 | — | — | |||||||||
| Sales (purchases) of trading securities, net | 2 | (40 | ) | — | ||||||||
| Proceeds from corporate owned life insurance policies | — | 21 | — | |||||||||
| Proceeds from sale of equity securities | — | 41 | — | |||||||||
| Investments in unconsolidated affiliates, net of payments received | 15 | (17 | ) | (12 | ) | |||||||
| Termination of interest rate swaps | — | — | (11 | ) | ||||||||
| Other | 4 | 3 | 2 | |||||||||
| Net cash (used in) provided by investing activities | (1,190 | ) | 1,731 | (67 | ) | |||||||
| Financing activities: | ||||||||||||
| Proceeds from issuance of debt | 5,242 | 466 | 2,249 | |||||||||
| Payment of debt issuance costs | (50 | ) | (7 | ) | (22 | ) | ||||||
| Repayment of debt | (2,883 | ) | (1,949 | ) | (2,057 | ) | ||||||
| Proceeds from revolving credit facility | 1,921 | 172 | — | |||||||||
| Repayment of revolving credit facility | (1,767 | ) | — | — | ||||||||
| Principal payments on capital lease obligations | (2 | ) | (2 | ) | (4 | ) | ||||||
| Payment of contingent consideration | (4 | ) | (5 | ) | (3 | ) | ||||||
| Stock issued under employee stock purchase and option plans | 91 | 97 | 64 | |||||||||
| Repurchase of common stock | (2,620 | ) | (1,097 | ) | (515 | ) | ||||||
| Excess income tax benefits from stock-based award activities | — | 41 | 39 | |||||||||
| Net cash used in financing activities | (72 | ) | (2,284 | ) | (249 | ) | ||||||
| Effect of foreign currency exchange rate changes on cash | 53 | (86 | ) | (50 | ) | |||||||
| (Decrease) increase in cash and cash equivalents | (239 | ) | 221 | 110 | ||||||||
| Cash and cash equivalents at beginning of period | 1,198 | 977 | 867 | |||||||||
| Cash and cash equivalents at end of period | $ | 959 | $ | 1,198 | $ | 977 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| (in millions) | Common Stock Shares | Treasury Stock Shares | Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Non- controlling Interests | Total | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2014 | 124.1 | — | 1 | 143 | (788 | ) | — | (59 | ) | — | (703 | ) | ||||||||||||||||||||||||
| Issuance of common stock | 3.1 | — | — | 65 | — | — | — | — | 65 | |||||||||||||||||||||||||||
| Repurchase of common stock | (7.8 | ) | — | — | (455 | ) | (61 | ) | — | — | — | (516 | ) | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | 31 | — | — | — | — | 31 | |||||||||||||||||||||||||||
| Income tax benefits from stock-based award activities | — | — | — | 39 | — | — | — | — | 39 | |||||||||||||||||||||||||||
| Q2 Solutions business combination | — | — | — | 423 | — | — | — | — | 423 | |||||||||||||||||||||||||||
| Non-controlling interest related to Q2 Solutions transaction | — | — | — | (231 | ) | — | — | — | 231 | — | ||||||||||||||||||||||||||
| Deferred tax impact of the Q2 Solutions transaction | — | — | — | (7 | ) | — | — | — | — | (7 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 387 | — | — | 1 | 388 | |||||||||||||||||||||||||||
| Unrealized loss on derivative instruments, net of tax | — | — | — | — | — | — | (9 | ) | — | (9 | ) | |||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | (56 | ) | (4 | ) | (60 | ) | ||||||||||||||||||||||||
| Reclassification adjustments, net of tax | — | — | — | — | — | — | 13 | — | 13 | |||||||||||||||||||||||||||
| Balance, December 31, 2015 | 119.4 | — | 1 | 8 | (462 | ) | — | (111 | ) | 228 | (336 | ) | ||||||||||||||||||||||||
| Issuance of common stock | 130.4 | — | 1 | 10,522 | — | — | — | — | 10,523 | |||||||||||||||||||||||||||
| Repurchase of common stock before October 3, 2016 | (1.5 | ) | — | — | (46 | ) | (52 | ) | — | — | — | (98 | ) | |||||||||||||||||||||||
| Repurchase of common stock on or after October 3, 2016 | — | (12.9 | ) | — | — | — | (1,000 | ) | — | — | (1,000 | ) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 76 | — | — | — | — | 76 | |||||||||||||||||||||||||||
| Income tax benefits from stock-based award activities | — | — | — | 41 | — | — | — | — | 41 | |||||||||||||||||||||||||||
| Investment by non-controlling interest | — | — | — | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 115 | — | — | 15 | 130 | |||||||||||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | — | — | — | — | — | — | (7 | ) | — | (7 | ) | |||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | — | — | — | — | — | 23 | — | 23 | |||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | (497 | ) | (16 | ) | (513 | ) | ||||||||||||||||||||||||
| Reclassification adjustments, net of tax | — | — | — | — | — | — | 22 | — | 22 | |||||||||||||||||||||||||||
| Balance, December 31, 2016 | 248.3 | (12.9 | ) | 2 | 10,600 | (399 | ) | (1,000 | ) | (570 | ) | 227 | 8,860 | |||||||||||||||||||||||
| Issuance of common stock | 3.7 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Repurchase of common stock | — | (28.5 | ) | — | — | — | (2,374 | ) | — | — | (2,374 | ) | ||||||||||||||||||||||||
| Repurchase and retirement of common stock | (2.5 | ) | — | — | — | (255 | ) | — | — | — | (255 | ) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 180 | — | — | — | — | 180 | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | — | — | — | — | — | — | — | (4 | ) | (4 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 1,309 | — | — | 19 | 1,328 | |||||||||||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | — | — | — | — | — | — | 4 | — | 4 | |||||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | — | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | 607 | 7 | 614 | |||||||||||||||||||||||||||
| Balance, December 31, 2017 | 249.5 | (41.4 | ) | $ | 2 | $ | 10,780 | $ | 655 | $ | (3,374 | ) | $ | 46 | $ | 249 | $ | 8,358 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- Summary of Significant Accounting Policies
The Company
Conducting business in more than 100 countries with over 55,000 employees, IQVIA Holdings Inc. (together with its subsidiaries, the “Company” or “IQVIA”) is a leading integrated information and technology-enabled healthcare service provider worldwide, dedicated to helping its clients improve their clinical, scientific and commercial results.
On October 3, 2016, Quintiles Transnational Holdings Inc. (“Quintiles”) completed its previously announced merger of equals transaction (the “Merger”) with IMS Health Holdings, Inc. (“IMS Health”). Pursuant to the terms of the merger agreement dated as of May 3, 2016 between Quintiles and IMS Health (the “Merger Agreement”), IMS Health was merged with and into Quintiles, and the separate corporate existence of IMS Health ceased, with Quintiles continuing as the surviving corporation (the “Surviving Corporation”). Immediately prior to the completion of the Merger, Quintiles reincorporated as a Delaware corporation. The Surviving Corporation changed its name to Quintiles IMS Holdings, Inc (“QuintilesIMS”). At the effective time of the Merger, each issued and outstanding share of IMS Health common stock, par value $0.01 per share (“IMS Health common stock”), was automatically converted into 0.3840 of a share of the Company’s common stock, par value $0.01 per share. In addition, immediately following the effective time of the Merger, Quintiles Transnational Corp (“Quintiles Corp.”), a direct subsidiary of Quintiles, was merged with and into IMS Health Incorporated, following which IMS Health Incorporated will continue as a direct, wholly-owned subsidiary of the Surviving Corporation. See Note 15 for additional information regarding the Merger.
On November 6, 2017, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation (the “Certificate of Amendment”) to effect a change of the Company’s name from “Quintiles IMS Holdings, Inc.” to “IQVIA Holdings Inc.” (the “Name Change”).
On November 15, 2017, shares of the Company commenced trading under an updated New York Stock Exchange ticker symbol, “IQV” (formerly the shares traded under the ticker symbol “Q”).
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company, its subsidiaries and investments in which the Company has control. Amounts pertaining to the non-controlling ownership interests held by third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as non-controlling interests. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. These estimates are based on historical experience and various other assumptions believed reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Foreign Currencies
The Company’s financial statements are reported in United States dollars and, accordingly, the Company’s results of operations are impacted by fluctuations in exchange rates that affect the translation of its revenues and expenses denominated in foreign currencies into United States dollars for purposes of reporting its consolidated financial results. Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to the accumulated other comprehensive income (loss) (“AOCI”) component of stockholders’ equity (deficit). The Company is subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of a transaction. The Company earns revenue from its service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company’s profitability with respect to such contracts.
For operations outside the United States 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. Other expense (income), net, includes foreign currency net losses (gains) for 2017, 2016 and 2015 of approximately $40 million, $6 million and ($5) million, respectively. The foreign currency losses in 2017 were primarily the result of the combination of changes in intercompany loan balances from corporate legal entity integration and a weaker U.S. dollar.
Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents.
Investments in Marketable Securities
Investments in marketable securities are classified as either trading or available-for-sale and measured at fair market value. Realized and unrealized gains and losses on trading securities are included in other expense (income), net, on the accompanying consolidated statements of income. Realized gains and losses on available-for-sale securities are included in other expense (income), net, on the accompanying consolidated statements of income. Unrealized gains and losses, net of deferred income taxes, on available-for-sale securities are included in the AOCI component of stockholders’ equity (deficit) until realized. Any gains or losses from the sales of investments or other-than-temporary declines in fair value are computed by specific identification.
Equity Method Investments
The Company’s investments in and advances to unconsolidated affiliates are accounted for under the equity method if the Company exercises significant influence or has an investment in a limited partnership that is considered to be greater than minor. These investments and advances are classified as investments in and advances to unconsolidated affiliates on the accompanying consolidated balance sheets. The Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in earnings of unconsolidated affiliates on the accompanying consolidated statements of income. The Company reviews its investments in and advances to unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Derivatives
The Company uses derivative instruments to manage exposures to interest rates and foreign currencies. Derivatives are recorded on the balance sheet at fair value at each balance sheet date utilizing pricing models for non-exchange-traded contracts. At inception, the Company designates whether or not the derivative instrument is an effective hedge of an asset, liability or firm commitment which is then classified as either a cash flow hedge or a fair value hedge. If determined to be an effective cash flow hedge, changes in the fair value of the derivative instrument are recorded as a component of AOCI until realized. The Company includes the impact from these hedges in the same line item as the hedged item on the consolidated statements of cash flows. Changes in fair value of effective fair value hedges are recorded in earnings as an offset to the changes in the fair value of the related hedged item. Hedge ineffectiveness, if any, is immediately recognized in earnings. Changes in the fair values of derivative instruments that are not an effective hedge are recognized in earnings. When it is probable that a hedged forecasted transaction will not occur, the Company discontinues hedge accounting for the affected portion of the forecasted transaction, and reclassifies gains or losses that were accumulated in AOCI to earnings in other expense (income), net for foreign exchange derivatives and interest expense for interest rate derivatives on the consolidated statements of income. Cash flows are classified consistent with the underlying hedged item. The Company has entered, and may in the future enter, into derivative contracts (caps, swaps, forwards, calls or puts, warrants, for example) related to its debt, investments in marketable equity securities and forecasted foreign currency transactions.
Accrued Loyalty
The Company owns businesses that manage co-pay reimbursements on behalf of its pharmaceutical customers. These customers prefund the reimbursements and the Company includes this cash on its balance sheet. The Company draws on this cash to pay pharmacies as consumers use these programs. Accrued loyalty was $143 million and $131 million, as of December 31, 2017 and 2016, respectively, and included within accrued expenses on the consolidated balance sheet.
Billed and Unbilled Services and Unearned Income
In general, prerequisites for billings and payments are established by contractual provisions including predetermined payment schedules, which may or may not correspond to the timing of the performance of services under the contract. Unbilled services arise when services have been rendered for which revenue has been recognized but the clients have not been billed.
In some cases, payments received are in excess of revenue recognized. Payments received in advance of services being provided are deferred as unearned income on the consolidated balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized, the unearned income balance is reduced by the amount of the revenue recognized during the period.
Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts is determined based on a variety of factors that affect the potential collectability of the related receivables, including length of time the receivables are past due, client credit ratings, financial stability of the client, specific one-time events and client payment history. In addition, in circumstances where the Company is made aware of a specific client’s inability to meet its financial obligations, a specific allowance is established. The accounts are individually evaluated on a regular basis and reserves are established as deemed appropriate based on the above criteria.
Receivables Financing Facility
Advances received under the Company’s receivables financing facility are accounted for as borrowings secured by the receivables and included in net cash provided by financing activities. The Company services the collateralized accounts receivables and the cash flows for the underlying receivables are included in cash provided by operating activities. The collateralized accounts receivables are included in trade accounts receivable and unbilled services, net.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Business Combinations
Business combinations are accounted for using the acquisition method of accounting. 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. Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired, including the amount assigned to identifiable intangible assets. When a business combination involves contingent consideration, the Company recognizes a liability equal to the estimated fair value of the contingent consideration obligation at the date of the acquisition. Subsequent changes in the estimated fair value of the contingent consideration are recognized in earnings in the period of the change. Acquisition-related costs are expensed as incurred. The consolidated financial statements include the results of operations of business combinations since the acquisition date.
Long-Lived Assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life or the lease term, if related to leased property, as follows:
| Buildings and leasehold improvements | 3 - 40 years | |
|---|---|---|
| Equipment | 3 - 10 years | |
| Furniture and fixtures | 5 - 10 years | |
| Transportation equipment | 3 - 20 years |
Definite-lived identifiable intangible assets are amortized primarily using an accelerated method that reflects the pattern in which the Company expects to benefit from the use of the asset over its estimated remaining useful life as follows:
| Trademarks and trade names | 1 - 17 years | |
|---|---|---|
| Contract backlog and client relationships | 1 - 25 years | |
| Software and related assets | 1 - 9 years | |
| Databases | 1 - 9 years | |
| Non-compete agreements and other | 1 - 5 years |
Goodwill and indefinite-lived identifiable intangible assets, which consist of a trade name, are not amortized but evaluated for impairment annually, or more frequently if events or changes in circumstances indicate an impairment.
Included in software and related items is the capitalized cost of internal-use software used in supporting the Company’s business. Qualifying costs incurred during the application development stage are capitalized and amortized over their estimated useful lives. Costs are capitalized from completion of the preliminary project stage and when it is considered probable that the software will be used to perform its intended function, up until the time the software is placed into service. The Company recognized $134 million, $44 million and $38 million of amortization expense in 2017, 2016 and 2015, respectively, related to software and related assets.
The carrying values of property, equipment and intangible and other long-lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flow projections, the Company will record an impairment charge to reduce carrying values to estimated fair value. See Note 17 for information regarding the impairment charges recognized in 2017 and 2016. During 2015, the Company recognized a $2 million impairment charge for long-lived assets related to a facility closure in Japan.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the client; (3) the collection of the fees is probable; and (4) the arrangement consideration is fixed or determinable. The Company’s arrangements are primarily service contracts that range in duration from a few months to several years.
In some cases, contracts provide for consideration that is contingent upon the occurrence of uncertain future events. The Company recognizes contingent revenue when the contingency has been resolved and all other criteria for revenue recognition have been met. Cash payments made to clients as incentives to induce the clients to enter into service agreements with the Company are amortized as a reduction of revenue over the period the services are performed. The Company records revenues net of any tax assessments by governmental authorities, such as value added taxes, that are imposed on and concurrent with specific revenue generating transactions. The Company does not recognize revenue with respect to start-up activities including contract and scope negotiation, feasibility analysis and conflict of interest review associated with contracts. The costs for these activities are expensed as incurred.
For the arrangements that include multiple elements, arrangement consideration is allocated to units of accounting based on the relative selling price. The best evidence of selling price of a unit of accounting is vendor-specific objective evidence (“VSOE”), which is the price the Company charges when the deliverable is sold separately. When VSOE is not available to determine selling price, management uses relevant third-party evidence (“TPE”) of selling price, if available. When neither VSOE nor TPE of selling price exists, management uses its best estimate of selling price considering all relevant information that is available without undue cost and effort.
The Company derives the majority of its revenues in the Commercial Solutions segment from various information and technology service offerings. 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. The Company’s subscription arrangements typically have terms ranging from one to three years and are generally non-cancelable and do not contain refund-type provisions. Technology services offerings consist of a mix of small and large-scale services and consulting projects, multi-year outsourcing contracts and Software-as-a-Service (“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 the Company’s contracts within the Research & Development Solutions segment are service contracts for clinical research that represent a single unit of accounting. The Company recognizes revenue on its clinical research services contracts as services are performed primarily on a proportional performance basis, generally using output measures that are specific to the service provided. Examples of output measures include among others, number of investigators enrolled, number of site initiation visits and number of monitoring visits completed. Revenue is determined by dividing the actual units of work completed by the total units of work required under the contract and multiplying that ratio by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of the agreed upon services to be provided. Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in contract value. Once the client has agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is recognized, as described above. To the extent that contracts involve multiple elements, the Company follows the allocation methodology described above and recognizes revenue for each unit of accounting on a proportional performance basis. Most contracts may be terminated upon 30 to 90 days notice by the client, however, in the event of termination, contract provisions typically require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company derives the majority of its revenues in its Integrated Engagement Services segment on a fee-for-service basis to clients within the biopharmaceutical industry. Fees on these arrangements are billed based on a contractual per-diem or hourly rate basis and revenue is recognized primarily on a time and materials basis. Some of the Company’s Integrated Engagement Services contracts are multiple element arrangements, with elements including recruiting, training and deployment of sales representatives. The nature of the terms of these multiple element arrangements will vary based on the customized needs of the Company’s clients. For contracts that have multiple elements, the Company follows the allocation methodology described above and recognizes revenue for each unit of accounting on a time and materials basis. The Company’s Integrated Engagement Services contracts sometimes include variable fees that are based on a percentage of service sales (royalty payments). The Company recognizes revenue on royalty payments when the variable components become fixed or determinable and all other revenue recognition criteria have been met, which generally only occurs upon the sale of the underlying service(s) and upon the Company’s receipt of information necessary to make a reasonable estimate.
Reimbursed Expenses
The Company includes reimbursed expenses in total revenues and costs of revenue as the Company is deemed to be the primary obligor in the applicable arrangements. These costs include such items as payments to investigators and travel expenses for the Company’s clinical monitors and sales representatives.
The Company has collection risk on contractually reimbursable expenses, and, from time to time, is 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.
Expenses
The Company’s costs and expenses are comprised primarily of 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 the Company’s 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 the Company’s 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.
Concentration of Credit Risk
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, marketable securities and accounts receivable. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. Investment policies have been implemented that limit purchases of marketable securities to investment grade securities. Substantially all revenues for Commercial Solutions, Research & Development Solutions and Integrated Engagement Services are earned by performing services under contracts with various pharmaceutical, biotechnology, medical device and healthcare companies. The concentration of credit risk is equal to the outstanding accounts receivable and unbilled services balances, less the unearned income related thereto, and such risk is subject to the financial and industry conditions of the Company’s clients. The Company does not require collateral or other securities to support client receivables. Credit losses have been immaterial and reasonably within management’s expectations. No client accounted for 10% or more of consolidated revenues in 2017, 2016 or 2015.
Restructuring Costs
Restructuring costs, which primarily include termination benefits and facility closure costs, are recorded at estimated fair value. Key assumptions in determining the restructuring costs include the terms and payments that may be negotiated to terminate certain contractual obligations and the timing of employees leaving the Company.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Merger Related Costs
Merger related costs include the direct and incremental costs associated with business combinations including (i) acquisition related costs such as investment banking, legal, accounting and consulting fees (see Footnote 15), (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 redundant employees. During 2016, the Company recognized $87 million of merger related costs, which includes $36 million of acquisition related costs. All of these costs are related to the Merger. Merger related costs for all other business combinations have been immaterial and are included within selling, general and administrative expenses on the consolidated statements of income.
Legal Costs
Legal costs are expensed as incurred.
Debt Fees
Fees incurred to issue debt are generally deferred and amortized as a component of interest expense over the estimated term of the related debt using the effective interest rate method.
Contingencies
The Company records accruals for claims, suits, investigations and proceedings when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews claims, suits, investigations and proceedings at least quarterly and records or adjusts accruals related to such matters to reflect the impact and status of any settlements, rulings, advice of counsel or other information pertinent to a particular matter. Legal costs associated with contingencies are charged to expense as incurred.
The Company is party to legal proceedings incidental to its business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters will have a material adverse effect to the Company’s financial statements.
Income Taxes
Income tax expense includes United States federal, state and international income taxes. Certain items of income and expense are not reported in income tax returns and GAAP financial statements in the same year. The income tax effects of these differences are reported as deferred income taxes. Valuation allowances are provided to reduce the related deferred income tax assets to an amount which will, more likely than not, be realized. In light of the newly enacted Tax Cuts and Jobs Act (the “Tax Act”), the Company no longer considers the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested and records deferred income taxes on these earnings. The Company has provisionally recorded their U.S. deferred taxes based on the Federal corporate income tax rate of 21%. We are continuing to analyze aspects of the Tax Act and, therefore, have not finalized our accounting policy with respect to whether to (1) recognize deferred taxes for basis differences expected to reverse as Global Low Taxed Intangible Income (“GILTI”) or (2) account for GILTI as period costs if and when incurred. We have not recognized any deferred tax impacts related to GILTI or the Base Erosion Anti Abuse Tax (“BEAT”) on a provisional basis. Interest and penalties related to unrecognized income tax benefits are recognized as a component of income tax expense as discussed further in Note 18.
Pensions and Other Postretirement Benefits
The Company provides 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 the Company’s postretirement health care and life insurance benefit plans. Management reviews these critical assumptions at least annually. Other assumptions involve demographic factors such as turnover, retirement and mortality rates. Management reviews these assumptions periodically and updates them when their experience deems it appropriate to do so.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
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 non-United States plans, the discount rate is based on the current yield of an index of high quality corporate bonds.
The Company estimates the service and interest cost components of net periodic benefit cost for the Company’s United States and United Kingdom pension benefit plans by utilizing a full yield curve approach in the estimation of these components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to each of the underlying projected cash flows based on time until payment.
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, the Company considers 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. The Company believes 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 the Company’s actual return on plan assets will approximate the long-term expected forecasts. While the Company believes that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect its pension and postretirement benefit obligations and future expense.
The Company’s estimated long-term rate of return on plan assets is based on the principles of capital market theory that maintain that over the long run, prudent investment risk taking is rewarded with incremental returns and that combining non-correlated assets can maximize risk adjusted portfolio returns. Long-term return estimates are developed by asset category based on actual class return data, historical relationships between asset classes and risk factors and peer plan data. Long-term return estimates for the Company’s United Kingdom pension plans are developed by asset category based on actual class return data, historical relationships between asset classes and risk factors.
The Company utilizes a corridor approach to amortizing unrecognized gains and losses in the pension and postretirement benefit 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.
Stock-based Compensation
The Company accounts for stock-based compensation for stock options and stock appreciation rights under the fair value method and uses the Black-Scholes-Merton model to estimate the value of such stock-based awards granted to its employees and non-executive directors. Expected volatility is based upon the historical volatility of a peer group for a period equal to the expected term, as the Company does not have adequate history to calculate its own volatility and believes the expected volatility will approximate the historical volatility of the peer group. The Company does not currently anticipate paying dividends. The expected term represents the period of time the grants are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of the grant.
The Company accounts for its stock-based compensation for restricted stock awards and restricted stock units based on the closing market price of the Company’s common stock on the date of grant. The Company accounts for its stock-based compensation for performance awards based on the closing market price of the Company’s common stock on the date of grant and upon the Monte Carlo simulation model.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Earnings Per Share
The calculation of earnings per share is based on the weighted average number of common shares or common stock equivalents outstanding during the applicable period. The dilutive effect of common stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share. Potentially dilutive securities include outstanding stock options and unvested restricted stock units, restricted stock and performance awards. Employee equity share options, restricted stock units, restricted stock, performance awards and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of benefits that would be recorded in additional paid-in capital when the award becomes deductible for tax purposes are assumed to be used to repurchase shares.
Treasury Stock
The Company records treasury stock purchases under the cost method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If the Company reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded in retained earnings.
Recently Issued Accounting Standards
Accounting pronouncements adopted
In August 2016, the United States Financial Accounting Standards Board (“FASB”) issued new accounting guidance that eliminates the diversity in practice related to the cash flow classification of certain cash receipts and payments including debt prepayment or extinguishment payments, payments upon maturity of a zero coupon bond, payment of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions received from certain equity method investees, and cash flows related to beneficial interests obtained in a financial asset securitization. The new guidance designates the appropriate cash flow statement classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. In the absence of specific guidance, each separately identifiable cash source and use will be classified on the basis of the nature of the underlying cash flows. The Company adopted this new accounting guidance retrospectively on January 1, 2017. The adoption of this new accounting guidance did not have a material effect on the Company’s consolidated financial statements.
In March 2016, the FASB issued new accounting guidance that simplifies several aspects of the accounting for employee stock-based compensation transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and the classification of excess income tax benefits on the statement of cash flows. Under the new accounting guidance, excess income tax benefits related to stock-based awards are reflected as a reduction of income tax expense on the statements of income and as cash provided from operating activities on the statements of cash flows. In the prior periods, these tax benefits were reflected directly in additional paid in capital and as cash provided from financing activities. The Company adopted this new accounting guidance prospectively on January 1, 2017. The adoption of this new accounting guidance did not impact the Company’s recognition of its stock-based compensation expense or its presentation of cash flows related to employee taxes paid for withheld shares.
Accounting pronouncements being evaluated
In August 2017, the FASB issued new accounting guidance that will allow more financial and nonfinancial hedging strategies to be eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The new accounting guidance will be effective for the Company on January 1, 2019. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
In March 2017, the FASB issued new accounting guidance that requires the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs, and requires that the other components of net periodic benefit expense be recognized in the non-operating section of the income statement. In addition, only the service cost component of net periodic benefit expense is eligible for capitalization when applicable. The new standard requires retrospective application of the change in the income statement and prospective application for the capitalization of service cost in assets. The new standard permits previously disclosed components of net benefit costs as an estimation basis for applying the retrospective presentation as a practical expedient. The new accounting guidance will be effective for the Company on January 1, 2018. Utilizing the practical expedient based on amounts disclosed in Note 19, the Company will reclassify non-service components of net periodic benefit cost of $17 million and $3 million for 2017 and 2016, respectively, from selling, general and administrative expenses into other income, net.
In January 2017, the FASB issued new accounting guidance that changes the definition of a business to clarify when a set of assets does not constitute a business. Under the new definition, when substantially all of the fair value of gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is generally not a business. The new accounting guidance will be effective for the Company on January 1, 2018. The adoption of this new accounting guidance may result in more acquisitions being accounted for as asset acquisitions.
In February 2016, the FASB issued new accounting guidance that requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
In January 2016, the FASB issued new accounting guidance that modifies how entities measure equity investments and present changes in the fair value of financial liabilities. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2017. Early adoption of the presentation guidance is permitted; however, early adoption of the recognition and measurement guidance is not permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In May 2014, the FASB and the International Accounting Standards Board issued a converged standard on the recognition of revenue from contracts with clients. The objective of the new standard is to establish a single comprehensive revenue recognition model that is designed to create greater comparability of financial statements across industries and jurisdictions. Under the new standard, companies will be required to recognize revenue to depict the transfer of goods or services to clients in amounts that reflect the consideration to which the company will be entitled in exchange for those goods or services. The Company has concluded that the majority of the clinical trial arrangements will represent a single performance obligation. The Company will account for revenue for this single performance obligation over time using project cost as an input method to measure progress. The Company will be required to use significant judgment in calculating its estimated costs at completion for each contract, and will be required to update these estimates on an ongoing basis, which may result in fluctuations in revenue recognized in any given period. The Company’s arrangements in the Commercial Solutions and Integrated Engagement Services segments are generally multiple element arrangements under which current rules require the deferral of revenue when payment on a delivered unit of accounting is contingent on performing on a future unit of accounting. Under the new standard these arrangements will consist of multiple performance obligations and such deferral of revenue will in some cases be lower (or zero) when management determines that it is probable that performance on the future performance obligation will occur. Service revenues and reimbursed expenses revenues will be treated consistently and presented as one line on the consolidated statements of income for all segments. The new standard will require expanded disclosures on revenue recognition, including information about changes in assets and liabilities that result from contracts with clients. The new standard will be effective for annual reporting periods beginning after December 15, 2017. The Company will adopt the new standard on January 1, 2018. The Company will use the full retrospective approach to transition upon adoption, which will require the Company to recast each prior reporting period presented.
The adoption of the new standard is expected to result in a revenue reduction of less than 1% in 2017 and the cumulative impact through 2017 is not expected to be material to total stockholders’ equity. The revenue impact of the new standard will be finalized upon adoption in the first quarter of 2018 and is therefore subject to change.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Accounts Receivable and Unbilled Services
Accounts receivable and unbilled services consist of the following (in millions):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Trade: | ||||||||
| Billed | $ | 1,229 | $ | 998 | ||||
| Unbilled services | 779 | 723 | ||||||
| Trade accounts receivable and unbilled services | 2,008 | 1,721 | ||||||
| Allowance for doubtful accounts | (15 | ) | (14 | ) | ||||
| Trade accounts receivable and unbilled services, net | $ | 1,993 | $ | 1,707 |
- Investments – Debt, Equity and Other Securities
Current
The Company’s short-term investments in debt, equity and other securities consist primarily of trading investments in mutual funds that are measured at fair value with realized and unrealized gains and losses recorded in other expense (income), net, on the accompanying consolidated statements of income.
Long-term
The Company’s long-term investments in debt, equity and other securities consist primarily of cost method investments.
The Company reviews the carrying value of each individual investment at each balance sheet date to determine whether or not an other-than-temporary decline in fair value has occurred. The Company employs alternative valuation techniques including the following: (i) the review of financial statements, including assessments of liquidity, (ii) the review of valuations available to the Company prepared by independent third parties used in raising capital, (iii) the review of publicly available information including press releases and (iv) direct communications with the investee’s management, as appropriate. If the review indicates that such a decline in fair value has occurred, the Company adjusts the carrying value to the estimated fair value of the investment and recognizes a loss for the amount of the adjustment.
- Investments in and Advances to Unconsolidated Affiliates
The Company accounts for its investments in and advances to unconsolidated affiliates under the equity method of accounting and records its pro rata share of its losses or earnings from these investments in equity in earnings (losses) of unconsolidated affiliates. The following is a summary of the Company’s investments in and advances to unconsolidated affiliates (in millions):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| NovaQuest Pharma Opportunities Fund III, L.P. | $ | 33 | $ | 43 | ||||
| NovaQuest Pharma Opportunities Fund IV, L.P. | 7 | 6 | ||||||
| CenduitTM | 14 | 11 | ||||||
| NostraData Pty Ltd. | 8 | 8 | ||||||
| Other | 8 | 1 | ||||||
| $ | 70 | $ | 69 |
NovaQuest Pharma Opportunities Funds
The Company has committed to invest up to $50 million as a limited partner in NovaQuest Pharma Opportunities Fund III, L.P. (“Fund III”). As of December 31, 2017, the Company has funded approximately $43 million and has approximately $7 million of remaining funding commitments. As of December 31, 2017 and 2016, the Company had a 10.9% ownership interest in Fund III.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company has committed to invest up to $20 million as a limited partner in NovaQuest Pharma Opportunities Fund IV, L.P. (“Fund IV”). As of December 31, 2017, the Company has funded approximately $11 million and has approximately $9 million of remaining funding commitments. As of December 31, 2017 and 2016, the Company had a 2.3% ownership interest in Fund IV.
Cenduit™
In May 2007, the Company and Thermo Fisher Scientific Inc. (“Thermo Fisher”) completed the formation of a joint venture, Cenduit™. The Company contributed its Interactive Response Technology operations in India and the United States. Thermo Fisher contributed its Fisher Clinical Services Interactive Response Technology operations in three locations — the United Kingdom, the United States and Switzerland. Additionally, each company contributed $4 million in initial capital. The Company and Thermo Fisher each own 50% of Cenduit™. Cenduit provides project related services to the Company on an as needed basis.
NostraData Pty Ltd.
In November 2015, IMS Health made a 10.25 million AUD (approximately 9 million USD) investment in NostraData Pty Ltd. (“NostraData”) for a 24% equity interest. NostraData provides data to the Company on an as needed basis.
See Note 20 for information regarding related party transactions.
- Variable Interest Entities
As of December 31, 2017, the Company’s investments in unconsolidated variable interest entities (“VIEs”) and its estimated maximum exposure to loss were as follows (in millions):
| Investments in Unconsolidated VIEs | Maximum Exposure to Loss | |||||||
|---|---|---|---|---|---|---|---|---|
| NovaQuest Pharma Opportunities Fund III, L.P. | $ | 33 | $ | 40 | ||||
| NovaQuest Pharma Opportunities Fund IV, L.P. | 7 | 16 | ||||||
| Pappas Life Science Ventures V, L.P. (“Pappas Fund V”) | 1 | 5 | ||||||
| $ | 41 | $ | 61 |
The Company has determined that these funds are VIEs but that the Company is not the primary beneficiary as it does not have a controlling financial interest in these funds. However, because the Company has the ability to exercise significant influence, it accounts for its investments in these funds under the equity method of accounting and records its pro rata share of earnings and losses in equity in earnings (losses) of unconsolidated affiliates on the accompanying consolidated statements of income. The investment assets of unconsolidated VIEs are included in investments in and advances to unconsolidated affiliates on the accompanying consolidated balance sheets.
- Derivatives
Foreign Exchange Risk Management
The Company transacts business in more than 100 countries and is subject to risks associated with fluctuating foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate movements. Accordingly, the Company enters into foreign currency forward contracts to (i) hedge certain forecasted foreign exchange cash flows arising from service contracts (“Service Contract Hedging”) and (ii) hedge non-United States dollar anticipated intercompany royalties (“Royalty Hedging”). It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the British Pound, the Japanese Yen, the Swiss Franc and the Canadian dollar.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Service Contract Hedging and Royalty Hedging contracts are designated as hedges and are carried at fair value, with changes in the fair value recorded to AOCI. The change in fair value is reclassified from AOCI to earnings in the period in which the hedged transaction occurs. These contracts have various expiration dates through November 2018.
As of December 31, 2017, the Company had 57 open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2018 with notional amounts totaling $282 million. As of December 31, 2016, the Company had 62 open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2017. For accounting purposes, these hedges are deemed to be highly effective. As of December 31, 2017 and 2016, the Company had recorded gross unrealized gains (losses) of $5 million and ($4) million and $11 million and ($9) million, respectively, related to these contracts. Upon expiration of the hedge instruments in 2018, the Company will reclassify the unrealized gains and losses on the derivative instruments included in AOCI into earnings. The unrealized gains (losses) are included in other current assets and liabilities on the accompanying consolidated balance sheets as of December 31, 2017 and 2016.
Interest Rate Risk Management
The Company purchases interest rate caps and has entered into interest rate swap agreements for purposes of managing its risk in interest rate fluctuations.
On June 9, 2011, the Company entered into six interest rate swaps that expired between September 30, 2013 and March 31, 2016, in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. During May 2015, in conjunction with the debt refinancing described in Note 11, the Company terminated the remaining open interest rate swaps for a cash payment to the counterparty of $12 million, which includes $1 million of accrued interest. Since the hedged forecasted cash transactions continued to be probable of occurring, the accumulated loss ($3 million at December 31, 2015) related to the terminated interest rate swaps in AOCI was reclassified to earnings as a component of interest expense in the same periods as the hedged forecasted transactions occurred over the first three months of 2016.
In April 2014, IMS Health purchased United States dollar denominated interest rate caps (“2014 Caps”) with a total notional value of $1 billion at strike rates ranging between 2% and 3%. These caps were effective at various times between April 2014 and April 2016, and expire at various times between April 2017 and April 2019. The total premiums were $21 million, which were paid in 2014. The 2014 Caps are designated as cash flow hedges.
IMS Health also entered into United States dollar and Euro denominated interest rate swap agreements in April 2014 (“2014 Swaps”) to hedge interest rate exposure on notional amounts of approximately $600 million of its borrowings. The 2014 Swaps were effective between April and June 2014, and expire at various times from March 2017 through March 2021. On these agreements, the Company pays a fixed rate ranging from 1.4% to 2.1% and receives a variable rate of interest equal to the greater of three-month United States dollar London Interbank Offered Rate (“LIBOR”) or three-month Euro Interbank Offered Rate (“EURIBOR”), and 1%. The 2014 Swaps are designated as cash flow hedges.
On June 3, 2015, the Company entered into seven forward starting interest rate swaps (“2015 Swaps”) in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. Interest on the swaps began accruing on June 30, 2016 and the interest rate swaps currently outstanding expire between March 31, 2018 and March 31, 2020. The Company pays a fixed rate ranging from 1.6% to 2.1% and receives a variable rate of interest equal to the three-month LIBOR on these agreements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The critical terms of the 2015 Swaps are substantially the same as the underlying borrowings. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Company’s interest payments and for accounting purposes these hedges are highly effective. As such, the effective portion of the hedges is recorded as unrealized gains (losses) on derivatives included in AOCI and the ineffective portion of the hedges is recognized in earnings. The 2014 EUR Swap (notional value $347 million) ceased to be considered a highly effective hedge for accounting purposes when the underlying debt was refinanced on March 7, 2017. As such, the Company discontinued hedge accounting on that date and prospective changes in the fair value of the 2014 EUR Swap are recognized in earnings. The 2014 USD Swap (notional value $100 million) ceased to be considered a highly effective hedge for accounting purposes during the third quarter of 2017 and as such, the Company has discontinued hedge accounting and prospective changes in the fair value of the 2014 USD Swap are recognized in earnings. The fair value of these interest rate swaps represents the present value of the anticipated net payments the Company will make to the counterparty, which, when they occur, are reflected as interest expense on the consolidated statements of income. These interest rate swaps will result in a total debt mix of approximately 55% fixed rate debt and 45% variable rate debt, before the additional protection arising from the interest rate caps.
Net Investment Risk Management
Beginning in 2016, the Company designated its foreign currency denominated debt as a hedge of its net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the United States dollar. As of December 31, 2017, these borrowings (net of original issue discount) were €4,036 million ($4,835 million). The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the cumulative translation adjustment component of AOCI with the related offset in long-term debt. Those amounts would be reclassified from AOCI to earnings upon the sale or substantial liquidation of these net investments. The amount of foreign exchange losses related to the net investment hedge included in cumulative translation adjustment for the year ended December 31, 2017 was $557 million.
The fair values of the Company’s derivative instruments and the line items on the accompanying consolidated balance sheets to which they were recorded are summarized in the following table (in millions):
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance Sheet Classification | Assets | Liabilities | Notional | Assets | Liabilities | Notional | ||||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||
| Foreign exchange forward contracts | Other current assets and liabilities | $ | 5 | $ | 4 | $ | 282 | $ | 11 | $ | 9 | $ | 300 | |||||||||||||
| Interest rate swaps | Other current liabilities | — | 1 | 405 | — | 15 | 945 | |||||||||||||||||||
| Interest rate caps | Deposits and other assets | 1 | — | 700 | 1 | — | 1,000 | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Interest rate swaps | Other current liabilities | — | 8 | 447 | — | — | — | |||||||||||||||||||
| Foreign exchange forward contracts | Other current liabilities | — | — | — | — | 1 | 189 | |||||||||||||||||||
| Total derivatives | $ | 6 | $ | 13 | $ | 12 | $ | 25 |
The effect of the Company’s cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Foreign exchange forward contracts | $ | (5 | ) | $ | 16 | $ | (1 | ) | ||||
| Interest rate derivatives | 9 | 8 | 6 | |||||||||
| Total | $ | 4 | $ | 24 | $ | 5 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company expects $1 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at December 31, 2017 to be reclassified into earnings within the next twelve months.
- Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| • | Level 1—Quoted prices in active markets for identical assets or liabilities. |
|---|
| • | Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
|---|
| • | Level 3—Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
|---|
The carrying values of cash, cash equivalents, accounts receivable and accounts payable approximated their fair values at December 31, 2017 and 2016 due to their short-term nature. At December 31, 2017 and 2016, the fair value of total debt approximated $10,432 million and $7,298 million, respectively, as determined under Level 2 measurements based on quoted prices for these financial instruments.
Recurring Fair Value Measurements
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of December 31, 2017 (in millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||||||||||
| Marketable securities | $ | 46 | $ | — | $ | — | $ | 46 | ||||||||
| Derivatives | — | 6 | — | 6 | ||||||||||||
| Total | $ | 46 | $ | 6 | $ | — | $ | 52 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | — | $ | 13 | $ | — | $ | 13 | ||||||||
| Contingent consideration | — | — | 69 | 69 | ||||||||||||
| Total | $ | — | $ | 13 | $ | 69 | $ | 82 |
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of December 31, 2016 (in millions):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||||||||||
| Marketable securities | $ | 40 | $ | — | $ | — | $ | 40 | ||||||||
| Derivatives | — | 12 | — | 12 | ||||||||||||
| Total | $ | 40 | $ | 12 | $ | — | $ | 52 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | — | $ | 25 | $ | — | $ | 25 | ||||||||
| Contingent consideration | — | — | 18 | 18 | ||||||||||||
| Total | $ | — | $ | 25 | $ | 18 | $ | 43 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Below is a summary of the valuation techniques used in determining fair value:
Marketable securities—The Company values trading and available-for-sale securities using the quoted market value of the securities held.
Derivatives—Derivatives consist of foreign exchange contracts and interest rate caps and swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates or using other observable inputs. The fair value of the interest rate caps and swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities or using market inputs with mid-market pricing as a practical expedient for bid-ask spread.
Contingent consideration—The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, net new business and operating forecasts and the probability of achieving the specific targets.
The following table summarizes the changes in Level 3 financial assets and liabilities measured on a recurring basis for the year ended December 31 (in millions):
| Contingent Consideration – Accrued Expenses | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Balance as of January 1 | $ | 18 | $ | 4 | $ | 1 | ||||||
| Business combinations | 57 | 19 | — | |||||||||
| Contingent consideration paid | (4 | ) | (4 | ) | (3 | ) | ||||||
| Revaluations included in earnings and foreign currency translation adjustments | (2 | ) | (1 | ) | 6 | |||||||
| Balance as of December 31 | $ | 69 | $ | 18 | $ | 4 |
The revaluation for the contingent consideration is recognized in other expense (income), net on the accompanying consolidated statements of income.
Non-recurring Fair Value Measurements
Certain assets are carried on the accompanying consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include cost and equity method investments and loans that are written down to fair value for declines that are deemed to be other-than-temporary, and goodwill and identifiable intangible assets that are tested for impairment annually and when a triggering event occurs. See Note 17 for additional information.
As of December 31, 2017, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaled approximately $18,519 million and were identified as Level 3. These assets are comprised of cost and equity method investments of $78 million, goodwill of $11,850 million and other identifiable intangibles, net of $6,591 million.
Cost and Equity Method Investments—The inputs available for valuing investments in non-public portfolio companies are generally not easily observable. The valuation of non-public investments requires significant judgment by the Company due to the absence of quoted market values, inherent lack of liquidity and the long-term nature of such assets. When a triggering event occurs, the Company considers a wide range of available market data when assessing the estimated fair value. Such market data includes observations of the trading multiples of public companies considered comparable to the private companies being valued as well as publicly disclosed merger transactions involving comparable private companies. In addition, valuations are adjusted to account for company-specific issues, the lack of liquidity inherent in a non-public investment and the fact that comparable public companies are not identical to the companies being valued. Such valuation adjustments are necessary because in the absence of a committed buyer and completion of due diligence similar to that performed in an actual negotiated sale process, there may be company-specific issues that are not fully known that may affect value. Further, a variety of additional factors are reviewed by the Company, including, but not limited to, financing and sales transactions with third parties, current operating performance and future expectations of the particular investment, changes in market outlook and the third-party financing environment. Because of the inherent uncertainty of valuations, estimated valuations may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Goodwill—Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets resulting from business combinations. The Company performs a qualitative analysis to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its book value. This includes a qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the book value for the respective reporting unit, the Company applies a two-step impairment test in which the Company determines whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, the Company performs the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. The Company determines the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing the reporting unit’s risk profile and growth prospects to selected, reasonably similar publicly traded companies. See Note 17 for additional information.
Definite-lived Intangible Assets—If a triggering event occurs, the Company determines the estimated fair value of definite-lived intangible assets by determining the present value of the expected cash flows. See Note 17 for additional information.
Indefinite-lived Intangible Asset—If a qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value of an indefinite-lived intangible asset, the Company determines the estimated fair value of the indefinite-lived intangible asset (trade name) by determining the present value of the estimated royalty payments on an after-tax basis that it would be required to pay the owner for the right to use such trade name. If the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to the excess.
- Property and Equipment
The major classes of property and equipment were as follows (in millions):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Land, buildings and leasehold improvements | $ | 324 | $ | 333 | ||||
| Equipment | 446 | 338 | ||||||
| Furniture and fixtures | 81 | 72 | ||||||
| Transportation equipment | 72 | 26 | ||||||
| Property and equipment, gross | 923 | 769 | ||||||
| Less accumulated depreciation | (483 | ) | (363 | ) | ||||
| Property and equipment, net | $ | 440 | $ | 406 |
Property and equipment depreciation expense was as follows (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Depreciation expense | $ | 125 | $ | 79 | $ | 61 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Goodwill and Identifiable Intangible Assets
As of December 31, 2017, the Company has approximately $6,591 million of identifiable intangible assets, of which approximately $18 million, relating to a trade name, is deemed to be indefinite-lived and, accordingly, is not being amortized. Amortization expense associated with identifiable definite-lived intangible assets was as follows (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Amortization expense | $ | 886 | $ | 210 | $ | 67 |
Estimated amortization expense for existing identifiable intangible assets is expected to be approximately $983 million, $988 million, $917 million, $765 million and $407 million for the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively. Estimated amortization expense can be affected by various factors, including future acquisitions or divestitures of service and/or licensing and distribution rights or impairments.
The following is a summary of identifiable intangible assets (in millions):
| As of December 31, 2017 | As of December 31, 2016 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
| Definite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Client relationships and backlog | $ | 4,604 | $ | (474 | ) | $ | 4,130 | $ | 3,983 | $ | (125 | ) | $ | 3,858 | ||||||||||
| Trademarks, trade names and other | 528 | (59 | ) | 469 | 384 | (15 | ) | 369 | ||||||||||||||||
| Databases | 1,876 | (468 | ) | 1,408 | 1,742 | (87 | ) | 1,655 | ||||||||||||||||
| Software and related assets | 927 | (382 | ) | 545 | 619 | (247 | ) | 372 | ||||||||||||||||
| Non-compete agreements | 24 | (3 | ) | 21 | 9 | — | 9 | |||||||||||||||||
| $ | 7,959 | $ | (1,386 | ) | $ | 6,573 | $ | 6,737 | $ | (474 | ) | $ | 6,263 | |||||||||||
| Indefinite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Trade names(1) | $ | 18 | $ | — | $ | 18 | $ | 127 | $ | — | $ | 127 |
(1) In 2017, in conjunction with the Company’s name change from QuintilesIMS to IQVIA, the classification of the Quintiles trade name changed from an indefinite-lived intangible asset to a definite-lived intangible asset.
The following is a summary of goodwill by segment for the years ended December 31, 2017 and 2016 (in millions):
| Commercial Solutions | Research & Development Solutions | Integrated Engagement Services | Consolidated | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2015 | $ | 70 | $ | 602 | $ | 48 | $ | 720 | ||||||||
| Business combinations | 9,698 | 611 | 67 | 10,376 | ||||||||||||
| Impairment | (23 | ) | — | — | (23 | ) | ||||||||||
| Impact of foreign currency fluctuations and other | (330 | ) | (17 | ) | 1 | (346 | ) | |||||||||
| Balance as of December 31, 2016 | 9,415 | 1,196 | 116 | 10,727 | ||||||||||||
| Business combinations | 403 | 178 | — | 581 | ||||||||||||
| Impairment | (40 | ) | — | — | (40 | ) | ||||||||||
| Impact of foreign currency fluctuations and other | 570 | 11 | 1 | 582 | ||||||||||||
| Balance as of December 31, 2017 | $ | 10,348 | $ | 1,385 | $ | 117 | $ | 11,850 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
During the second quarter of 2017, the Company determined there was sufficient indication that the carrying value of Encore Health Resources LLC (“Encore”) should be reviewed for further impairment due to its continued decline in performance. The Company performed an impairment assessment that resulted in the recognition of a goodwill impairment of $39.6 million, which represented the remaining amount of goodwill associated with Encore, and an intangible asset impairment of $0.4 million for declines in fair value. On July 12, 2017, the Company completed the sale of Encore to an unrelated third party. As of December 31, 2017, accumulated goodwill impairment losses were $63 million, solely related to Encore.
During the year ended December 31, 2016, the Company recorded impairment losses of $28 million. See Note 17 for additional information.
- Accrued Expenses
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2017 | 2016 | ||||||
| Compensation, including bonuses, fringe benefits and payroll taxes | $ | 656 | $ | 610 | ||||
| Restructuring | 84 | 102 | ||||||
| Interest | 45 | 42 | ||||||
| Client contract related | 565 | 502 | ||||||
| Professional fees | 76 | 69 | ||||||
| Contingent consideration and deferred purchase price | 59 | 22 | ||||||
| Other | 179 | 146 | ||||||
| $ | 1,664 | $ | 1,493 |
- Credit Arrangements
The following is a summary of the Company’s revolving credit facilities at December 31, 2017:
| Facility | Interest Rates | |
|---|---|---|
| $1,000 million (revolving credit facility) | LIBOR in the relevant currency borrowed plus a margin (margin of 2.00% at December 31, 2017) | |
| $25 million (receivables financing facility) | LIBOR Market Index Rate (1.56% at December 31, 2017) plus 0.90% | |
| £10 million (approximately $13 million) general banking facility with a European headquartered bank | Bank’s base rate (0.50% at December 31, 2017) plus 1% |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The following table summarizes the Company’s debt at the dates indicated (dollars in millions):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Senior Secured Credit Facilities: | ||||||||
| Term A Loan due 2021—U.S. Dollar LIBOR at average floating rates of 3.69% | $ | 844 | $ | 888 | ||||
| Term A Loan due 2021—Euro LIBOR at average floating rates of 2.00% | 453 | 419 | ||||||
| Term B Loan due 2025—U.S. Dollar LIBOR at average floating rates of 3.69% | 748 | — | ||||||
| Term B Loan due 2024—U.S. Dollar LIBOR at average floating rates of 3.69% | 1,188 | — | ||||||
| Term B Loan due 2024—Euro LIBOR at average floating rates of 2.75% | 1,423 | — | ||||||
| Term B Loan due 2021—U.S. Dollar LIBOR at average floating rates of 3.50% | — | 1,700 | ||||||
| Term B Loan due 2021—Euro LIBOR at average floating rates of 3.75% | — | 765 | ||||||
| Revolving Credit Facility due 2021: | ||||||||
| U.S. Dollar denominated borrowings—U.S. Dollar LIBOR at average floating rates of 3.47% | 529 | 375 | ||||||
| 5.0% Senior Notes due 2026—U.S. Dollar denominated | 1,050 | 1,050 | ||||||
| 2.875% Senior Notes due 2025—Euro denominated | 503 | — | ||||||
| 3.25% Senior Notes due 2025—Euro denominated | 1,707 | — | ||||||
| 3.5% Senior Notes due 2024—Euro denominated | 749 | 658 | ||||||
| 4.125% Senior Notes due 2023—Euro denominated | — | 289 | ||||||
| 4.875% Senior Notes due 2023—U.S. Dollar denominated | 800 | 800 | ||||||
| Receivables financing facility due 2020—U.S. Dollar LIBOR at average floating rate of 2.46% | 275 | 275 | ||||||
| Principal amount of debt | 10,269 | 7,219 | ||||||
| Less: unamortized discount and debt issuance costs | (44 | ) | (19 | ) | ||||
| Less: current portion | (103 | ) | (92 | ) | ||||
| Long-term debt | $ | 10,122 | $ | 7,108 |
Contractual maturities of long-term debt at December 31, 2017 are as follows (in millions):
| 2018 | $ | 103 | ||
|---|---|---|---|---|
| 2019 | 103 | |||
| 2020 | 378 | |||
| 2021 | 1,652 | |||
| 2022 | 34 | |||
| Thereafter | 7,999 | |||
| $ | 10,269 |
At December 31, 2017, there were bank guarantees totaling approximately £3 million (approximately $4 million) issued against the availability of the general banking facility with a European headquartered bank through their operations in the United Kingdom.
Senior Secured Credit Agreement and Senior Notes
2017 Financing Transactions
At December 31, 2017, the Company’s senior credit facility provided financing of up to approximately $5,656 million, which consisted of $5,185 million principal amount of debt outstanding (as detailed in the table above) and $471 million of available borrowing capacity on the $1.0 billion revolving credit facility that expires in 2021.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
On September 14, 2017, the Company’s wholly owned subsidiary, Quintiles IMS Incorporated (the “Issuer”), issued €420 million (approximately $501 million) aggregate principal amount of 2.875% senior notes due 2025 (the “2025 Notes”). The 2025 Notes, which are unsecured obligations of the Issuer, mature on September 15, 2025 and bear an interest rate of 2.875%, which is paid semi-annually on March 15 and September 15 of each year, beginning on March 15, 2018. The 2025 Notes may be redeemed prior to their final stated maturity, subject to a customary make-whole premium at any time prior to September 15, 2020 (subject to a certain customary “equity claw” redemption right) and thereafter subject to a redemption premium declining from 1.438% to 0%. On September 18, 2017, the Company amended its senior credit facility agreement (the “Amendment”) to provide for an incremental term B loan of $750 million and to increase the facility’s restricted payment capacity, specifically an increase to the total net leverage ratio conditions for unlimited restricted investments from 4.25-to-1.00 to 4.50-to-1.00 and for dividends and distributions from 4.00-to-1.00 to 4.50-to-1.00. The new term B loan will mature in 2025 and bear a floating interest rate of LIBOR plus 2.00% per year.
On March 7, 2017, the Company refinanced all of its term B loans due 2021—U.S. dollar denominated (approximately $1,700 million) and its term B loans due 2021—Euro denominated (approximately $765 million) with an extended and repriced term B loan facility due in 2024 for an aggregate principal amount of approximately $2,479 million comprised of $1,200 million U.S. dollar denominated term B loans and €1,200 million ($1,279 million) Euro denominated term B loans. The U.S. dollar denominated term B loans bear interest based on the U.S. Dollar LIBOR with a floor of 0.75%, plus a margin of 2.00% for an all-in interest rate of 3.69% as of December 31, 2017. The Euro denominated term B loans bear interest based on the Euro LIBOR with a floor of 0.75%, plus a margin of 2.00% for an all-in interest rate of 2.75% as of December 31, 2017. In connection with this refinancing, the Company recognized a $3 million loss on extinguishment of debt, which includes fees and related expenses.
On February 28, 2017, the Issuer issued €1,425 million (approximately $1,522 million) aggregate principal amount of 3.25% senior notes due 2025 (the “2017 Notes”). The 2017 Notes, which are unsecured obligations of the Issuer, mature on March 15, 2025 and bear an interest rate of 3.25%, which is paid semi-annually on March 15 and September 15 of each year, beginning on September 15, 2017. The 2017 Notes may be redeemed prior to their final stated maturity, subject to a customary make-whole premium at any time prior to March 15, 2020 (subject to a certain customary “equity claw” redemption right) and thereafter subject to annually declining redemption premiums at any time prior to March 15, 2022. During March 2017, the proceeds of the 2017 Notes were used to pay fees and expenses related to the notes offering and the refinancing referenced above and other general corporate purposes, including the repurchase of the Company’s common stock.
The net proceeds from the offering of the 2025 Notes and the Amendment referenced above were used to refinance certain indebtedness, including the redemption of the outstanding 4.125% Euro denominated senior notes due 2023 (the “4.125% Notes”), to pay down the revolving credit facility, to pay fees and expenses related to the offering of the 2025 Notes and the Amendment and for other general corporate purposes, including the repurchase of the Company’s common stock and acquisitions. In connection with this refinancing, the Company recognized a $16 million loss on extinguishment of debt, which includes the 4.125% Notes make-whole premium.
2016 Financing Transactions
On October 3, 2016, the Company 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 $1.0 billion. 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. The Company incurred a loss on extinguishment of debt of approximately $8 million related to the aggregate payments for make-whole premiums.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
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 the Company 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 the Company’s wholly-owned domestic restricted subsidiaries (excluding IMS Japan K.K.) and, subject to certain exceptions, each of the Company’s future domestic subsidiaries that guarantees the Company’s 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.
The Company also assumed in the Merger €275 million of 4.125% Senior Notes due in April 2023 (the “4.125% Senior Notes”). As noted above, during the third quarter of 2017 the 4.125% Senior Notes were redeemed. Interest on the 4.125% Senior Notes was payable semi-annually each year and commenced on October 1, 2015.
Receivables Financing Facility
On December 15, 2017, the Company amended its Receivables Financing Agreement to extend the original term of its receivables financing facility to December 15, 2020. In addition, the applicable margin (over LIBOR) changed to 90 bps regardless of the Company’s credit rating. Prior to the amendment, the margin was based on the Company’s credit rating and could range from 85 bps to 135 bps.
On December 5, 2014, the Company entered into a four-year arrangement to securitize certain of its accounts receivable. Under the receivables financing facility, certain of the Company’s accounts receivable are sold on a non-recourse basis by certain of its consolidated subsidiaries to another of its consolidated subsidiaries, a bankruptcy-remote special purpose entity (“SPE”). The SPE obtained a term loan and revolving loan commitment from a third-party lender, secured by liens on the assets of the SPE, to finance the purchase of the accounts receivable, which includes 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. The Company has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under the receivables financing facility. The assets of the SPE are not available to satisfy any of the Company’s obligations or any obligations of its subsidiaries. As of December 31, 2017, $25 million of revolving loans were available under the receivables financing facility.
Restrictive Covenants
The Company’s 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 Company’s 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. The Company’s long-term debt arrangements contain usual and customary restrictive covenants that, among other things, place limitations on the Company’s 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 Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included elsewhere in this Annual Report on Form 10-K. At December 31, 2017, the Company was in compliance in all material respects with the financial covenants under the Company’s financing arrangements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Leases
The Company leases facilities under operating leases, many of which contain renewal and escalation clauses. The Company also leases certain equipment and motor vehicles under operating leases. The leases expire at various dates through 2029 with options to cancel certain leases at various intervals. Rental expenses under these agreements were $197 million, $127 million and $109 million in 2017, 2016 and 2015, respectively.
The following is a summary of future minimum payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2017 (in millions):
| Operating Leases | ||||
|---|---|---|---|---|
| 2018 | $ | 169 | ||
| 2019 | 135 | |||
| 2020 | 115 | |||
| 2021 | 94 | |||
| 2022 | 75 | |||
| Thereafter | 157 | |||
| Total minimum lease payments | $ | 745 |
- Contingencies
The Company and its subsidiaries are involved in legal and tax proceedings, claims and litigation arising in the ordinary course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where management currently believes it is probable that the Company will incur a loss and that the probable loss or range of loss can be reasonably estimated, the Company has recorded reserves in the consolidated financial statements based on its best estimates of such loss. In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. However, even in many instances where the Company has recorded an estimated liability, the Company is unable to predict with certainty the final outcome of the matter or whether resolution of the matter will materially affect the Company’s results of operations, financial position or cash flows. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.
The Company routinely enters into agreements with its suppliers to acquire data and with its clients to sell data, all in the normal course of business. In these agreements, the Company sometimes agrees to indemnify and hold harmless the other party for any damages such other party may suffer as a result of potential intellectual property infringement and other claims related to the use of the data. The Company has not accrued a liability with respect to these matters, as the exposure is considered remote.
Based on its review of the latest information available, management does not expect the impact of pending legal and tax proceedings, claims and litigation, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or financial position. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which it is resolved. The following is a summary of certain legal matters involving the Company.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company’s wholly-owned subsidiary, IMS Government Solutions Inc. (“IMS Government Solutions”), is primarily engaged in providing services under contracts with the United States government. United States government contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the United States government have the ability to investigate whether contractors’ operations are being conducted in accordance with such requirements. IMS Government Solutions discovered potential noncompliance with various contract clauses and requirements under its General Services Administration Contract (the “GSA Contract”), which was awarded in 2002 to its predecessor company, Synchronous Knowledge Inc. (Synchronous Knowledge Inc. was acquired by IMS Health in May 2005). The potential noncompliance arose from two primary areas: first, at the direction of the government, work performed under one task order was invoiced under another task order without the appropriate modifications to the orders being made; and second, personnel who did not meet strict compliance with the labor categories component of the qualification requirements of the GSA Contract were assigned to contracts. The Company is currently unable to determine the outcome of all of these matters pending the resolution of the Voluntary Disclosure Program process and the ultimate liability arising from these matters could exceed the Company’s current reserves.
On February 13, 2014, a group of approximately 1,200 medical doctors and 900 private individuals filed a civil lawsuit with the Seoul Central District Court against IMS Korea and two other defendants, KPA and the Korean Pharmaceutical Information Center (“KPIC”). The civil lawsuit alleges KPA and KPIC collected their personal information in violation of applicable privacy laws without the necessary consent through a software system installed on pharmacy computer systems in Korea, and that personal information was transferred to IMS Korea and sold to pharmaceutical companies. On September 11, 2017, the District Court issued a final decision that the encryption in use by the defendants since June 2014 was adequate to meet the requirements of the Korean Personal Information Privacy Act (“PIPA”) and the sharing of non-identified information for market research purposes was allowed under PIPA. The District Court also found an earlier version of encryption was insufficient to meet PIPA requirements, but no personal data had been leaked or re-identified. The District Court did not award any damages to plaintiffs. Approximately 280 medical doctors and 200 private individuals appealed the District Court decision. The Company believes the appeal is without merit and intends to vigorously defend its position.
On July 23, 2015, indictments were issued by the Seoul Central District Prosecutors’ Office in South Korea against 24 individuals and companies alleging improper handling of sensitive health information in violation of, among others, South Korea’s Personal Information Protection Act. IMS Korea and two of its employees were among the individuals and organizations indicted. Although there is no assertion that IMS Korea used patient identified health information in any of its offerings, prosecutors allege that certain of IMS Korea’s data suppliers should have obtained patient consent when they converted sensitive patient information into non-identified data and that IMS Korea had not taken adequate precautions to reduce the risk of re-identification. The Company believes the indictment is without merit as it acted in compliance with all applicable laws at all times and intends to vigorously defend its position.
On January 10, 2017, IQVIA Inc., IMS Health Incorporated and IMS Software Services, Inc. (collectively “IQVIA Parties”) filed a lawsuit in the U.S. District Court for the District of New Jersey against Veeva Systems, Inc. (“Veeva”) alleging Veeva unlawfully used IQVIA Parties intellectual property to improve Veeva data offerings, to promote and market Veeva data offerings and to improve Veeva technology offerings. IQVIA Parties seek injunctive relief, appointment of a monitor, the award of compensatory and punitive damages and reimbursement of all litigation expenses, including reasonable attorneys’ fees and costs. On March 13, 2017, Veeva filed counterclaims alleging anticompetitive business practices in violation of the Sherman Act and state laws. Veeva claims damages in excess of $200 million, and is seeking punitive damages and litigation costs, including attorneys’ fees. The Company believes the counterclaims are without merit, reject all counterclaims raised by Veeva and intend to vigorously defend IQVIA Parties’ position and pursue the Company’s claims against Veeva.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 1.0 million shares of preferred stock, $0.01 per share par value. No shares of preferred stock were issued and outstanding as of December 31, 2017 or 2016.
Equity Repurchase Program and Secondary Public Offerings
On October 30, 2013, the Company’s Board of Directors (the “Board”) approved an equity repurchase program (the “Repurchase Program”) authorizing the repurchase of up to $125 million of either the Company’s common stock or vested in-the-money employee stock options, or a combination thereof. The Board increased the stock repurchase authorization under the Repurchase Program with respect to the repurchase of its common stock by $600 million, $1.5 billion, $1 billion and $1 billion in 2015, November 2016, February 2017 and May 2017, respectively, which increased the total amount that has been authorized under the Repurchase Program to $4.225 billion. The Repurchase Program does not obligate the Company to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it could be modified, extended, suspended or discontinued at any time.
During the year ended December 31, 2017, the Company repurchased 30,896,313 shares of its common stock, including repurchases both under and outside of the Repurchase Program at an average market price per share of $84.80 for an aggregate purchase price of approximately $2.6 billion. These amounts include shares of the Company’s common stock that it repurchased from certain of its principal stockholders in a private transaction and directly from underwriters in connection with three separate underwritten secondary public offerings described below.
In February 2017, the Company entered into a share repurchase agreement with certain of the Company’s principal stockholders under the Repurchase Program. Pursuant to that agreement, the Company purchased an aggregate of 9,677,420 shares of the Company’s common stock in a private transaction for an aggregate purchase price of approximately $750 million. This transaction was consummated on February 28, 2017.
On May 24, 2017, an automatic shelf registration statement (including a prospectus) relating to the offering of an unspecified amount of common stock was filed by the Company with the Securities and Exchange Commission and became effective upon filing. The registration statement will expire three years after the date of filing. Additionally, in May, the Company completed an underwritten secondary public offering of 10,571,003 shares of its common stock held by certain of the Company’s principal stockholders (the “May Selling Stockholders”), of which the Company repurchased 3,571,003 shares for an aggregate purchase price of approximately $300 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the May Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the May Selling Stockholders.
In September 2017, the Company completed an underwritten secondary public offering of 9,000,000 shares of its common stock held by certain of the Company’s principal stockholders (the “September Selling Stockholders”), of which the Company repurchased 4,000,000 shares for an aggregate purchase price of approximately $380 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the September Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the September Selling Stockholders.
In November 2017, the Company completed an underwritten secondary public offering of 10,000,000 shares of its common stock held by certain of the Company’s principal stockholders (the “November Selling Stockholders”), of which the Company repurchased 2,500,000 shares for an aggregate purchase price of approximately $255 million. These shares were repurchased outside of the Company’s existing Repurchase Program. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the November Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the November Selling Stockholders.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
As of December 31, 2017, the Company has remaining authorization to repurchase up to $182 million of its common stock under the Repurchase Program. In addition, from time to time, the Company has repurchased and may continue to repurchase common stock through private or other transactions outside of the Repurchase Program. In February 2018, the Board authorized an increase of the share repurchase authorization by $1.5 billion. See Note 27 for additional information regarding this authorization increase.
Below is a summary of the share repurchases made both under and outside of the Repurchase Program (in millions, except per share data):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Number of shares of common stock repurchased | 30.9 | 14.3 | 7.8 | |||||||||
| Aggregate purchase price | $ | 2,620 | $ | 1,098 | $ | 516 | ||||||
| Average price per share | $ | 84.80 | $ | 76.57 | $ | 65.56 |
Non-controlling Interests
As discussed further in Note 15, the Company contributed businesses to a joint venture with Quest Diagnostics Incorporated (“Quest”) that was recorded at book value (carryover basis) because the Company owns 60% of the joint venture and maintains control of these businesses. As a result, Quest’s non-controlling interest in the joint venture, referred to as Q2 Solutions, is equal to 40%. Quest’s non-controlling interest was $249 million at December 31, 2017.
- Business Combinations
IMS Health
On October 3, 2016, pursuant to the terms of the Merger Agreement, IMS Health merged with and into Quintiles, with Quintiles continuing as the Surviving Corporation. The combination of Quintiles and IMS Health capabilities and resources creates an information and technology enabled healthcare service provider with a full suite of end-to-end clinical and commercial offerings. The Merger was accounted for as a business combination with Quintiles considered the accounting and the legal acquirer. Immediately prior to the completion of the Merger, Quintiles reincorporated as a Delaware corporation. The Surviving Corporation changed its name to Quintiles IMS Holdings, Inc. At the effective time of the Merger, IMS Health common stock was automatically converted into 0.3840 of a share of the Company’s common stock. In addition, IMS Health equity awards held by current employees and certain members of the former IMS Health board of directors were converted into the Company’s equity awards after giving effect to the exchange ratio. The terms of these awards, including vesting provisions, are substantially consistent to those of the historical IMS Health equity awards. All of the Company’s and IMS Health’s performance units outstanding at the date of the Merger were converted into restricted stock units with service based vesting requirements. The merger consideration was approximately $10.4 billion (based on the closing price of the Company’s common stock on October 3, 2016), and consisted of the fair value of the Company’s common stock issued (approximately 126.6 million shares) in exchange for the IMS Health common stock as well as the fair value of the vested portion of the converted IMS Health equity awards. The Merger-date value of former IMS Health stock-based awards was valued using the Black-Scholes-Merton model and apportioned between Merger consideration (purchase price) and unearned compensation to be recognized in expense as earned in future periods based on remaining service periods. In connection with the IMS Health acquisition, the Company recorded goodwill, primarily attributable to the assembled workforce of IMS Health and the expected synergies, which was assigned to the Commercial Solutions segment ($9,688 million), the Research & Development Solutions segment ($533 million) and the Integrated Engagement Services segment ($67 million). The goodwill is not deductible for income tax purposes.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Quest
On July 1, 2015, the Company and Quest closed on a joint venture transaction that resulted in the combination of their respective global clinical trials laboratory operations. The joint venture transaction was effected through the creation of two primary new legal entities that the Company controls. Both the Company’s and Quest’s clinical trials laboratory operations were contributed to these new legal entities. The Company accounted for the contribution of the Quest businesses as a business combination. Quest was issued a 40% equity interest in the legal entities, the fair value of which was $423 million on July 1, 2015 (40% of the fair value of all operations contributed by both parties) and represents the purchase price paid by the Company for the clinical trials laboratory operations that Quest contributed to the joint venture transaction. The resulting combined capabilities are designed to provide its clients with globally scaled end-to-end clinical trials laboratory services and the combined business is referred to and marketed as Q2 Solutions. The Company accounted for the contribution of the Quest businesses as a business combination and consolidated the related new legal entities in its financial statements with a non-controlling interest for the portion owned by Quest. The Company recorded goodwill, primarily attributable to assembled workforce and expected synergies. This business combination is part of the Research & Development Solutions segment and the resulting goodwill is not deductible for income tax purposes.
The following table summarizes the estimated fair value of the net assets acquired at the date of the acquisitions (in millions):
| IMS Health | Quest | |||||||
|---|---|---|---|---|---|---|---|---|
| Assets acquired: | ||||||||
| Cash and cash equivalents | $ | 2,031 | $ | 32 | ||||
| Accounts receivable and unbilled services | 528 | 6 | ||||||
| Prepaid expenses | 85 | 1 | ||||||
| Other current assets | 145 | 4 | ||||||
| Property and equipment | 247 | 16 | ||||||
| Goodwill | 10,288 | 262 | ||||||
| Other identifiable intangibles | 6,435 | 126 | ||||||
| Deferred income tax asset – long-term | 25 | — | ||||||
| Other long-term assets | 71 | — | ||||||
| Liabilities assumed: | ||||||||
| Accounts payable and accrued expenses | (700 | ) | (13 | ) | ||||
| Unearned income | (175 | ) | — | |||||
| Current portion of long-term debt | (88 | ) | — | |||||
| Other current liabilities | (45 | ) | — | |||||
| Long-term debt, less current portion | (6,070 | ) | — | |||||
| Deferred income tax liability – long-term | (2,104 | ) | (10 | ) | ||||
| Other long-term liabilities | (248 | ) | (1 | ) | ||||
| Net assets acquired | $ | 10,425 | $ | 423 |
The other identifiable intangible assets consisted of the following (in millions):
| IMS Health | Quest | |||||||
|---|---|---|---|---|---|---|---|---|
| Client relationships | $ | 3,960 | $ | 74 | ||||
| Backlog | — | 33 | ||||||
| Trade names | 385 | 19 | ||||||
| Databases | 1,820 | — | ||||||
| Software | 270 | — | ||||||
| Total other identifiable intangibles | $ | 6,435 | $ | 126 | ||||
| Amortized over a weighted average useful life (in years) | 18 | 9 |
The acquired Quest trade name is an indefinite-lived intangible asset that is not amortized.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Acquisition Related Costs
Acquisition related costs include the direct and incremental costs associated with mergers and acquisitions such as investment banking, legal, accounting and consulting fees. The Company recognized approximately $36 million of acquisition related costs associated with the IMS Health merger during the year ended December 31, 2016, which are included with merger related costs on the consolidated statement of income. Acquisition related costs for all other acquisitions were immaterial and are not presented.
Unaudited Pro Forma Information
The following unaudited pro forma information presents the financial results as if the acquisition of IMS Health had occurred on January 1, 2015 with pro forma adjustments to give effect to (i) an increase in depreciation and amortization expense for fair value adjustments of property, plant and equipment and intangible assets, (ii) an increase in stock-based compensation expense resulting from the exchange of the vested IMS Health equity awards for the Company’s equity awards and (iii) the related income tax effects. The pro forma results do not include any cost synergies, costs or other effects pertaining to the integration of IMS Health. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred for the periods presented below had the IMS Health acquisition been completed on January 1, 2015, nor are they indicative of the future operating results of the Company.
The following table summarizes the pro forma results (in millions, except earnings per share):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2016 | 2015 | |||||||
| Revenues | $ | 7,784 | $ | 7,180 | ||||
| Reimbursed expenses | 1,514 | 1,411 | ||||||
| Total revenues | $ | 9,298 | $ | 8,591 | ||||
| Net income attributable to IQVIA Holdings Inc. | $ | 42 | $ | 450 | ||||
| Earnings per share attributable to common stockholders: | ||||||||
| Basic | $ | 0.17 | $ | 1.80 | ||||
| Diluted | $ | 0.17 | $ | 1.76 |
Pro forma information is not presented for any other acquisitions as the aggregate operations of the acquired businesses were not significant to the overall operations of the Company.
The Company’s consolidated statements of income for the year ended December 31, 2016 includes $806 million of revenues related to the IMS Health acquisition. Following the closing of the IMS Health acquisition, the Company began integrating IMS Health’s operations. As a result, computing a separate measure of IMS Health’s stand-alone profitability for periods after the acquisition date is impracticable.
Other Acquisitions
The Company also completed a number of individually immaterial acquisitions during the year ended December 31, 2017. The Company’s assessment of fair value and the purchase price allocation related to these acquisitions is preliminary and subject to change upon completion. Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date). In addition to the merger with IMS Health in October 2016, the Company completed a few unrelated individually immaterial acquisitions during the fourth quarter of 2016. The accompanying consolidated financial statements include the results of the acquisitions subsequent to each respective closing date.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The following table provides certain financial information for these individually immaterial acquisitions, including the preliminary allocations of the purchase prices to certain tangible and intangible assets acquired and goodwill (in millions):
| Amortization Period | 2017 | 2016 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total cost of acquisitions, net of cash acquired(1) | $ | 923 | $ | 136 | ||||||
| Amounts recorded in the Consolidated Balance Sheets: | ||||||||||
| Goodwill | $ | 581 | $ | 88 | ||||||
| Portion of goodwill deductible for income tax purposes | 235 | — | ||||||||
| Intangible assets: | ||||||||||
| Client relationships | 6-16 years | $ | 285 | $ | 31 | |||||
| Backlog | 1-4 years | 15 | 7 | |||||||
| Non-compete agreements | 2-5 years | 14 | 9 | |||||||
| Software | 2-9 years | 61 | 1 | |||||||
| Trade names | 1-17 years | 17 | — | |||||||
| Total intangible assets | $ | 392 | $ | 48 |
| (1) | Total cost of acquisitions, net of cash acquired, includes contingent consideration and deferred purchase payments of $69 million. |
|---|
- Restructuring
From time to time, the Company takes restructuring actions to adapt to changing market conditions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, aligning resources with customer requirements and taking actions to improve process efficiencies. There were restructuring plans approved in each of 2017, 2016 and 2015 for these activities. Additionally, in 2016, the Company also acquired certain restructuring.
The 2017 management approved plans resulted in approximately $61 million of restructuring expense, net of reversals, which consisted of severance, facility closure costs and other exit-related costs. The 2016 management approved plans resulted in approximately $33 million of restructuring expense, net of reversals, which consisted of severance, facility closure costs and other exit-related costs. The 2015 management approved plans resulted in approximately $23 million of restructuring expense, net of reversals, which consisted of severance, facility closure costs and other exit-related costs. Also during 2015, in connection with consummating the joint venture transaction with Quest, a restructuring plan was approved to reduce facility overcapacity and eliminate redundant roles. Since the start of this plan in 2015, the Company has recognized approximately $12 million of restructuring costs related to this plan.
The following amounts were recorded for the restructuring plans (in millions):
| Severance and Related Costs | Exit Costs | Total | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2015 | $ | 12 | $ | 2 | $ | 14 | ||||||
| Expense, net of reversals | 60 | 3 | 63 | |||||||||
| Acquisitions | 80 | — | 80 | |||||||||
| Payments | (48 | ) | (2 | ) | (50 | ) | ||||||
| Foreign currency translation and other | (5 | ) | — | (5 | ) | |||||||
| Balance at December 31, 2016 | 99 | 3 | 102 | |||||||||
| Expense, net of reversals | 59 | 4 | 63 | |||||||||
| Payments | (77 | ) | (4 | ) | (81 | ) | ||||||
| Foreign currency translation and other | (1 | ) | 1 | — | ||||||||
| Balance at December 31, 2017 | $ | 80 | $ | 4 | $ | 84 |
The reversals were due to changes in estimates primarily resulting from the redeployment of staff and higher than expected voluntary terminations. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. The Company expects the majority of the restructuring accruals at December 31, 2017 will be paid in 2018.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Impairment Charges
During 2017 and 2016, the Company performed impairment assessments of Encore that resulted in the impairment of goodwill of $39.6 million and $23 million, respectively. These impairments represented the entire amount of goodwill associated with Encore. Encore had certain strategic initiatives not performing as expected, resulting in a decline in revenues. Additionally, as part of the respective impairment assessment, intangible asset impairments of $0.4 million and $5 million were recorded in 2017 and 2016, respectively. On July 12, 2017, the Company completed the sale of Encore to an unrelated third party.
- Income Taxes
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act is comprehensive legislation that includes provisions that lower the federal corporate income tax rate from 35% to 21% beginning in 2018 and impose a one-time transition tax on undistributed foreign earnings. ASC 740 “Income Taxes” generally requires the effects of the tax law change to be recorded in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin No. 118 to address situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company has recognized the tax impacts related to the transition tax on undistributed foreign earnings and the impact to deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis. The ultimate impact may differ from these provisional amounts, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional interpretive regulatory guidance that may be issued. The accounting is expected to be complete when the 2017 U.S. corporate income tax return is filed in 2018.
The components of income before income taxes and equity in earnings (losses) of unconsolidated affiliates are as follows (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Domestic | $ | (495 | ) | $ | (85 | ) | $ | 68 | ||||
| Foreign | 826 | 564 | 471 | |||||||||
| $ | 331 | $ | 479 | $ | 539 |
The components of income tax expense attributable to continuing operations are as follows (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Current expense: | ||||||||||||
| Federal and state | $ | (3 | ) | $ | 64 | $ | 51 | |||||
| Foreign | 222 | 129 | 109 | |||||||||
| 219 | 193 | 160 | ||||||||||
| Deferred (benefit) expense: | ||||||||||||
| Federal and state | (1,165 | ) | 166 | 5 | ||||||||
| Foreign | (41 | ) | (14 | ) | (6 | ) | ||||||
| (1,206 | ) | 152 | (1 | ) | ||||||||
| $ | (987 | ) | $ | 345 | $ | 159 |
As a result of the Tax Act, the Company recorded a provisional deferred tax benefit of $977 million related to the revaluation of deferred taxes at the newly enacted 21% rate and reversal of the deferred tax liability on undistributed earnings net of the newly enacted transition tax.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The differences between the Company’s consolidated income tax expense attributable to continuing operations and the expense computed at the 35% United States statutory income tax rate were as follows (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Federal income tax expense at statutory rate | $ | 116 | $ | 167 | $ | 189 | ||||||
| State and local income taxes, net of federal effect | (13 | ) | — | 2 | ||||||||
| Research and development | (9 | ) | (11 | ) | (13 | ) | ||||||
| Foreign nontaxable interest income | (7 | ) | (8 | ) | (9 | ) | ||||||
| United States taxes recorded on foreign earnings | 6 | 252 | 38 | |||||||||
| Tax contingencies | 17 | 2 | (8 | ) | ||||||||
| Foreign rate differential | (95 | ) | (60 | ) | (49 | ) | ||||||
| Equity compensation | (19 | ) | — | — | ||||||||
| Provisional Tax Act impact | (977 | ) | — | — | ||||||||
| Other | (6 | ) | 3 | 9 | ||||||||
| $ | (987 | ) | $ | 345 | $ | 159 |
In 2016, due to the Merger, the Company reevaluated its indefinite reinvestment assertion based on the need for cash in the United States, including funding the Repurchase Program and potential acquisitions. Accordingly, the Company changed its assertion with respect to $2,801 million of foreign earnings, including $1,865 million of IMS Health’s previously undistributed historical foreign earnings. 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.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $3,134 million at December 31, 2017. With the enactment of the Tax Act, the Company does not consider any of its foreign earnings as indefinitely reinvested. The Company has recorded a provisional estimate of the deferred income tax liability for the transition tax, net of foreign tax credits, of $186 million as of December 31, 2017.
The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below (in millions):
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||
| Deferred income tax assets: | ||||||||
| Net operating loss and capital loss carryforwards | $ | 278 | $ | 242 | ||||
| Tax credit carryforwards | 170 | 267 | ||||||
| Accrued expenses and unearned income | 46 | 75 | ||||||
| Employee benefits | 189 | 273 | ||||||
| Other | 82 | 32 | ||||||
| 765 | 889 | |||||||
| Valuation allowance for deferred income tax assets | (200 | ) | (153 | ) | ||||
| Total deferred income tax assets | 565 | 736 | ||||||
| Deferred income tax liabilities: | ||||||||
| Undistributed foreign earnings | (21 | ) | (590 | ) | ||||
| Amortization and depreciation | (1,334 | ) | (2,026 | ) | ||||
| Other | (30 | ) | (164 | ) | ||||
| Total deferred income tax liabilities | (1,385 | ) | (2,780 | ) | ||||
| Net deferred income tax liabilities | $ | (820 | ) | $ | (2,044 | ) |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Due to the U.S. income tax rate decreasing from 35% to 21% per the Tax Act, the Company recorded a provisional reduction to its net deferred tax liabilities of $606 million, which includes a $753 million reduction to deferred tax liabilities that related to intangible amortization that was recorded through purchase accounting upon the Merger. In response to the Tax Act, the Company also reversed most of its deferred tax liability related to undistributed foreign earnings
The Company had federal, state and local, and foreign tax loss carryforwards and tax credits, the tax effect of which was $469 million as of December 31, 2017. Of this amount, $34 million has an indefinite carryforward period, and the remaining $435 million expires at various times beginning in 2018. Some of these losses are subject to limitations under the Internal Revenue Code, however, management expects all losses to be utilized during the carryforward periods.
In 2017, the Company increased its valuation allowance by $47 million to $200 million at December 31, 2017 from $153 million at December 31, 2016. The valuation allowance increase is primarily related to an increase in the value of the U.S. state net operating losses as a result of the U.S. federal tax rate decreasing with the Tax Act.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Balance at January 1 | $ | 64 | $ | 30 | $ | 41 | ||||||
| IMS Health balance as of Merger | — | 37 | — | |||||||||
| Additions based on tax positions related to the current year | 11 | 3 | 2 | |||||||||
| Additions for income tax positions of prior years | 13 | 7 | 9 | |||||||||
| Impact of changes in exchange rates | 4 | (3 | ) | (1 | ) | |||||||
| Settlements with tax authorities | (2 | ) | — | — | ||||||||
| Reductions for income tax positions of prior years | (2 | ) | (1 | ) | (2 | ) | ||||||
| Reductions due to the lapse of the applicable statute of limitations | (6 | ) | (9 | ) | (19 | ) | ||||||
| Balance at December 31 | $ | 82 | $ | 64 | $ | 30 |
As of December 31, 2017, the Company had total gross unrecognized income tax benefits of $82 million associated with over 100 jurisdictions in which the Company conducts business that, if recognized, would reduce the Company’s effective income tax rate.
The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of income. In 2017, 2016 and 2015, the amount of interest and penalties recorded as an addition/(reduction) to income tax expense in the accompanying consolidated statements of income was $3 million, $2 million and ($2) million, respectively. As of December 31, 2017 and 2016, the Company had accrued approximately $18 million and $11 million, respectively, of interest and penalties.
The Company believes that it is reasonably possible that a decrease of up to $10 million in gross unrecognized income tax benefits for federal, state and foreign exposure items may be necessary within the next 12 months due to lapse of statutes of limitations or uncertain tax positions being effectively settled. The Company believes that it is reasonably possible that a decrease of up to $1 million in gross unrecognized income tax benefits for foreign items may be necessary within the next 12 months due to payments. For the remaining uncertain income tax positions, it is difficult at this time to estimate the timing of the resolution.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the tax years that remain open for examination by tax authorities in the most significant jurisdictions in which the Company operates:
| United States | 2014-2016 | |
|---|---|---|
| India | 2006-2017 | |
| Japan | 2012-2016 | |
| United Kingdom | 2016 | |
| Switzerland | 2013-2016 |
In certain of the jurisdictions noted above, the Company operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that tax years are technically not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.
Due to the geographic breadth of the Company’s operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes that may be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of income tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, the Company will record additional income tax expense or income tax benefit in the period in which such resolution occurs.
The Company had a tax holiday for Quintiles East Asia Pte. Ltd. in Singapore through June 2015. The income tax benefit of this holiday was approximately $2 million in 2015. The tax holiday increased earnings per share by approximately $0.02 in 2015.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Employee Benefit Plans
Pension and Postretirement Benefit Plans
The Company sponsors both funded and unfunded defined benefit pension plans. These plans provide benefits based on various criteria, including, but not limited to, years of service and salary. The Company also sponsors an unfunded postretirement benefit plan in the United States that provides health and prescription drug benefits to retirees who meet the eligibility requirements. The Company uses a December 31 measurement date for all pension and postretirement benefit plans.
The following table summarizes changes in the benefit obligation, the plan assets and the funded status of the pension benefit plans (in millions):
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Obligation and funded status: | ||||||||||||||||
| Change in benefit obligation | ||||||||||||||||
| Projected benefit obligation at beginning of year | $ | 308 | $ | — | $ | 508 | $ | 154 | ||||||||
| Service costs | 13 | 4 | 26 | 18 | ||||||||||||
| Interest cost | 11 | 3 | 9 | 5 | ||||||||||||
| Expected return on plan assets | — | — | — | — | ||||||||||||
| Actuarial gains | 25 | (30 | ) | (2 | ) | (8 | ) | |||||||||
| Business combinations | — | 333 | — | 377 | ||||||||||||
| Benefits paid | (8 | ) | (2 | ) | (21 | ) | (9 | ) | ||||||||
| Contributions | — | — | 1 | — | ||||||||||||
| Settlements | — | — | (4 | ) | — | |||||||||||
| Foreign currency fluctuations and other | — | — | 42 | (29 | ) | |||||||||||
| Projected benefit obligation at end of year | 349 | 308 | 559 | 508 | ||||||||||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | 312 | — | 348 | 87 | ||||||||||||
| Actual return on plan assets | 53 | 5 | 17 | 4 | ||||||||||||
| Contributions | 3 | 1 | 21 | 9 | ||||||||||||
| Business combinations | — | 308 | — | 284 | ||||||||||||
| Benefits paid | (8 | ) | (2 | ) | (21 | ) | (9 | ) | ||||||||
| Settlements | — | — | (4 | ) | — | |||||||||||
| Foreign currency fluctuations and other | — | — | 30 | (27 | ) | |||||||||||
| Fair value of plan assets at end of year | 360 | 312 | 391 | 348 | ||||||||||||
| Funded status | $ | 11 | $ | 4 | $ | (168 | ) | $ | (160 | ) |
The following table summarizes the amounts recognized in the consolidated balance sheets related to the pension benefit plans (in millions):
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Deposits and other assets | $ | 55 | $ | 45 | $ | 15 | $ | 13 | ||||||||
| Accrued expenses | 2 | 1 | 8 | 9 | ||||||||||||
| Other long-term liabilities | 42 | 40 | 175 | 164 | ||||||||||||
| AOCI | 33 | 29 | (3 | ) | (8 | ) |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The following table summarizes the accumulated benefit obligation for all pension benefit plans (in millions):
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Accumulated benefit obligation | $ | 343 | $ | 303 | $ | 507 | $ | 469 |
At December 31, 2017, the benefit obligation for other postretirement benefits was $3 million, with $1 million recorded in accrued expenses and $2 million included within other long-term liabilities.
The following table provides the information for pension plans with an accumulated benefit obligation in excess of plan assets and projected benefit obligations in excess of plan assets (in millions):
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Plans with accumulated benefit obligation in excess of plan assets: | ||||||||||||||||
| Accumulated benefit obligation | $ | 45 | $ | 43 | $ | 442 | $ | 409 | ||||||||
| Fair value of plan assets | 3 | 2 | 301 | 271 | ||||||||||||
| Plans with projected benefit obligation in excess of plan assets: | ||||||||||||||||
| Projected benefit obligation | $ | 46 | $ | 44 | $ | 492 | $ | 444 | ||||||||
| Fair value of plan assets | 3 | 2 | 309 | 271 |
The components of net periodic benefit cost changes in plan assets and benefit obligations recognized in other comprehensive loss were as follows (in millions):
| Pension Benefits | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2015 | ||||||||||||||||
| Service cost | $ | 13 | $ | 4 | $ | 26 | $ | 18 | $ | 15 | ||||||||||
| Interest cost | 11 | 3 | 9 | 5 | 3 | |||||||||||||||
| Expected return on plan assets | (24 | ) | (6 | ) | (14 | ) | (6 | ) | (3 | ) | ||||||||||
| Amortization of actuarial losses | — | — | 1 | 1 | 1 | |||||||||||||||
| Net periodic benefit cost | — | 1 | 22 | 18 | 16 | |||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive loss: | ||||||||||||||||||||
| Actuarial loss (gain) – current years | (4 | ) | (29 | ) | (4 | ) | (5 | ) | — | |||||||||||
| Amortization of actuarial losses | — | — | (1 | ) | (1 | ) | (1 | ) | ||||||||||||
| Total recognized in other comprehensive income | (4 | ) | (29 | ) | (5 | ) | (6 | ) | (1 | ) | ||||||||||
| Total recognized in net periodic benefit cost and other comprehensive loss | $ | (4 | ) | $ | (28 | ) | $ | 17 | $ | 12 | $ | 15 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The components of other changes in plan assets and benefit obligations recognized in other comprehensive loss related to the other postretirement benefits plan are de minimis. In addition, the amounts in AOCI that are expected to be recognized as components of net periodic benefit cost (credit) during 2018 for pension and other postretirement benefit plans are de minimis.
Assumptions
The weighted average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2015 | 2017 | 2016 | ||||||||||||||||||||||
| Discount rate | 4.17 | % | 3.62 | % | 1.89 | % | 1.88 | % | 2.46 | % | 2.90 | % | 2.40 | % | ||||||||||||||
| Rate of compensation increases | 3.00 | % | 3.00 | % | 5.17 | % | 5.27 | % | 4.32 | % | — | — | ||||||||||||||||
| Expected return on plan assets | 7.94 | % | 7.94 | % | 4.16 | % | 4.26 | % | 4.05 | % | — | — |
The weighted average assumptions used to determine benefit obligations were as follows at December 31:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
| Discount rate | 3.69 | % | 4.17 | % | 1.90 | % | 1.68 | % | 2.90 | % | 2.90 | % | ||||||||||||
| Rate of compensation increases | 3.00 | % | 3.00 | % | 4.54 | % | 5.17 | % | — | — |
The discount rate represents the interest rate used to determine the present value of the future cash flows currently expected to be required to settle the Company’s defined benefit plan obligations. The discount rates are derived using weighted average yield curves on AA-rated corporate bonds. The cash flows from the Company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. At December 31, 2017, the discount rate ranged from 2.90% to 3.73% for the Company’s United States pension plan and postretirement benefit plan. At December 31, 2017, the discount rate ranged from 2.22% to 2.53% for the Company’s United Kingdom pension plans. The United States and United Kingdom plans represent approximately 76% of the consolidated benefit obligation as of December 31, 2017. The discount rates in other non-U.S. countries ranged from 0.40% to 11.60% at December 31, 2017.
The Company’s assumption for the expected return on plan assets was determined by the weighted average of the long-term expected rate of return on each of the asset classes invested as of the balance sheet date. For plan assets invested in government bonds, the expected return was based on the yields on the relevant indices as of the balance sheet date. There is considerable uncertainty for the expected return on plan assets invested in equity and diversified growth funds. The expected rate of return on plan assets for the United States pension plans was 7.75% at January 1, 2018. Outside the United States, the range of applicable expected rates of return was 1.0% to 6.46% as of January 1, 2018, compared to 0.8% to 9.0% as of January 1, 2017. The expected return on assets (“EROA”) was $38 million and $13 million and the actual return on assets was $70 million and $10 million for the years ended December 31, 2017 and 2016, respectively.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Under the Company’s 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 and is equal to 1/12th of the yield on 30-year U.S. Government Treasury Bonds, with a minimum of 0.25%. At retirement, the account is converted to a monthly retirement benefit.
At December 31, 2017, the Company’s health care cost trend rate for the next seven years was assumed to be 6.5% and the assumed ultimate cost trend rate was 5%. The Company assumed that ultimate cost trend rate is reached in 2021.
Assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates at December 31, 2017 would have a de minimis effect on the total of service and interest cost and on the accumulated postretirement benefit obligation.
Plan Assets
The Company’s pension plan weighted average asset allocations, by asset category, were as follows:
| Plan Assets at December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | Total | ||||||||||||||||||||||
| Asset Category | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
| Equity securities | 69.86 | % | 70.09 | % | 47.92 | % | 46.09 | % | 58.44 | % | 57.43 | % | ||||||||||||
| Debt securities | 25.21 | 24.94 | 14.65 | 14.42 | 19.71 | 19.39 | ||||||||||||||||||
| Real estate | 4.93 | 4.97 | — | — | 2.36 | 2.35 | ||||||||||||||||||
| Other | — | — | 37.43 | 39.49 | 19.49 | 20.83 | ||||||||||||||||||
| Total | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |
The target asset allocation for the Company’s pension plans were as follows:
| Asset Category | United States Plans | Non-United States Plans | Total | |||
|---|---|---|---|---|---|---|
| Equity securities | 60-80% | 35-50% | 45-65% | |||
| Debt securities | 20-30% | 10-20% | 10-30% | |||
| Real estate | 0-10% | —% | 0-5% | |||
| Other | —% | 30-45% | 10-30% |
The following table summarizes United States plan assets measured at fair value (in millions):
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Category | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| Domestic equities | $ | 37 | $ | — | $ | 37 | $ | 32 | $ | — | $ | 32 | ||||||||||||
| International equities | 23 | — | 23 | 20 | — | 20 | ||||||||||||||||||
| Corporate bonds | 53 | — | 53 | 46 | — | 46 | ||||||||||||||||||
| Real estate | 18 | — | 18 | 15 | — | 15 | ||||||||||||||||||
| Total assets in the fair value hierarchy | 131 | — | 131 | 113 | — | 113 | ||||||||||||||||||
| Common/collective trusts measured at net asset value (“NAV”)(1) | — | — | 229 | — | — | 199 | ||||||||||||||||||
| Total | $ | 131 | $ | — | $ | 360 | $ | 113 | $ | — | $ | 312 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The following table summarizes non-United States plan assets measured at fair value (in millions):
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Category | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| International equities | $ | — | $ | 66 | $ | 66 | $ | — | $ | 57 | $ | 57 | ||||||||||||
| Debt issued by national, state or local government | 2 | 55 | 57 | 2 | 48 | 50 | ||||||||||||||||||
| Diversified growth fund | — | 17 | 17 | — | 14 | 14 | ||||||||||||||||||
| Investments funds | — | 7 | 7 | — | 7 | 7 | ||||||||||||||||||
| Insurance contracts | — | 141 | 141 | — | 133 | 133 | ||||||||||||||||||
| Other | — | 7 | 7 | — | 6 | 6 | ||||||||||||||||||
| Total assets in the fair value hierarchy | 2 | 293 | 295 | 2 | 265 | 267 | ||||||||||||||||||
| Assets measured at NAV(1) | — | — | 96 | — | — | 81 | ||||||||||||||||||
| Total | $ | 2 | $ | 293 | $ | 391 | $ | 2 | $ | 265 | $ | 348 |
| (1) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the above plan asset tables are intended to permit reconciliation of the fair value of plan assets in the fair value hierarchy to the plan asset amounts presented in the above funded status table as of December 31, 2017 and 2016. |
|---|
Investments in mutual funds are valued at quoted market prices. Investments in common/collective trusts and pooled funds are valued at the NAV as reported by the trust. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. Insurance contracts are valued at the amount of the benefit liability. The Company has no Level 3 assets that rely on unobservable inputs to measure fair value.
Investment Policies and Strategies
The Company invests primarily in a diversified portfolio of equity and debt securities that provide for long-term growth within reasonable and prudent levels of risk. The asset allocation targets established by the Company are strategic and applicable to the plan’s long-term investing horizon. The portfolio is constructed and maintained to provide adequate liquidity to meet associated liabilities and minimize long-term expense and provide prudent diversification among asset classes in accordance with the principles of modern portfolio theory. The plan employs a diversified mix of actively managed investments around a core of passively managed index exposures in each asset class. Within each asset class, rapid market shifts, changes in economic conditions or an individual fund manager’s outlook may cause the asset allocation to fall outside the prescribed targets. The majority of the Company’s plan assets are measured quarterly against benchmarks established by the Company’s investment advisors and the Company’s Asset Management Committee, who review actual plan performance and have the authority to recommend changes as deemed appropriate. Assets are rebalanced periodically to their strategic targets to maintain the plan’s strategic risk/reward characteristics. The Company periodically conducts asset liability modeling studies to ensure that the investment strategy is aligned with the obligations of the plans and that the assets will generate income and capital growth to meet the cost of current and future benefits that the plans provide. The pension plans do not have investments in Company stock at December 31, 2017 or 2016.
The portfolio for the Company’s United Kingdom pension plans seek to invest in a range of suitable assets of appropriate liquidity that will generate in the most effective manner possible, income and capital growth to ensure that there are sufficient assets to meet benefit payments when they fall due, while controlling the long-term costs of the plans and avoiding short-term volatility of investment returns. The plans seek to achieve these objectives by investing in a mixture of real (equities) and monetary (fixed interest) assets. It recognizes that the returns on real assets, while expected to be greater over the long-term than those on monetary assets, are likely to be more volatile. A mixture across asset classes should nevertheless provide the level of returns required by the plans. The trustee periodically conducts asset liability modeling exercises to ensure the investments are aligned with the appropriate benchmark to better reflect the plans’ liabilities. The trustee also undertakes to review this benchmark on a regular basis.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Cash Flows
Contributions
The Company expects to contribute approximately $22 million in required contributions to its pension and postretirement benefit plans during 2018. The Company may make additional contributions into its pension plans in 2018 depending on, among other factors, how the funded status of those plans change or in order to meet minimum funding requirements as set forth in employee benefit and tax laws, plus additional amounts the Company may deem to be appropriate.
Estimated future benefit payments and subsidy receipts
The following benefit payments (net of expected participant contributions) for pension benefits are expected to be paid as follows (in millions):
| Pension Benefits | ||||
|---|---|---|---|---|
| 2018 | $ | 29 | ||
| 2019 | 30 | |||
| 2020 | 32 | |||
| 2021 | 35 | |||
| 2022 | 37 | |||
| Years 2023 through 2027 | 218 | |||
| $ | 381 |
Benefit payments (net of expected participant contributions) for other postretirement benefits are expected to be de minimis over the periods presented.
Defined Contribution Plans
Defined contribution or profit sharing plans are offered in Australia, Austria, Belgium, Bulgaria, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel, Japan, Malaysia, the Netherlands, New Zealand, Poland, Slovakia, South Africa, Sweden, Switzerland, Taiwan, Thailand, the United States and the United Kingdom. In some cases, these plans are required by local laws or regulations.
In the United States, the Company has 401(k) plans under which the Company matches employee deferrals at varying percentages and specified limits of the employee’s salary. In 2017, 2016 and 2015, the Company expensed $47 million, $39 million and $36 million, respectively, related to matching contributions.
Certain key executives of the Company participate in an unfunded defined contribution executive retirement plan, assumed in the Merger, which was frozen to additional accruals for future service contributions in 2012. Participants continue to receive an annual investment credit based on the average of the annual yields at the end of each month on the AA-AAA rated 10 plus year maturity component of the Merrill Lynch United States Corporate Bond Master Index.
Plans Accounted for as Postretirement Benefits
The Company provides certain executives with postretirement medical, dental and life insurance benefits. These benefits are individually negotiated arrangements in accordance with their individual employment arrangements. The above tables do not include the Company’s expense or obligation associated with providing these benefits. The obligation related to these benefits was approximately $12 million for the year ended December 31, 2017, and the Company’s expense for the year then ended was de minimis.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Stock Incentive Plans
Stock incentive plans provide incentives to eligible employees, officers and directors in the form of non-qualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance awards, covered annual incentive awards, cash-based awards and other stock-based awards, in each case subject to the terms of the stock incentive plans.
In April 2017, the Company’s 2017 Incentive and Stock Award Plan (the “2017 Plan”) was approved by the Company’s stockholders. The 2017 Plan consolidates the unused share pools under the Company’s 2014 Incentive and Stock Award Plan (the “2014 Plan”), the Company’s 2013 Stock Incentive Plan (the “2013 Plan”), the Company’s 2010 Equity Incentive Plan (the “2010 Plan”) and the Company’s 2008 Stock Incentive Plan (the “2008 Plan”), and together with the 2010 Plan, the 2013 Plan and the 2014 Plan, the “Prior Plans,” and makes shares underlying outstanding awards granted under (but not ultimately delivered) the Prior Plans eligible for use in connection with new awards under the 2017 Plan. The 2017 Plan provides for the grant of stock options, SARs, restricted and deferred stock (including RSUs), performance awards, dividend equivalents, other stock-based awards and cash-based awards.
The fair value of stock options and SARs is estimated using the Black-Scholes-Merton option-pricing model. The fair value of restricted stock and RSUs is based on the closing market price of the Company’s common stock on the date of grant. The fair value of the performance shares is determined separately for the portion of the award based on compound annual earnings per share (“EPS”) growth and the portion of the award based on relative total shareholder return (“TSR”). The fair value of the compound annual EPS growth portion of the award is equal to the closing market price of the Company’s common stock on the date of grant. The fair value of the TSR portion of the award is determined based on a Monte Carlo simulation model.
The Company recognized stock-based compensation expense of $106 million, $80 million and $38 million in 2017, 2016 and 2015, respectively. Stock-based compensation expense is included in selling, general and administrative expenses on the accompanying consolidated statements of income. The associated future income tax benefit recognized was $21 million, $24 million and $9 million in 2017, 2016 and 2015, respectively. As of December 31, 2017, there was approximately $103 million of total unrecognized stock-based compensation expense related to outstanding non-vested stock-based compensation arrangements, which the Company expects to recognize over a weighted average period of 1.16 years.
As of December 31, 2017, there were 13.4 million shares available for future grants under all of the Company’s stock incentive plans.
The Company used the following assumptions when estimating the value of the stock-based compensation for stock options and SARs issued as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Expected volatility | 22 – 25% | 20 – 30% | 26 – 41% | |||||||||
| Weighted average expected volatility | 24% | 28% | 34% | |||||||||
| Expected dividends | 0.0% | 0.0% | 0.0% | |||||||||
| Expected term (in years) | 1.0 – 6.9 | 0.3 – 6.6 | 3.7 – 6.7 | |||||||||
| Risk-free interest rate | 1.16 – 2.32% | 0.32 – 2.19% | 1.06 – 2.04% |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Stock Options
The option price is determined by the Board at the date of grant and the options expire 10 years from the date of grant. The vesting schedule for options granted to employees is either (i) 25% per year beginning on the first anniversary of the date of grant; or (ii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant.
The Company’s stock option activity in 2017 is as follows (in millions, except number of options and exercise price):
| Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | 7,251,339 | $ | 34.83 | $ | 299 | |||||||
| Exercised | (2,957,816 | ) | 34.43 | |||||||||
| Canceled | (212,891 | ) | 57.03 | |||||||||
| Outstanding at December 31, 2017 | 4,080,632 | $ | 33.97 | $ | 261 |
The weighted average fair value per share of the options granted in 2016 and 2015 was $17.91 and $21.96, respectively. The total intrinsic value of options exercised was approximately $157 million, $155 million and $144 million in 2017, 2016 and 2015, respectively. The Company received cash of approximately $102 million, $101 million and $59 million in 2017, 2016 and 2015, respectively, from options exercised.
Selected information regarding the Company’s stock options as of December 31, 2017 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Options | Exercise Price Range | Weighted Average Exercise Price | Weighted Average Remaining Life (in Years) | Number of Options | Weighted Average Exercise Price | |||||||||||||||||||||||||
| 827,775 | $ | 8.34 | — | $ | 18.23 | $ | 11.15 | 2.54 | 827,775 | $ | 11.15 | |||||||||||||||||||
| 1,219,780 | 18.40 | — | 26.05 | 24.21 | 3.09 | 1,219,780 | 24.21 | |||||||||||||||||||||||
| 823,189 | 28.13 | — | 42.74 | 33.07 | 4.59 | 751,032 | 33.52 | |||||||||||||||||||||||
| 839,003 | 44.45 | — | 64.67 | 57.72 | 6.99 | 431,827 | 56.09 | |||||||||||||||||||||||
| 370,885 | $ | 64.86 | — | $ | 77.11 | $ | 65.28 | 7.12 | 172,635 | $ | 65.31 |
The weighted average remaining contractual life of the options outstanding and exercisable as of December 31, 2017 is 4.5 years and 3.9 years, respectively. The total aggregate intrinsic value of the exercisable stock options and the stock options expected to vest as of December 31, 2017 was approximately $260 million.
Stock Appreciation Rights – Stock Settled
The exercise price of the stock-settled SARs (“SSRs”) is equal to the closing market price of the Company’s common stock as of the grant date and expire on the tenth anniversary of the date of grant. The SSRs are eligible to vest either (i) in equal increments of 25% on each of the first four anniversaries of the date of grant or (ii) in three equal annual installments on each of the first three anniversaries of the date of grant.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company’s SSR activity in 2017 is as follows (in millions, except number of SSRs and exercise price):
| Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | 1,313,322 | $ | 62.13 | $ | 18 | |||||||
| Granted | 1,971,768 | 78.96 | ||||||||||
| Exercised | (123,342 | ) | 63.24 | |||||||||
| Canceled | (236,978 | ) | 74.00 | |||||||||
| Outstanding at December 31, 2017 | 2,924,770 | $ | 72.47 | $ | 74 |
The total intrinsic value of SSRs exercised was approximately $2.9 million in 2017.
The weighted average remaining contractual life of the SSRs outstanding and exercisable as of December 31, 2017 is 8.5 years and 6.8 years, respectively. The total aggregate intrinsic value of the exercisable SSRs and the SSRs expected to vest as of December 31, 2017 was approximately $72 million.
Stock Appreciation Rights – Cash Settled
The Company’s cash settled SARs (“CSRs”) require the Company to settle in cash an amount equal to the difference between the fair value of the Company’s common stock on the date of exercise and the grant price, multiplied by the number of CSRs being exercised. These awards either (i) vest 25% per year or (ii) vest 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant; or (iii) one-third per year beginning on the first anniversary of the date of grant.
The Company’s CSR activity in 2017 is as follows (in millions, except number of CSRs and grant price):
| Number of CSRs | Weighted Average Grant Price | Aggregate Intrinsic Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | 479,176 | $ | 52.42 | $ | 11 | |||||||
| Granted | 15,227 | 78.21 | ||||||||||
| Exercised | (117,813 | ) | 50.26 | |||||||||
| Canceled | (39,475 | ) | 56.52 | |||||||||
| Outstanding at December 31, 2017 | 337,115 | $ | 53.87 | $ | 15 |
As of December 31, 2017, 2016 and 2015, the weighted average fair value per share of the CSRs granted was $52.53, $34.25 and $29.79, respectively. The Company paid approximately $4 million, $2 million and $1 million to settle exercised CSRs in 2017, 2016 and 2015, respectively.
The weighted average remaining contractual life of the CSRs outstanding and exercisable as of December 31, 2017 is 6.5 years and 5.9 years, respectively. The total aggregate intrinsic value of the exercisable CSRs and the CSRs expected to vest as of December 31, 2017 was approximately $15 million.
Restricted Stock Units – Stock Settled
The Company’s RSUs will settle in shares of the Company’s common stock within 45 days of the applicable vesting date. RSUs granted to employees vest either (i) 25% per year beginning on the first anniversary of the date of grant; (ii) one-third per year beginning on the first anniversary of the grant date; (iii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant or (iv) 100% at the end of the three-year period following the grant date. Members of the Company’s board of directors receive RSUs that are fully vested when granted.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
The Company’s RSU activity in 2017 is as follows:
| Number of RSUs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | 1,720,817 | $ | 74.40 | |||||
| Granted | 57,699 | 97.03 | ||||||
| Vested | (563,435 | ) | 72.90 | |||||
| Canceled | (117,373 | ) | 71.11 | |||||
| Outstanding at December 31, 2017 | 1,097,708 | $ | 76.71 |
As of December 31, 2017, there are 1.1 million RSUs outstanding with an intrinsic value of approximately $107 million.
Restricted Stock Units – Cash Settled
The Company’s cash settled RSUs (“Cash RSUs”) require the Company to settle in cash an amount equal to the fair value of the Company’s common stock on the vest date multiplied by the number of vested Cash RSUs. These awards vest 100% at the end of the three-year period following the date of grant.
The Company’s Cash RSU activity in 2017 is as follows:
| Number of Cash RSUs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | — | $ | — | |||||
| Granted | 9,015 | 95.98 | ||||||
| Outstanding at December 31, 2017 | 9,015 | $ | 95.98 |
As of December 31, 2017, there are 9,015 Cash RSUs outstanding with an intrinsic value of approximately $0.9 million.
Restricted Stock Awards
Restricted stock awards (“RSAs”) vest either (i) in equal increments of 50% on each of the second and fourth anniversaries of the grant date; (ii) one-third per year beginning on the first anniversary of the date of grant; or (iii) 25% on each of the second and third anniversaries of the grant date and 50% on the fourth anniversary of the date of grant.
The Company’s RSA activity in 2017 is as follows:
| Number of RSAs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | 367,053 | $ | 80.20 | |||||
| Granted | 254,582 | 78.21 | ||||||
| Vested | (181,484 | ) | 80.20 | |||||
| Outstanding at December 31, 2017 | 440,151 | $ | 79.05 |
As of December 31, 2017, there are 440,151 RSAs outstanding with an intrinsic value of approximately $43 million.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Performance Awards
The Company awarded performance awards that contain both service and performance based vesting criteria. Vesting occurs if the recipient remains employed and depends on the degree to which the Company achieves certain compound annual EPS growth and relative TSR goals during a three-year performance period (as defined in the award agreements).
The Company’s performance award activity in 2017 is as follows:
| Number of Performance Awards | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2016 | — | $ | — | |||||
| Granted | 519,206 | 85.76 | ||||||
| Canceled | (42,874 | ) | 84.90 | |||||
| Outstanding at December 31, 2017 | 476,332 | $ | 85.84 |
As of December 31, 2017, there are 476,332 performance awards outstanding with an intrinsic value of approximately $47 million.
Employee Stock Purchase Plan
Prior to December 31, 2016, the Company sponsored an Employee Stock Purchase Plan (“ESPP”) that allowed eligible employees to authorize payroll deductions of up to 10% of their base salary to be applied toward the purchase of full shares of the Company’s common stock on the last day of the offering period. During 2016 and 2015, the Company issued 0.1 million shares of common stock for purchases under the ESPP. Effective as of December 31, 2016, the ESPP was discontinued and participant contributions under the ESPP ceased. The final purchase of shares under the ESPP occurred on December 31, 2016.
Other
The Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees, and maintains other statutory indemnity plans as required by local laws or regulations.
- Related Party Transactions
During 2017, 2016 and 2015, the Company entered into a number of contracts with HUYA Bioscience International, LLC, primarily in Asia, in which the Company will provide up to approximately $5 million, $(8 million) net cancellations and $32 million, respectively, of services on a fee for services basis at arm’s length and at market rates. In 2017, 2016 and 2015, the Company recognized revenue of approximately $8 million, $6 million and $7 million, respectively, for services under these agreements.
The Company has entered into other transactions with related parties including investments in and advances to unconsolidated affiliates that are discussed in Note 4.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Operations by Geographic Location
The table below presents the Company’s operations by geographical location. The Company attributes revenues to geographical locations based upon where the services are performed. The Company’s operations within each geographical region are further broken down to show each country that accounts for 10% or more of the totals (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Revenues: | ||||||||||||
| Americas: | ||||||||||||
| United States | $ | 3,282 | $ | 2,145 | $ | 1,788 | ||||||
| Other | 325 | 233 | 185 | |||||||||
| Americas | 3,607 | 2,378 | 1,973 | |||||||||
| Europe and Africa: | ||||||||||||
| United Kingdom | 586 | 461 | 410 | |||||||||
| Other | 2,532 | 1,594 | 1,237 | |||||||||
| Europe and Africa | 3,118 | 2,055 | 1,647 | |||||||||
| Asia-Pacific: | ||||||||||||
| Japan | 763 | 587 | 443 | |||||||||
| Other | 572 | 344 | 263 | |||||||||
| Asia-Pacific | 1,335 | 931 | 706 | |||||||||
| Revenues | 8,060 | 5,364 | 4,326 | |||||||||
| Reimbursed expenses | 1,679 | 1,514 | 1,411 | |||||||||
| Total revenues | $ | 9,739 | $ | 6,878 | $ | 5,737 |
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2017 | 2016 | ||||||
| Property, equipment and software, net: | ||||||||
| Americas: | ||||||||
| United States | $ | 623 | $ | 430 | ||||
| Other | 27 | 25 | ||||||
| Americas | 650 | 455 | ||||||
| Europe and Africa: | ||||||||
| United Kingdom | 51 | 40 | ||||||
| Other | 208 | 214 | ||||||
| Europe and Africa | 259 | 254 | ||||||
| Asia-Pacific: | ||||||||
| Japan | 39 | 36 | ||||||
| Other | 37 | 34 | ||||||
| Asia-Pacific | 76 | 70 | ||||||
| Total property, equipment and software, net | $ | 985 | $ | 779 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Segments
The following table presents the Company’s operations by reportable segment. The Company is managed through three reportable segments, Commercial Solutions, Research & Development Solutions and Integrated Engagement Services. Commercial Solutions provides mission critical information, technology solutions and real-world insights and services to the Company’s life science clients. Research & Development Solutions, which primarily serves biopharmaceutical clients, is engaged in research and development and provides clinical research and clinical trial services. Integrated Engagement Services provides contract sales to both biopharmaceutical clients and the broader healthcare market. Prior period segment results have been recast to conform to immaterial changes to management reporting in 2017. The recast only impacts the fourth quarter of 2016 as the management reporting changes relate to IMS Health and these results are only reflected in our results since the date of the Merger on October 3, 2016.
Certain costs are not allocated to the Company’s 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. The Company does not allocate depreciation and amortization, restructuring costs, merger related costs or impairment charges to its segments. Revenues and costs for reimbursed expenses are not allocated to the Company’s segments. Asset information by segment is not presented, as this measure is not used by the chief operating decision maker to assess the performance of the Company. Information presented below is in millions:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Revenues | ||||||||||||
| Commercial Solutions | $ | 3,630 | $ | 1,089 | $ | 323 | ||||||
| Research & Development Solutions | 3,647 | 3,478 | 3,159 | |||||||||
| Integrated Engagement Services | 783 | 797 | 844 | |||||||||
| Total revenues | 8,060 | 5,364 | 4,326 | |||||||||
| Costs of revenue | ||||||||||||
| Commercial Solutions | 1,917 | 641 | 239 | |||||||||
| Research & Development Solutions | 2,068 | 1,956 | 1,779 | |||||||||
| Integrated Engagement Services | 637 | 639 | 687 | |||||||||
| Total costs of revenue | 4,622 | 3,236 | 2,705 | |||||||||
| Selling, general and administrative expenses | ||||||||||||
| Commercial Solutions | 703 | 214 | 65 | |||||||||
| Research & Development Solutions | 582 | 579 | 556 | |||||||||
| Integrated Engagement Services | 73 | 82 | 79 | |||||||||
| General corporate and unallocated | 247 | 136 | 115 | |||||||||
| Total selling, general and administrative expenses | 1,605 | 1,011 | 815 | |||||||||
| Segment profit | ||||||||||||
| Commercial Solutions | 1,010 | 234 | 19 | |||||||||
| Research & Development Solutions | 997 | 943 | 824 | |||||||||
| Integrated Engagement Services | 73 | 76 | 78 | |||||||||
| Total segment profit | 2,080 | 1,253 | 921 | |||||||||
| General corporate and unallocated | (247 | ) | (136 | ) | (115 | ) | ||||||
| Depreciation and amortization | (1,011 | ) | (289 | ) | (128 | ) | ||||||
| Restructuring costs | (63 | ) | (71 | ) | (30 | ) | ||||||
| Merger related costs | — | (87 | ) | — | ||||||||
| Impairment charges | (40 | ) | (28 | ) | (2 | ) | ||||||
| Total income from operations | $ | 719 | $ | 642 | $ | 646 | ||||||
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Earnings Per Share
The following table reconciles the basic to diluted weighted average shares outstanding (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Basic weighted average common shares outstanding | 217.8 | 149.1 | 123.0 | |||||||||
| Effect of dilutive stock options and share awards | 4.8 | 2.9 | 2.6 | |||||||||
| Diluted weighted average common shares outstanding | 222.6 | 152.0 | 125.6 |
The following table presents the weighted average number of outstanding stock-based awards not included in the computation of diluted earnings per share if they are subject to performance conditions or if the effect of including such stock-based awards in the computation would be anti-dilutive (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Shares subject to performance conditions | 0.4 | 0.1 | 0.1 | |||||||||
| Shares subject to anti-dilutive stock-based awards | 1.0 | 1.1 | 1.0 | |||||||||
| Total shares excluded from diluted earnings per share | 1.4 | 1.2 | 1.1 |
The vesting of performance awards is contingent upon the achievement of certain performance targets. The performance awards are not included in diluted earnings per share until the performance targets have been met.
Stock-based awards will have a dilutive effect under the treasury method when the respective period’s average market value of the Company’s common stock exceeds the exercise proceeds.
- Comprehensive Income
Below is a summary of the components of AOCI (in millions):
| Foreign Currency Translation | Derivative Instruments | Defined Benefit Plans | Income Taxes | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2014 | $ | (56 | ) | $ | (19 | ) | $ | (15 | ) | $ | 31 | $ | (59 | ) | ||||||
| Other comprehensive (loss) income before reclassifications | (61 | ) | (13 | ) | — | 9 | (65 | ) | ||||||||||||
| Reclassification adjustments | — | 18 | 1 | (6 | ) | 13 | ||||||||||||||
| Balance at December 31, 2015 | (117 | ) | (14 | ) | (14 | ) | 34 | (111 | ) | |||||||||||
| Other comprehensive (loss) income before reclassifications | (506 | ) | (4 | ) | 34 | (5 | ) | (481 | ) | |||||||||||
| Reclassification adjustments | — | 28 | 1 | (7 | ) | 22 | ||||||||||||||
| Balance at December 31, 2016 | (623 | ) | 10 | 21 | 22 | (570 | ) | |||||||||||||
| Other comprehensive income before reclassifications | 406 | 5 | 8 | 197 | 616 | |||||||||||||||
| Reclassification adjustments | — | (1 | ) | 1 | — | — | ||||||||||||||
| Balance at December 31, 2017 | $ | (217 | ) | $ | 14 | $ | 30 | $ | 219 | $ | 46 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
Below is a summary of the (gains) losses reclassified from AOCI into the consolidated statements of income and the affected financial statement line item (in millions):
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Reclassification Adjustments | Affected Financial Statement Line Item | 2017 | 2016 | 2015 | ||||||||||
| Derivative instruments: | ||||||||||||||
| Interest rate swaps and caps | Interest expense | $ | — | $ | 6 | $ | 12 | |||||||
| Foreign exchange forward contracts | Revenues | 7 | 19 | 6 | ||||||||||
| Foreign exchange forward contracts | Other expense (income), net | (8 | ) | 3 | — | |||||||||
| Total before income taxes | (1 | ) | 28 | 18 | ||||||||||
| Income tax (benefit) expense | — | 7 | 6 | |||||||||||
| Total net of income taxes | $ | (1 | ) | $ | 21 | $ | 12 | |||||||
| Defined benefit plans: | ||||||||||||||
| Amortization of actuarial losses | See Note 19 | $ | 1 | $ | 1 | $ | 1 | |||||||
| Income tax (benefit) expense | — | — | — | |||||||||||
| Total net of income taxes | $ | 1 | $ | 1 | $ | 1 |
- Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information (in millions):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Interest paid | $ | 320 | $ | 124 | $ | 82 | ||||||
| Income taxes paid, net of refunds | $ | 195 | $ | 106 | $ | 121 | ||||||
| Non-cash Investing Activities: | ||||||||||||
| Fair value of consideration transferred in connection with business combinations | $ | — | $ | 10,425 | $ | 423 |
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements - Continued
- Quarterly Financial Data (Unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations (in millions, except per share data):
| 2017 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Revenues | $ | 1,911 | $ | 1,969 | $ | 2,019 | $ | 2,161 | ||||||||
| Income from operations | 168 | 151 | 197 | 203 | ||||||||||||
| Net income | 76 | 79 | 89 | 1,084 | ||||||||||||
| Net income attributable to non-controlling interests | (2 | ) | (4 | ) | (5 | ) | (8 | ) | ||||||||
| Net income attributable to IQVIA Holdings Inc.(1) | $ | 74 | $ | 75 | $ | 84 | $ | 1,076 | ||||||||
| Basic earnings per share(2) | $ | 0.32 | $ | 0.35 | $ | 0.39 | $ | 5.14 | ||||||||
| Diluted earnings per share(2) | $ | 0.31 | $ | 0.34 | $ | 0.38 | $ | 5.02 |
| 2016 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter(3) | |||||||||||||
| Revenues | $ | 1,108 | $ | 1,167 | $ | 1,136 | $ | 1,953 | ||||||||
| Income from operations | 179 | 151 | 168 | 144 | ||||||||||||
| Net income (loss) | 109 | 92 | 104 | (175 | ) | |||||||||||
| Net income attributable to non-controlling interests | (2 | ) | (5 | ) | (5 | ) | (3 | ) | ||||||||
| Net income (loss) attributable to IQVIA Holdings Inc. | $ | 107 | $ | 87 | $ | 99 | $ | (178 | ) | |||||||
| Basic earnings (loss) per share(2) | $ | 0.89 | $ | 0.73 | $ | 0.83 | $ | (0.74 | ) | |||||||
| Diluted earnings (loss) per share(2) | $ | 0.88 | $ | 0.71 | $ | 0.82 | $ | (0.74 | ) |
| (1) | The significant increase during the fourth quarter of 2017 is due to the enactment of the Tax Act. See Note 18 for additional details. |
|---|
| (2) | The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period. |
|---|
| (3) | The fourth quarter of 2016 includes the results of operations of IMS Health since the date of the Merger on October 3, 2016. |
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- Subsequent Event
On February 14, 2018, the IQVIA board authorized an increase in the post-merger share repurchase authorization by $1.5 billion to a total of $5.0 billion, with $1.7 billion authorization remaining.
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