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

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

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

Overview

IQVIA is a leading global provider of advanced analytics, technology solutions and contract research services to the life sciences industry. Formed through the Merger of IMS Health and Quintiles, IQVIA applies human data science – leveraging the analytic rigor and clarity of data science to the ever-expanding scope of human science – to enable companies to reimagine and develop new approaches to clinical development and commercialization, speed innovation, and accelerate improvements in healthcare outcomes. Powered by the IQVIA CORE™, we deliver unique and actionable insights at the intersection of large scale analytics, transformative technology and extensive domain expertise, as well as execution capabilities to help biotech, medical device, and pharmaceutical companies, medical researchers, government agencies, payers and other healthcare stakeholders tap into a deeper understanding of diseases, human behaviors and scientific advances, in an effort to advance their path toward cures. With more than 58,000 employees, we conduct operations in more than 100 countries.

We renamed two of our reportable segments during the second quarter of 2018. The reportable segment formerly known as Commercial Solutions is now named Technology & Analytics Solutions and the reportable segment formerly known as Integrated Engagement Services is now named Contract Sales & Medical Solutions. This is a name change only and there are no changes to the composition of either segment.

We are managed through three reportable segments, Technology & Analytics Solutions, Research & Development Solutions and Contract Sales & Medical Solutions. Technology & Analytics Solutions provides critical information, technology solutions and real-world insights and services to our 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. Contract Sales & Medical Solutions provides contract sales to both biopharmaceutical clients and the broader healthcare market.

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

Effective January 1, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) and ASU 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) using the full retrospective method. As a result of the adoption of ASU 2014-09 and ASU 2017-07, we retrospectively adjusted 2017 and 2016 related presentations in our consolidated financial statements and amounts and disclosures set forth in this Annual Report on Form 10-K reflect these changes. See Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information about these changes.

Industry Outlook

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

Business Combinations

We have completed and will continue to consider strategic business combinations to enhance our capabilities and offerings in certain areas, including various individually immaterial acquisitions during the years ended December 31, 2018 and 2017. In October 2016, we completed the Merger to better serve our clients across their entire product lifecycle by (i) increasing the efficiency of healthcare companies’ commercial organizations through enhanced analytics and outsourcing services; (ii) improving clinical trial design, recruitment, and execution; and (iii) creating real-world information solutions based on the use of medicines by actual patients in normal situations.

These transactions were accounted for as business combinations and the acquired results of operations are included in our consolidated financial information since the acquisition date with a non-controlling interest for the portion that we do not own. See Note 14 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to these business combinations.

Sources of Revenue

Total revenues are comprised of revenues from the provision of our services. We do not have any material product revenues.

Costs and Expenses

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

Foreign Currency Translation

In 2018, approximately 40% of our revenues were denominated in currencies other than the United States dollar, which represents approximately 55 currencies. Because a large portion of our revenues and expenses are denominated in currencies other than the United States dollar and our financial statements are reported in United States dollars, changes in foreign currency exchange rates can significantly affect our results of operations. The revenue and expenses of our foreign operations are generally denominated in local currencies and translated into United States dollars for financial reporting purposes. Accordingly, exchange rate fluctuations will affect the translation of foreign results into United States dollars for purposes of reporting our consolidated results. As a result, we believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate the analysis of period-to-period comparisons of business performance that excludes the effects of foreign currency rate fluctuations. The constant currency information assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results.

Consolidated Results of Operations

For information regarding our results of operations for Technology & Analytics Solutions, Research & Development Solutions and Contract Sales & Medical Solutions, refer to “Segment Results of Operations” later in this section.

Revenues

Change
Year Ended December 31,2018 vs. 20172017 vs. 2016
(dollars in millions)201820172016$%$%
Revenues$10,412$9,702$6,815$7107.3%$2,88742.4%

2018 compared to 2017

In 2018, our revenues increased $710 million, or 7.3%, as compared to 2017. This increase was comprised of constant currency revenue growth of approximately $664 million, or 6.8%, and a positive impact of approximately $46 million from the effects of foreign currency fluctuations. The constant currency revenue growth was comprised of a $444 million increase in Technology & Analytics Solutions, a $332 million increase in Research & Development Solutions and a $112 million decrease in Contract Sales & Medical Solutions.

2017 compared to 2016

In 2017, our revenues increased $2,887 million, or 42.4%, as compared to 2016. This increase was comprised of constant currency revenue growth of approximately $2,869 million, or 42.1%, and a positive impact of approximately $18 million from the effects of foreign currency fluctuations. The constant currency revenue growth was comprised of a $2,508 million increase in Technology & Analytics Solutions, which includes $2,557 million from the Merger, partially offset by lower revenue from Encore during the first half of 2017 and the sale of Encore at the beginning of the third quarter of 2017, a $371 million increase in Research & Development Solutions and a $10 million decrease in Contract Sales & Medical Solutions.

Costs of Revenue, exclusive of Depreciation and Amortization

Year Ended December 31,
(dollars in millions)201820172016
Costs of revenue, exclusive of depreciation and amortization$6,746$6,301$4,748
% of revenues64.8%64.9%69.7%

2018 compared to 2017

When compared to 2017, costs of revenue, exclusive of depreciation and amortization, in 2018 increased $445 million, or 7.1%. This increase included a constant currency increase of approximately $421 million, or 6.7%, and a negative impact of approximately $24 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $361 million increase in Technology & Analytics Solutions, a $151 million increase in Research & Development Solutions and a $91 million decrease in Contract Sales & Medical Solutions.

As a percent of revenues, costs of revenue remained flat compared to 2017.

2017 compared to 2016

When compared to 2016, costs of revenue, exclusive of depreciation and amortization, in 2017 increased $1,553 million, or 32.7%. This increase included a constant currency increase of approximately $1,555 million, or 32.8%, partially offset by a positive impact of approximately $2 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $1,263 million increase in Technology & Analytics Solutions, which included $1,302 million from the Merger, partially offset by lower costs from Encore during the first half of 2017 and the sale of Encore at the beginning of the third quarter of 2017, a $290 million increase in Research & Development Solutions and a $2 million increase in Contract Sales & Medical Solutions.

As a percent of revenues, costs of revenue declined in 2017 to 64.9% as compared to 69.7% in 2016. This decline was primarily due to the fact that 2017 includes a lower proportion of revenues from the lower margin Contract Sales & Medical Solutions segment, primarily as a result of the Merger.

Selling, General and Administrative Expenses

Year Ended December 31,
(dollars in millions)201820172016
Selling, general and administrative expenses$1,716$1,622$1,016
% of revenues16.5%16.7%14.9%

2018 compared to 2017

The $94 million increase in selling, general and administrative expenses in 2018 as compared to 2017 included a constant currency increase of approximately $86 million, or 5.3%, and a negative impact of approximately $8 million from the effects of foreign currency fluctuations. The constant currency growth primarily consisted of a $47 million increase in Technology & Analytics Solutions, a $33 million increase in Research & Development Solutions and a $10 million increase in general corporate and unallocated expenses. These increases were partially offset by a $4 million decrease in Contract Sales & Medical Solutions.

2017 compared to 2016

The $606 million increase in selling, general and administrative expenses in 2017 as compared to 2016 included a constant currency increase of approximately $599 million, or 59.0%, and a negative impact of approximately $7 million from the effects of foreign currency fluctuations. The constant currency growth primarily consisted of a $491 million increase in Technology & Analytics Solutions, primarily from the Merger, a $6 million increase in Research & Development Solutions and a $111 million increase in general corporate and unallocated expenses. These increases were partially offset by a $9 million decrease in Contract Sales & Medical Solutions.

Depreciation and Amortization

Year Ended December 31,
(dollars in millions)201820172016
Depreciation and amortization$1,141$1,011$289
% of revenues11.0%10.4%4.2%

The $130 million increase in depreciation and amortization in 2018 as compared to 2017 was primarily due to higher intangible asset balances as a result of acquisitions occurring in 2017 and 2018, increased amortization due to higher capitalized software balances and foreign currency fluctuations.

The $722 million increase in depreciation and amortization in 2017 as compared to 2016 was primarily due to the approximately $6.4 billion of intangible assets acquired in the Merger.

Impairment Charges

Year Ended December 31,
(in millions)201820172016
Impairment charges$—$40$28

During 2017 and 2016, we recognized $40 million and $28 million, respectively, of impairment losses for declines in fair value of goodwill and identifiable intangible assets in Encore. See Note 8 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to impairment charges.

Restructuring Costs

Year Ended December 31,
(in millions)201820172016
Restructuring costs$68$63$71

During 2018, we recognized $68 million of restructuring charges, net of reversals for changes in estimates, under our existing restructuring plans as a result of continuing efforts to streamline our global operations. The remaining actions under these plans, as well as actions associated with upcoming 2019 plans, are expected to occur throughout 2019 and are expected to consist of severance, facility closure and other exit-related costs.

During 2017 and 2016, we recognized $63 million and $71 million of restructuring charges, net of reversals for changes in estimates, respectively, under our existing restructuring plans.

Merger Related Costs

Year Ended December 31,
(in millions)201820172016
Merger related costs$—$—$87

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

Interest Income and Interest Expense

Year Ended December 31,
(in millions)201820172016
Interest income$(8)$(7)$(4)
Interest expense$414$346$144

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

Interest expense during 2018 was higher than 2017 due to an increase in the average debt outstanding, primarily as a result of the February 2017 issuance of €1,425 million (approximately $1,522 million) of 3.25% senior notes, the September 2017 issuance of €420 million (approximately $501 million) of 2.875% senior notes, the September 2017 incremental term B loan of $750 million and the June 2018 issuance of $1.63 billion of additional term B loans. See Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to these debt transactions.

Interest expense during 2017 was higher than 2016 due to an increase in the average debt outstanding, primarily as a result of the debt assumed in the Merger, the refinancing transaction in the fourth quarter of 2016 (approximately $4.5 billion) and the 2017 debt issuances noted above.

Loss on Extinguishment of Debt

Year Ended December 31,
(in millions)201820172016
Loss on extinguishment of debt$2$19$31

During 2018, we recognized a $2 million loss on extinguishment of debt for fees and expenses incurred related to the refinancing of our Senior Secured Credit Facilities as discussed further in Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

During 2017, we recognized a $19 million loss on extinguishment of debt for fees and expenses incurred related to the refinancing of our senior notes and Senior Secured Credit Facilities, which included a $16 million make-whole premium.

In the fourth quarter of 2016, we recognized a $31 million loss on extinguishment of debt related to the refinancing of our Senior Secured Credit Facilities. The loss on extinguishment of debt included an $8 million make-whole premium, $9 million of unamortized debt issuance costs and $14 million of unamortized discount.

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

Other Expense (Income), Net

Year Ended December 31,
(in millions)201820172016
Other expense (income), net$5$13$(11)

Other expense, net for 2018 primarily consisted of an increase in fair value of acquisition-related contingent consideration and foreign currency net losses partially offset by positive returns on pension assets.

Other expense, net for 2017 primarily consisted of foreign currency net losses partially offset by higher return on pension assets and investment gains. 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.

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

Income Tax Expense (Benefit)

Year Ended December 31,
(dollars in millions)201820172016
Income tax expense (benefit)$59$(992)$325
Effective income tax rate18.0%(337.4)%78.1%

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 imposes 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 (“SAB 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. During the fourth quarter of 2017, we 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 our consolidated financial statements on a provisional basis. During the fourth quarter of 2018, we completed our accounting for SAB 118 that resulted in a full year benefit of $35 million related to the transition tax. Additionally, in 2018 as a result of the new provisions of the Tax Act, we recorded a benefit of $25 million related to Foreign Derived Intangible Income (“FDII”) as well as a tax expense of $35 million related to GILTI. Our effective income tax rate was also favorably impacted by a tax benefit of $188 million related to purchase accounting amortization of approximately $813 million as a result of the Merger.

For 2017, we recorded a provisional deferred tax benefit of $966 million related to the revaluation of deferred taxes at the newly enacted 21% rate and the reversal of the deferred tax liability on undistributed foreign earnings net of the newly enacted transition tax. We no longer consider any of our foreign earnings to be indefinitely reinvested. Our effective income tax rate was also favorably impacted by a tax benefit of $261 million related to purchase accounting amortization of approximately $763 million as a result of the Merger.

In 2016, due to the Merger, we reevaluated our indefinite reinvestment assertion based on the need for cash in the United States, including funding the Repurchase Program and potential acquisitions. Accordingly, we changed our assertion with respect to $2,801 million of foreign earnings, including $1,865 million of IMS Health’s previously undistributed historical foreign earnings. 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.

In January of 2019, the U.S. Treasury Department issued final regulations regarding the transition tax. We are in the process of reviewing these regulations to determine if there is an impact on our effective income tax rate.

Equity in Earnings (Losses) of Unconsolidated Affiliates

Year Ended December 31,
(in millions)201820172016
Equity in earnings (losses) of unconsolidated affiliates$15$10$(4)

Equity in earnings (losses) of unconsolidated affiliates primarily included earnings from our investment in NovaQuest Pharma Opportunities Fund III, L.P. See Note 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information with respect to this fund.

Net Income Attributable to Non-controlling Interests

Year Ended December 31,
(in millions)201820172016
Net income attributable to non-controlling interests$(25)$(19)$(15)

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

Segment Results of Operations

Revenues and profit by segment are as follows:

Segment RevenuesSegment Profit
(in millions)201820172016201820172016
Technology & Analytics Solutions$4,137$3,682$1,148$1,023$996$235
Research & Development Solutions5,4655,1054,7371,128957875
Contract Sales & Medical Solutions810915930597478
Total10,4129,7026,8152,2102,0271,188
General corporate and unallocated(260)(248)(137)
Depreciation and amortization(1,141)(1,011)(289)
Impairment charges—(40)(28)
Restructuring costs(68)(63)(71)
Merger related costs——(87)
Consolidated$10,412$9,702$6,815$741$665$576

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

Technology & Analytics Solutions

Year Ended December 31,Change
(dollars in millions)2018201720162018 vs. 20172017 vs. 2016
Revenues$4,137$3,682$1,148$45512.4%$2,534220.7%
Costs of revenue, exclusive of depreciation and amortization2,3431,96769537619.11,272183.0
Selling, general and administrative expenses771719218527.2501229.8
Segment profit$1,023$996$235$272.7%$761323.8%

Revenues

2018 compared to 2017

Technology & Analytics Solutions’ revenues were $4,137 million in 2018, an increase of $455 million, or 12.4%, over 2017. This increase was comprised of constant currency revenue growth of approximately $444 million, or 12.1%, and a positive impact of approximately $11 million from the effects of foreign currency fluctuations. The constant currency growth resulted primarily from revenue growth in the Americas region as well as the Europe and Africa region. The revenue growth in these regions was due to higher revenues across technology solutions and real-world and analytical services as well as incremental revenue from acquisitions.

2017 compared to 2016

Technology & Analytics Solutions’ revenues were $3,682 million in 2017, an increase of $2,534 million, or 220.7%, over 2016. This increase was comprised of constant currency revenue growth of approximately $2,508 million, or 218.5%, and a positive impact of approximately $26 million from the effects of foreign currency fluctuations. The constant currency increase included the incremental impact from the Merger of $2,557 million, including post-Merger acquisitions, partially offset by a decline in revenue from Encore during the first half of 2017 and the sale of Encore at the beginning of the third quarter of 2017.

Costs of Revenue, exclusive of Depreciation and Amortization

2018 compared to 2017

Technology & Analytics Solutions’ costs of revenue, exclusive of depreciation and amortization, were $2,343 million in 2018, an increase of $376 million over 2017. This increase was comprised of constant currency growth of approximately $361 million, or 18.4%, and a negative impact of approximately $15 million from the effects of foreign currency fluctuations. The constant currency increase was primarily due to an increase in compensation and related expenses to support revenue growth and incremental costs from acquisitions.

2017 compared to 2016

Technology & Analytics Solutions’ costs of revenue, exclusive of depreciation and amortization, were $1,967 million in 2017, an increase of $1,272 million over 2016. This increase was comprised of constant currency growth of approximately $1,263 million, or 181.7%, and a negative impact of approximately $9 million from the effects of foreign currency fluctuations. The constant currency increase included the incremental impact from the Merger of $1,302 million, including post-Merger acquisitions, partially offset by lower costs from Encore due to lower revenue volumes during the first half of 2017 and the sale of Encore at the beginning of the third quarter of 2017.

Selling, General and Administrative Expenses

2018 compared to 2017

Technology & Analytics Solutions’ selling, general and administrative expenses increased $52 million in 2018 as compared to 2017. This increase was comprised of a constant currency increase of approximately $47 million, or 6.5%, and a negative impact of approximately $5 million from the effects of foreign currency fluctuations. The constant currency increase was primarily related to an increase in compensation and related expenses from higher headcount to support growth and incremental costs from acquisitions.

2017 compared to 2016

Technology & Analytics Solutions’ selling, general and administrative expenses increased $501 million in 2017 as compared to 2016. This increase was comprised of a constant currency increase of approximately $491 million, or 225.2%, and a negative impact of approximately $10 million from the effects of foreign currency fluctuations. The constant currency increase was primarily due to the incremental impact from the Merger, including post-Merger acquisitions.

Research & Development Solutions

Year Ended December 31,Change
(dollars in millions)2018201720162018 vs. 20172017 vs. 2016
Revenues$5,465$5,105$4,737$3607.1%$3687.8%
Costs of revenue, exclusive of depreciation and amortization3,7213,5663,2831554.32838.6
Selling, general and administrative expenses616582579345.830.5
Segment profit$1,128$957$875$17117.9%$829.4%

Backlog

Research and Development Solutions contracted backlog was $17.13 billion at December 31, 2018 and we expect approximately $4.8 billion of this backlog to convert to revenue in the next 12 months. Contracted backlog was $14.84 billion at December 31, 2017. The December 31, 2017 backlog amount has been updated to reflect the adoption of the new revenue standard.

Backlog represents, at a particular point in time, future revenues from work not yet completed or performed under signed contracts. Once work begins on a project, revenues are recognized over the duration of the project. Backlog denominated in foreign currencies are valued each month using the actual average foreign exchange rates in effect during the month.

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

Revenues

2018 compared to 2017

Research & Development Solutions’ revenues were $5,465 million in 2018, an increase of $360 million, or 7.1%, over 2017. This increase was comprised of constant currency revenue growth of approximately $332 million, or 6.5%, and a positive impact of approximately $28 million from the effects of foreign currency fluctuations.

The constant currency growth primarily included volume-related increases in clinical, data management and life cycle safety services, increased lab testing volumes and incremental revenue from acquisitions.

2017 compared to 2016

Research & Development Solutions’ revenues were $5,105 million in 2017, an increase of $368 million, or 7.8%, over 2016. This increase was comprised of constant currency revenue growth of approximately $371 million, or 7.8%, partially offset by a negative impact of approximately $3 million from the effects of foreign currency fluctuations.

The constant currency revenue growth primarily included volume-related increases from our clinical solutions and services and our clinical trial support services as well as revenue from acquisitions, partially offset by lower revenue from early clinical development services, due to a facility closure in Europe in 2016.

Costs of Revenue, exclusive of Depreciation and Amortization

2018 compared to 2017

Research & Development Solutions’ costs of revenue, exclusive of depreciation and amortization, increased $155 million, or 4.3%, in 2018 as compared to 2017. This increase included a constant currency increase of approximately $151 million, or 4.2%, and a negative impact of approximately $4 million from the effects of foreign currency fluctuations.

The constant currency increase was primarily due to an increase in reimbursed expenses and an increase in compensation and related expenses as well as incremental costs from acquisitions. Compensation and related expenses increased as a result of headcount to support revenue growth and our next generation of clinical development capabilities, which include analytics-driven methods and technology to optimize trial design.

2017 compared to 2016

Research & Development Solutions’ costs of revenue, exclusive of depreciation and amortization, increased $283 million, or 8.6%, in 2017 as compared to 2016. This increase included a constant currency increase of approximately $290 million, or 8.8%, partially offset by a positive impact of approximately $7 million from the effects of foreign currency fluctuations.

The constant currency increase was primarily due to an increase in reimbursed expenses, compensation and related expenses and the impact from post-Merger acquisitions. The increase in compensation and related expenses resulted from (i) an increase in billable headcount resulting from the higher volume of constant currency revenue, (ii) our continued investment in our global delivery network (“GDN”) that enables us to provide standardized, centrally-managed services from seven hub locations across five countries, and (iii) an increase in competition for qualified personnel in certain markets.

Selling, General and Administrative Expenses

2018 compared to 2017

Research & Development Solutions’ selling, general and administrative expenses increased $34 million, or 5.8%, in 2018 as compared to 2017, which included a constant currency increase of approximately $33 million, or 5.7%, and a negative impact of approximately $1 million from the effects of foreign currency fluctuations. The constant currency increase was primarily related to higher compensation and related expenses due to increased headcount to support growth and our next generation of clinical development capabilities, as well as incremental costs from acquisitions.

2017 compared to 2016

Research & Development Solutions’ selling, general and administrative expenses increased $3 million, or 0.5%, in 2017 as compared to 2016, which included a constant currency increase of approximately $6 million, or 1.0%, partially offset by a positive impact of approximately $3 million from the effects of foreign currency fluctuations. The constant currency increase was primarily due to the impact of post-Merger acquisitions, partially offset by lower incentive compensation and bad debt expense.

Contract Sales & Medical Solutions

Year Ended December 31,Change
(dollars in millions)2018201720162018 vs. 20172017 vs. 2016
Revenues$810$915$930$(105)(11.5)%$(15)(1.6)%
Costs of revenue, exclusive of depreciation and amortization682768770(86)(11.2)(2)(0.3)
Selling, general and administrative expenses697382(4)(5.5)(9)(11.0)
Segment profit$59$74$78$(15)(20.3)%$(4)(5.1)%

Revenues

2018 compared to 2017

Contract Sales & Medical Solutions’ revenues were $810 million in 2018, a decrease of $105 million, or 11.5%, over 2017. This decrease was comprised of a constant currency revenue decline of approximately $112 million, or 12.2%, partially offset by a positive impact of approximately $7 million from the effects of foreign currency fluctuations. The decline in constant currency revenues was largely due to cancellations in 2017 in the Americas region and reduced volume in the Asia-Pacific region.

2017 compared to 2016

Contract Sales & Medical Solutions’ revenues were $915 million in 2017, a decrease of $15 million, or 1.6%, over 2016. This decrease was comprised of a constant currency revenue decline of approximately $10 million, or 1.1%, and a negative impact of approximately $5 million from the effects of foreign currency fluctuations. The decline in constant currency revenues was due to lower demand in Japan and North America, which was also a result of cancellations that occurred in 2017. The decline was also due to a $9 million benefit from the acceleration of revenue in the second quarter of 2016 that did not recur in 2017 related to a contract modification on a sales force arrangement that fixed a portion of the contract price that was previously not determinable until future sales-based royalties were known, partially offset by revenue from new projects starting up, primarily in Europe.

Costs of Revenue, exclusive of Depreciation and Amortization

2018 compared to 2017

Contract Sales & Medical Solutions’ costs of revenue, exclusive of depreciation and amortization, decreased $86 million, or 11.2%, in 2018 as compared to 2017. This decrease included a constant currency decline of approximately $91 million, or 11.8%, partially offset by approximately $5 million from the negative effects of foreign currency fluctuations. The constant currency cost of revenue decrease was due to a decrease in compensation and related expenses resulting from a decrease in billable headcount.

2017 compared to 2016

Contract Sales & Medical Solutions’ costs of revenue, exclusive of depreciation and amortization, decreased $2 million, or 0.3%, in 2017 as compared to 2016. This decrease included constant currency growth of approximately $2 million, or 0.3%, more than offset by approximately $4 million from the positive effects of foreign currency fluctuations. The constant currency cost of revenue growth was due to an increase in compensation and related expenses resulting from an increase in billable headcount in Europe as a result of an increase in new projects starting up in the 2017 period.

Selling, General and Administrative Expenses

2018 compared to 2017

Contract Sales & Medical Solutions’ selling, general and administrative expenses decreased $4 million, or 5.5%, in 2018 as compared to 2017, primarily due to lower compensation and related expenses resulting from a reduction in headcount.

2017 compared to 2016

Contract Sales & Medical Solutions’ selling, general and administrative expenses decreased $9 million, or 11.0%, in 2017 as compared to 2016, primarily due to lower compensation and related expenses resulting from a decrease in headcount.

Liquidity and Capital Resources

Overview

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

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

We had a cash balance of $891 million at December 31, 2018 ($212 million of which was in the United States), a decrease from $959 million at December 31, 2017.

Based on our current operating plan, we believe that our available cash and cash equivalents, future cash flows from operations and our ability to access funds under our revolving credit and receivables financing facilities will enable us to fund our operating requirements and capital expenditures and meet debt obligations for at least the next 12 months. We regularly evaluate our debt arrangements, as well as market conditions, and from time to time we may explore opportunities to modify our existing debt arrangements or pursue additional financing arrangements that could result in the issuance of new debt securities by us or our affiliates. We may use our existing cash, cash generated from operations or dispositions of assets or businesses and/or proceeds from any new financing arrangements or issuances of debt or equity securities to repay or reduce some of our outstanding obligations, to repurchase shares from our stockholders or for other purposes. As part of our ongoing business strategy, we also continually evaluate new acquisition, expansion and investment possibilities or other strategic growth opportunities, as well as potential dispositions of assets or businesses, as appropriate, including dispositions that may cause us to recognize a loss on certain assets. Should we elect to pursue any such transaction, we may seek to obtain debt or equity financing to facilitate those activities. Our ability to enter into any such potential transactions and our use of cash or proceeds is limited to varying degrees by the terms and restrictions contained in our existing debt arrangements. We cannot provide assurances that we will be able to complete any such financing arrangements or other transactions on favorable terms or at all.

Equity Repurchase Program

On October 30, 2013, our Board approved the Repurchase Program authorizing the repurchase of up to $125 million of either our common stock or vested in-the-money employee stock options, or a combination thereof. Our Board increased the stock repurchase authorization under the Repurchase Program with respect to the repurchase of our common stock by $600 million, $1.5 billion, $2 billion and $1.5 billion in 2015, 2016, 2017 and 2018, respectively, which increased the total amount that has been authorized under the Repurchase Program to $5.725 billion. The Repurchase Program does not obligate us to repurchase any particular amount of common stock or vested in-the-money employee stock options, and it may be modified, suspended or discontinued at any time. The timing and amount of repurchases are determined by our management based on a variety of factors such as the market price of our common stock, our corporate requirements, and overall market conditions. Purchases of our common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or in privately negotiated transactions. The Repurchase Program for common stock does not have an expiration date.

During the year ended December 31, 2018, we repurchased 12.6 million shares of our common stock at an average market price per share of $111.23 for an aggregate purchase price of $1,396 million under the Repurchase Program. These amounts include 6.0 million shares of our common stock, which we repurchased directly from underwriters in connection with two secondary public offerings of shares of our common stock held by certain of our sponsors for an aggregate purchase price of $659 million. During the year ended December 31, 2017, we repurchased 30.9 million shares of our common stock for approximately $2.6 billion. These amounts include 9.7 million shares of our common stock, which we repurchased from certain of our principal stockholders in a private transaction for approximately $750 million and 10.1 million shares of our common stock, which we repurchased directly from underwriters in connection with three separate underwritten, secondary public offerings of shares of our common stock held by certain of our principal stockholders for approximately $935 million in the aggregate in May, September and November 2017. Additional information regarding the Repurchase Program is presented in Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and Note 13 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

As of December 31, 2018, we had remaining authorization to repurchase up to $285 million of our common stock under our Repurchase Program. In addition, from time to time, we have repurchased and may continue to repurchase common stock through private or other transactions outside of our Repurchase Program. On February 13, 2019, our Board authorized an increase in the post-merger share repurchase authorization by $2.0 billion, resulting in approximately $2.3 billion remaining authorization.

Debt

As of December 31, 2018, we had $11.1 billion of total indebtedness, excluding $880 million of available borrowings under our revolving credit facilities. See Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details regarding our credit arrangements.

Senior Secured Credit Agreement and Senior Notes

At December 31, 2018, our Fourth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) provided financing through several senior secured credit facilities (collectively, the “Senior Secured Credit Facilities”) of up to approximately $6,959 million, which consisted of $6,079 million principal amount of debt outstanding and $880 million of available borrowing capacity on the $1,500 million revolving credit facility that expires in 2023. The revolving credit facility is comprised of a $675 million senior secured revolving facility available in U.S. dollars, a $600 million senior secured revolving facility available in U.S. dollars, Euros, Swiss Francs and other foreign currencies, and a $225 million senior secured revolving facility available in U.S. dollars and Yen. The term A loans and revolving credit facility under the Credit Agreement mature in June 2023, while the term B loans under the Credit Agreement mature in 2024 and 2025. We are required to make scheduled quarterly payments on the term A loans equal to 1.25% of the original principal amount, with the remaining balance paid at maturity. We are required to make scheduled quarterly payments on the term B loans equal to approximately 0.25% of the original principal amount, with the remaining balance paid at maturity. In addition, beginning with fiscal year ending December 31, 2017, we were required to apply 50% of excess cash flow (as defined in the Credit Agreement), subject to a reduction to 25% or 0% depending upon our senior secured first lien net leverage ratio, for prepayment of the term loans, with any such prepayment to be applied toward principal payments due in subsequent quarters. We are also required to pay an annual commitment fee that ranges from 0.20% to 0.35% in respect of any unused commitments under the revolving credit facility. The Senior Secured Credit Facilities are collateralized by substantially all of our assets and the assets of our material domestic subsidiaries including 100% of the equity interests of substantially all of our material domestic subsidiaries and 66% of the equity interests of substantially all of our first-tier material foreign subsidiaries and their domestic subsidiaries.

2018 Financing Transactions

On April 6, 2018, we amended our credit agreement to increase our revolving credit facility borrowing capacity to $1.5 billion.

On June 11, 2018, we amended our credit agreement (the “Amendment”) to extend the maturity of our existing term A loans and revolving credit facility to 2023 and reduce the applicable interest rate to LIBOR plus a margin ranging from 1.25% to 2.00%. In connection with this Amendment, we recognized a $2 million loss on extinguishment of debt, which includes fees and related expenses.

Under the Amendment, we also placed additional term B loans. The additional term B loans will mature in 2025 and were comprised of $950 million of U.S. dollar denominated term B loans and €583 million ($681 million) Euro denominated term B loans. The U.S. dollar denominated term B loans bear interest based on the U.S. Dollar LIBOR plus a margin ranging from 1.75% to 2.00%. The Euro denominated term B loans bear interest based on the Euro LIBOR with a floor ranging from 0.50% to 0.75%, plus a margin of 2.00%. The proceeds of the additional term B loans were used to pay down the revolving credit facility and $650 million of existing term B loans due 2024 and to pay fees and expenses in connection with the transactions.

2017 Financing Transactions

During the first quarter of 2017, we issued €1.425 billion (approximately $1,522 million) of senior notes due 2025. The senior notes mature on March 15, 2025 and bear an annual interest rate of 3.25%, which is paid semi-annually on March 15 and September 15, beginning on September 15, 2017. Also, during the first quarter of 2017, we refinanced our term B loans in which the maturity was extended to 2024 and the interest rate margin on the loan denominated in U.S. dollars was reduced from 2.50% to 2.00% and the interest rate margin on the loan denominated in Euros was reduced from 2.75% to 2.00%.

During the third quarter of 2017, we issued €420 million (approximately $501 million) of senior notes due 2025. The senior notes mature on September 15, 2025 and bear an interest rate of 2.875%, which is paid semi-annually on March 15 and September 15, beginning on March 15, 2018. Also, during the third quarter of 2017, we entered into an amendment to provide for an incremental term B loan of $750 million and an increase in restricted payment capacity. The term B loan will mature in 2025 and bears a floating interest rate of LIBOR plus 2.00% per year. The net proceeds from the senior notes due 2025 and the incremental term B loan were used for the redemption of the outstanding 4.125% Euro denominated senior notes due 2023, to pay down the revolving credit facility, to pay certain fees and expenses and for other general corporate purposes, including the repurchase of our common stock and acquisitions.

Receivables Financing Facility

On December 5, 2014, we entered into a four-year arrangement to securitize certain of our accounts receivable. Under the receivables financing facility, certain of our accounts receivable are sold on a non-recourse basis by certain of our consolidated subsidiaries to another of our consolidated subsidiaries, a bankruptcy-remote special purpose entity (“SPE”). The SPE obtained a term loan and revolving loan commitment from a third-party lender, secured by liens on the assets of the SPE, to finance the purchase of the accounts receivable, which 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. IQVIA has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under the receivables financing facility. The assets of the SPE are not available to satisfy any of our obligations or any obligations of our subsidiaries. On December 15, 2017, we amended our receivables financing facility to extend the original term of the facility to December 15, 2020. In addition, the applicable margin (over LIBOR) changed to 90 bps regardless of our credit rating. Prior to the amendment, the margin was based on our credit rating and could range from 85 bps to 135 bps. As of December 31, 2018, no additional amounts of revolving loans were available under the receivables financing facility.

Restrictive Covenants

Our Credit Agreement provides 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 Credit Agreement and a covenant to maintain a specified minimum interest coverage ratio. If an event of default occurs under any of our 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 Credit Agreement, other actions permitted to be taken by a secured creditor. Our long-term debt arrangements contain usual and customary restrictive covenants that, among other things, place limitations on our ability to declare dividends. For additional information regarding these restrictive covenants, see Part II, Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Dividend Policy” and Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. At December 31, 2018, we were in compliance in all material respects with the financial covenants under our financing arrangements.

Years ended December 31, 2018, 2017 and 2016

Cash Flow from Operating Activities

Year Ended December 31,
(in millions)201820172016
Net cash provided by operating activities$1,254$970$860

2018 compared to 2017

Cash provided by operating activities increased $284 million in 2018 as compared to 2017. The increase is primarily due to higher cash-related net income of $135 million as well as higher accounts payable and accrued expenses, partially offset by an increase in accounts receivable and unbilled services due to timing of invoicing and higher payments for interest.

2017 compared to 2016

Cash provided by operating activities increased $110 million in 2017 as compared to 2016. Cash flows from operating activities reflects higher cash-related net income of $640 million, offset by higher payments for interest, income taxes and normal fluctuations in cash collections from clients and accounts payable. Cash collections from clients can vary significantly each year depending on the timing of cash receipts under contractual payment terms relative to the recognition of revenue over a project lifecycle and the timing of renewals.

Cash Flow from Investing Activities

Year Ended December 31,
(in millions)201820172016
Net cash (used in) provided by investing activities$(810)$(1,190)$1,731

2018 compared to 2017

Cash used in investing activities decreased $380 million in 2018 as compared to 2017. The decrease was primarily due to lower cash used for the acquisition of businesses ($545 million) partially offset by an increase in cash used for acquisition of property, equipment and software ($90 million), an increase in investments in equity securities ($23 million) and an increase in investments in unconsolidated affiliates ($32 million).

2017 compared to 2016

During 2017, we had net cash outflows from investing activities, while during 2016, we had net cash inflows. The decrease of $2,921 million in our net cash flows from investing activities was primarily due to cash from the acquisition of businesses, including the Merger in 2016 ($1,887 million), cash used for the acquisition of businesses in 2017 ($854 million) and higher cash used for the acquisition of property, equipment and software in 2017 ($205 million).

Cash Flow from Financing Activities

Year Ended December 31,
(in millions)201820172016
Net cash used in financing activities$(452)$(72)$(2,284)

2018 compared to 2017

Cash used in financing activities increased $380 million in 2018 as compared to 2017. The increase in cash used in financing activities was primarily related to lower net borrowings under our credit facilities ($1,470 million), partially offset by less cash used to repurchase common stock ($1,215 million).

2017 compared to 2016

Cash used in financing activities decreased $2,212 million in 2017 as compared to 2016. The decrease in cash used in financing activities was primarily related to higher net borrowings under our credit facilities ($3,781 million), partially offset by higher cash used to repurchase common stock ($1,523 million).

Contingencies

We are exposed to certain known contingencies that are material to our investors. The facts and circumstances surrounding these contingencies and a discussion of their effect on us are in Note 12 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These contingencies may have a material effect on our liquidity, capital resources or results of operations. In addition, even where our reserves are adequate, the incurrence of any of these liabilities may have a material effect on our liquidity and the amount of cash available to us for other purposes.

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

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements except for operating leases entered into in the normal course of business.

Contractual Obligations and Commitments

Below is a summary of our future payment commitments by year under contractual obligations as of December 31, 2018:

(in millions)20192020 - 20212022 - 2023ThereafterTotal
Long-term debt, including interest(1)$508$1,287$3,257$8,167$13,219
Operating leases167244159119689
Data acquisition2894671354895
Purchase obligations(2)172215862
Commitments to unconsolidated affiliates(3)—————
Benefit obligations(4)25272981162
Uncertain income tax positions(5)17———17
Total$1,023$2,047$3,595$8,379$15,044
(1)Interest payments on our debt are based on the interest rates in effect on December 31, 2018.
(2)Purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions and the approximate timing of the transactions.
(3)We are currently committed to invest $120 million in private equity funds. As of December 31, 2018, we have funded approximately $78 million of these commitments and we have approximately $42 million remaining to be funded which has not been included in the above table as we are unable to predict when these commitments will be paid.
(4)Amounts represent expected future benefit payments for our pension and postretirement benefit plans, as well as expected contributions for 2019 for our funded pension benefit plans. We made cash contributions totaling approximately $31 million to our defined benefit plans in 2018, and we estimate that we will make contributions totaling approximately $25 million to our defined benefit plans in 2019. Due to the potential impact of future plan investment performance, changes in interest rates, changes in other economic and demographic assumptions and changes in legislation in foreign jurisdictions, we are not able to reasonably estimate the timing and amount of contributions that may be required to fund our defined benefit plans for periods beyond 2019.
(5)As of December 31, 2018, our liability related to uncertain income tax positions was approximately $106 million, $89 million of which has not been included in the above table as we are unable to predict when these liabilities will be paid due to the uncertainties in the timing of the settlement of the income tax positions.

Application of Critical Accounting Policies

Note 1 to the audited consolidated financial statements provided elsewhere in this Annual Report on Form 10-K describes the significant accounting policies used in the preparation of the consolidated financial statements. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.

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

Revenue Recognition

Our arrangements are primarily service contracts that range in duration from a few months to several years. In some cases, contracts provide for variable consideration that is contingent upon the occurrence of uncertain future events, such as performance incentives (including royalty payments or penalty clauses that can either increase or decrease the transaction price). We estimate the amount of variable consideration at the expected value or at the most likely amount depending on the type of consideration. Estimated amounts are included in the transaction price to the extent it is probable based on available information (historical, current and forecasted). Cash payments made to customers as incentives to induce the customers to enter into service agreements with us are amortized as a reduction of revenue over the period the services are performed. We record 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.

We derive the majority of our revenues in the Technology & Analytics Solutions segment from various information and technology services offerings. Technology services offerings may contain multiple performance obligations consisting of a mix of small and large-scale services and consulting projects, multi-year outsourcing contracts and Software-as-a-Service (“SaaS”) arrangements. These arrangements typically have terms ranging from several weeks to three years, with a majority having terms of one year or less. For arrangements that include multiple performance obligations, the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices. For these contracts, the standalone selling prices are based on our normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location.

The majority of revenue in our Research & Development Solutions segment is recognized over time using a cost-based input method since there is no single output measure that would fairly depict the transfer of control over the life of the performance obligation. Progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract. Costs included in the measure of progress include direct labor and third-party costs (such as payments to investigators and travel expenses for our clinical monitors). This cost-based method of revenue recognition requires us to make estimates of costs to complete our projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. These significant estimates of project costs are updated and adjusted on a regular basis. These updates and adjustments are likely to result in variability in our revenue recognition from period to period that may cause unexpected variability in our operating results. At any point in time, we are working on thousands of active client projects, which are governed by individual contracts. Most projects are customized based on the needs of the client, the type of services being provided, therapeutic indication of the drug, geographic locations and other variables. Project specific terms related to pricing, billing terms and the scope and type of services to be provided are generally negotiated and contracted on a project-by-project basis. Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in contract value. In such situations, we enter into negotiations for a contract amendment to reflect the change in scope and the related price. Depending on the complexity of the amendment, the negotiation process can take from a few weeks for a simple adjustment to several months for a complex amendment. Management may authorize the project team to commence work on activities outside the contract scope while we negotiate and finalize the contract amendment. In these limited cases, if we are not able to obtain a contract amendment from the client, our profit margin on the arrangement may be impacted. This result occurs because our costs of delivery are expensed as they are incurred, while revenue is not recognized unless the client has agreed to the changes in scope and renegotiated pricing terms in a form that meets the definition of a contract under Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers.”

The majority of revenue in our Contract Sales & Medical Solutions segment is from contract sales to the biopharmaceutical industry and broader healthcare market and recognized over time using a single measure of progress dependent on the performance obligation. Some of our Contract Sales & Medical Solutions contracts contain multiple performance obligations with distinct promises including recruiting, sales force automation and deployment of sales representatives. The nature of the terms of these performance obligations will vary based on the customized needs of the customer. For contracts that have multiple performance obligations, the standalone selling prices of our performance obligations are not directly observable since they are rarely sold standalone. Therefore, we estimate the standalone selling prices using an expected cost plus a margin approach under which expected costs of satisfying a performance obligation are forecasted and added to an appropriate margin for that distinct good or service.

See Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion.

Accounts Receivable and Unbilled Services

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

Investments in Unconsolidated Affiliates—Equity Method Investments

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

Income Taxes

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

Income tax expense is based on the distribution of profit before income tax among the various taxing jurisdictions in which we operate, adjusted as required by the income tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate. We do not consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States. Accordingly, we have provided a deferred income tax liability related to those undistributed earnings. The associated foreign income taxes on our foreign earnings could be available as a credit in the United States on our income taxes. We recognize foreign tax credits to the extent that the recognition is supported by projected foreign source income. See Note 16 to our audited consolidated financial statements included elsewhere in the Annual Report on Form 10-K for details regarding the Tax Cuts and Jobs Act and the impact on our consolidated financial statements.

Business Combinations

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

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

Goodwill, Tangible and Identifiable Intangible Assets

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

For goodwill, we perform a qualitative analysis to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its book value. This includes a qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that estimated fair value is less than the book value for the respective reporting unit, we apply a two-step impairment test in which we determine whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, we perform the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. We determine the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing the reporting unit’s risk profile and growth prospects to selected, reasonably similar publicly traded companies. The inherent subjectivity of applying a discounted cash flow and market comparables approach to valuing our assets and liabilities could have a significant impact on our analysis. Any future impairment could have a material adverse effect on our financial condition or results of operations.

For indefinite-lived intangible assets, we perform a qualitative analysis to determine whether it is more likely than not that the estimated fair value of the indefinite-lived intangible asset is less than its carrying value. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value of the indefinite-lived intangible asset, we determine the estimated fair value of the indefinite-lived intangible asset (trade name) by determining the present value of the estimated royalty payments on an after-tax basis that it would be required to pay the owner for the right to use such trade name. If the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to the excess. Any future impairment could have a material adverse effect on our financial condition or results of operations.

We review the carrying values of property and equipment if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flows over the remaining depreciation or amortization period, we will reduce carrying values to estimated fair value. The inherent subjectivity of our estimates of future cash flows could have a significant impact on our analysis. Any future write-offs of long-lived assets could have a material adverse effect on our financial condition or results of operations.

Stock-based Compensation

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

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

•We calculate expected volatility based on reported data for selected reasonably similar publicly traded companies for which the historical information is available. We plan to continue to use the guideline peer group volatility information until the historical volatility of our common shares is relevant to measure expected volatility for future award grants;
•We determine the risk-free interest rate by reference to implied yields available from United States Treasury securities with a remaining term equal to the expected life assumed at the date of grant;
•We estimate the dividend yield to be zero as we do not currently anticipate paying any future dividends;
•We estimate the average expected life of the award based on our historical experience; and
•We estimate forfeitures based on our historical analysis of actual forfeitures.

Pensions and Other Postretirement Benefits

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

The discount rate is the rate at which the benefit obligations could be effectively settled and is determined annually by management. For United States plans, the discount rate is based on results of a modeling process in which the plans’ expected cash flow (determined on a projected benefit obligation basis) is matched with spot rates developed from a yield curve comprised of high-grade (Moody’s Aa and above, or Standard and Poor’s AA and above) non-callable corporate bonds to develop the present value of the expected cash flow, and then determining the single rate (discount rate), which when applied to the expected cash flow derives that same present value. In the United Kingdom specifically, the discount rate is set based on the yields on a universe of high quality non-callable corporate bonds denominated in the British Pound, appropriate to the duration of plan liabilities. For the other non-United States plans, the discount rate is based on the current yield of an index of high quality corporate bonds. As a sensitivity measure, a 25 basis point increase in the discount rate for our United States plan and United Kingdom plans, absent any offsetting changes in other assumptions, would result in a less than $1 million increase in pension expense at December 31, 2018.

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

In selecting an expected return on plan asset assumption, we consider the returns being earned by each plan investment category in the fund, the rates of return expected to be available for reinvestment and long-term economic forecasts for the type of investments held by the plan. The actual return on plan assets will vary from year to year versus this assumption. We believe it is appropriate to use long-term expected forecasts in selecting the expected return on plan assets. As such, there can be no assurance that our actual return on plan assets will approximate the long-term expected forecasts. As a sensitivity measure, a 25 basis point change in the expected return on assets (“EROA”) assumption for our United States plan, absent any offsetting changes in other assumptions, would result in a less than $1 million increase or decrease in pension expense at December 31, 2018. For our United Kingdom plans, a 25 basis point change in the EROA assumption, absent any offsetting changes in other assumptions, would result in a less than $1 million increase or decrease in pension expense at December 31, 2018. While we believe that the assumptions used are reasonable, differences in actual experience or changes in assumptions may materially affect our pension and postretirement obligations and future expense.

We utilize a corridor approach to amortizing unrecognized gains and losses in the pension and postretirement plans. Amortization occurs when the accumulated unrecognized net gain or loss balance exceeds the criterion of 10% of the larger of the beginning balances of the projected benefit obligation or the market-related value of the plan assets. The excess unrecognized gain or loss balance is then amortized using the straight-line method over the average remaining service life of active employees expected to receive benefits. At December 31, 2018, the weighted-average remaining service life of active employees was approximately 20 years.

Foreign Currency

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

For operations 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.

Recently Issued Accounting Standards

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

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