filings.toolsItem 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 approximately 67,000 employees, we conduct operations in more than 100 countries.
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 solutions 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 Part I, Item 1, “Business”.
Industry Outlook
For information about the industry outlook and markets that we operate in, refer to Part I, Item I, “Our Market Outlook”.
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, 2019 and 2018. 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. 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 2019, 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 foreign currencies 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 condensed consolidated results. As a result, we believe that reporting results of operations that exclude the effects of foreign currency rate fluctuations on certain financial results can facilitate analysis of period to period comparisons. This 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.
For a discussion of our results of operations comparison for 2018 and 2017, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed on February 19, 2019. Our reportable segment results of operations comparison for 2018 and 2017 included below within this Annual Report on Form 10-K reflects the change in segment presentation that occurred during the first quarter of 2019.
Revenues
| Change | ||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Year Ended December 31, | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||||||||||||||||
| (dollars in millions) | 2019 | 2018 | 2017 | $ | % | $ | % | |||||||||||||||||||||
| Revenues | $ | 11,088 | $ | 10,412 | $ | 9,702 | $ | 676 | 6.5 | % | $ | 710 | 7.3 | % |
2019 compared to 2018
In 2019, our revenues increased $676 million, or 6.5%, as compared to 2018. This increase was comprised of constant currency revenue growth of approximately $835 million, or 8.0%, and a negative impact of approximately $159 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 $378 million increase in Research & Development Solutions and a $13 million increase in Contract Sales & Medical Solutions.
Costs of Revenue, exclusive of Depreciation and Amortization
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Costs of revenue, exclusive of depreciation and amortization | $ | 7,300 | $ | 6,746 | $ | 6,301 | ||||||
| % of revenues | 65.8 | % | 64.8 | % | 64.9 | % |
2019 compared to 2018
When compared to 2018, costs of revenue, exclusive of depreciation and amortization, in 2019 increased $554 million, or 8.2%. This increase included a constant currency increase of approximately $690 million, or 10.2%, and a positive impact of approximately $136 million from the effects of foreign currency fluctuations. The constant currency growth was comprised of a $369 million increase in Technology & Analytics Solutions, a $295 million increase in Research & Development Solutions and a $26 million increase in Contract Sales & Medical Solutions.
As a percent of revenues, costs of revenue remained flat compared to 2018.
Selling, General and Adm****inistrative Expenses
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Selling, general and administrative expenses | $ | 1,734 | $ | 1,716 | $ | 1,622 | ||||||
| % of revenues | 15.6 | % | 16.5 | % | 16.7 | % |
2019 compared to 2018
The $18 million increase in selling, general and administrative expenses in 2019 as compared to 2018 included a constant currency increase of approximately $60 million, or 3.5%, and a positive impact of approximately $42 million from the effects of foreign currency fluctuations. The constant currency growth primarily consisted of a $34 million increase in Research & Development Solutions and a $37 million increase in general corporate and unallocated expenses. These increases were partially offset by a $6 million decrease in Technology & Analytics Solutions and a $5 million decrease in Contract Sales & Medical Solutions.
Depreciation and Amortization
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Depreciation and amortization | $ | 1,202 | $ | 1,141 | $ | 1,011 | ||||||
| % of revenues | 10.8 | % | 11.0 | % | 10.4 | % |
The $61 million increase in depreciation and amortization in 2019 as compared to 2018 was primarily due to higher intangible asset balances as a result of acquisitions occurring in 2018 and 2019, and increased amortization due to higher capitalized software balances.
Impairment Charges
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Impairment charges | $ | — | $ | — | $ | 40 |
During 2017, we recognized $40 million 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) | 2019 | 2018 | 2017 | |||||||||
| Restructuring costs | $ | 75 | $ | 68 | $ | 63 |
During 2019, we recognized $75 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 2020 plans, are expected to occur throughout 2020 and are expected to consist of severance, facility closure and other exit-related costs.
During 2018, we recognized $68 million of restructuring charges, net of reversals for changes in estimates, respectively, under our existing restructuring plans.
Interest Income and Interest Expense
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Interest income | $ | (9 | ) | $ | (8 | ) | $ | (7 | ) | |||
| Interest expense | $ | 447 | $ | 414 | $ | 346 |
Interest income included interest received primarily from bank balances and investments.
Interest expense during 2019 was higher than 2018 due to an increase in the average debt outstanding, primarily as a result of the May 2019 issuance of $1.1 billion of 5.00% senior notes due 2027 and the June 2018 issuance of $1.63 billion of additional term B loans.
Loss on Extinguishment of Debt
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Loss on extinguishment of debt | $ | 24 | $ | 2 | $ | 19 |
During 2019, we incurred $24 million of fees and expenses related to the redemption of our 4.875% senior notes due 2023 in aggregate principal amount of $800 million as discussed further in Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
During 2018, we incurred $2 million of fees and expenses 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.
See “—Liquidity and Capital Resources” for more information on these transactions.
Other Expense (Income), Net
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Other (income) expense, net | $ | (37 | ) | $ | 5 | $ | 13 |
Other income, net for 2019 primarily consisted of a gain related to the remeasurement of a previously held equity interest of an equity method investment upon acquiring the remaining interest as a result of a business combination.
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.
Income Tax Expense (Benefit)
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | |||||||||
| Income tax expense (benefit) | $ | 116 | $ | 59 | $ | (992 | ) | |||||
| Effective income tax rate | 33.0 | % | 18.0 | % | (337.4 | )% |
In 2019 the U.S. Treasury Department issued final regulations on the transition tax and proposed regulations on Foreign Derived Intangible Income (“FDII’) which we analyzed. While the final regulations related to the transition tax did not have a material impact on us, the proposed guidance for FDII had an unfavorable impact. Although the proposed guidance for FDII is not authoritative and subject to change in the regulatory review process, we reversed the tax benefit recorded in 2018 by recording a tax expense of $25 million for this impact. It is expected that during 2020 the U.S. Treasury Department will issue final regulations on FDII.
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 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.
Equity in Earnings (Losses) of Unconsolidated Affiliates
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Equity in (losses) earnings of unconsolidated affiliates | $ | (9 | ) | $ | 15 | $ | 10 |
Equity in earnings (losses) of unconsolidated affiliates decreased in 2019 compared to 2018 primarily as a result of earnings from our investment in NovaQuest Pharma Opportunities Fund III, L.P. that were recognized in 2018 that did not reoccur in 2019. See Note 4 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information.
Net Income Attributable to Non-controlling Interests
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Net income attributable to non-controlling interests | $ | (36 | ) | $ | (25 | ) | $ | (19 | ) |
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 Revenues | Segment Profit | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Technology & Analytics Solutions | $ | 4,486 | $ | 4,137 | $ | 3,682 | $ | 1,101 | $ | 1,041 | $ | 998 | ||||||||||||
| Research & Development Solutions | 5,788 | 5,465 | 5,105 | 1,141 | 1,055 | 861 | ||||||||||||||||||
| Contract Sales & Medical Solutions | 814 | 810 | 915 | 52 | 61 | 69 | ||||||||||||||||||
| Total | 11,088 | 10,412 | 9,702 | 2,294 | 2,157 | 1,928 | ||||||||||||||||||
| General corporate and unallocated | (240 | ) | (207 | ) | (149 | ) | ||||||||||||||||||
| Depreciation and amortization | (1,202 | ) | (1,141 | ) | (1,011 | ) | ||||||||||||||||||
| Impairment charges | — | — | (40 | ) | ||||||||||||||||||||
| Restructuring costs | (75 | ) | (68 | ) | (63 | ) | ||||||||||||||||||
| Consolidated | $ | 11,088 | $ | 10,412 | $ | 9,702 | $ | 777 | $ | 741 | $ | 665 |
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 to integration activities and acquisitions. We also do not allocate depreciation and amortization or impairment charges to our segments. Prior period segment results have been recast to conform to changes to management reporting in 2019. The recast impacts the allocation of selling, general and administrative expenses for 2018 and 2017.
Technology & Analytics Solutions
| Year Ended December 31, | Change | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
| Revenues | $ | 4,486 | $ | 4,137 | $ | 3,682 | $ | 349 | 8.4 | % | $ | 455 | 12.4 | % | ||||||||||||||
| Costs of revenue, exclusive of depreciation and amortization | 2,663 | 2,343 | 1,967 | 320 | 13.7 | 376 | 19.1 | |||||||||||||||||||||
| Selling, general and administrative expenses | 722 | 753 | 717 | (31 | ) | (4.1 | ) | 36 | 5.0 | |||||||||||||||||||
| Segment profit | $ | 1,101 | $ | 1,041 | $ | 998 | $ | 60 | 5.8 | % | $ | 43 | 4.3 | % |
Revenues
2019 compared to 2018
Technology & Analytics Solutions’ revenues were $4,486 million in 2019, an increase of $349 million, or 8.4%, over 2018. This increase was comprised of constant currency revenue growth of approximately $444 million, or 10.7%, and a negative impact of approximately $95 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 driven by higher real-world and analytical services as well as incremental revenue from acquisitions.
Costs of Revenue, exclusive of Depreciation and Amortization
2019 compared to 2018
Technology & Analytics Solutions’ costs of revenue, exclusive of depreciation and amortization, were $2,663 million in 2019, an increase of $320 million over 2018. This increase was comprised of constant currency growth of approximately $369 million, or 15.7%, and a positive impact of approximately $49 million from the effects of foreign currency fluctuations. The constant currency increase was primarily due to an increase in compensation and related expenses from higher headcount to support revenue growth and incremental costs from acquisitions.
Selling, General and Administrative Expenses
2019 compared to 2018
Technology & Analytics Solutions’ selling, general and administrative expenses decreased $31 million in 2019 as compared to 2018. This decrease was comprised of a constant currency decrease of approximately $6 million, or 0.8%, and a positive impact of approximately $25 million from the effects of foreign currency fluctuations. The constant currency decrease was primarily related to cost savings initiatives.
Research & Development Solutions
| Year Ended December 31, | Change | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
| Revenues | $ | 5,788 | $ | 5,465 | $ | 5,105 | $ | 323 | 5.9 | % | $ | 360 | 7.1 | % | ||||||||||||||
| Costs of revenue, exclusive of depreciation and amortization | 3,936 | 3,721 | 3,566 | 215 | 5.8 | 155 | 4.3 | |||||||||||||||||||||
| Selling, general and administrative expenses | 711 | 689 | 678 | 22 | 3.2 | 11 | 1.6 | |||||||||||||||||||||
| Segment profit | $ | 1,141 | $ | 1,055 | $ | 861 | $ | 86 | 8.2 | % | $ | 194 | 22.5 | % |
Backlog
Research and Development Solutions contracted backlog increased from $17.1 billion at December 31, 2018 to $19.0 billion at December 31, 2019 and we expect approximately $5.2 billion of this backlog to convert to revenue in the next 12 months. Contracted backlog was $14.8 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
2019 compared to 2018
Research & Development Solutions’ revenues were $5,788 million in 2019, an increase of $323 million, or 5.9%, over 2018. This increase was comprised of constant currency revenue growth of approximately $378 million, or 6.9%, and a negative impact of approximately $55 million from the effects of foreign currency fluctuations.
The constant currency growth primarily included volume-related increases in clinical services, data management and lab testing volumes as well as incremental revenue from acquisitions.
Costs of Revenue, exclusive of Depreciation and Amortization
2019 compared to 2018
Research & Development Solutions’ costs of revenue, exclusive of depreciation and amortization, increased $215 million, or 5.8%, in 2019 as compared to 2018. This increase included a constant currency increase of approximately $295 million, or 7.9%, and a positive impact of approximately $80 million from the effects of foreign currency fluctuations.
The constant currency increase was primarily due to an increase in compensation and related expenses as well as incremental costs from acquisitions. Compensation and related expenses increased as a result of higher headcount to support revenue growth.
Selling, General and Administrative Expenses
2019 compared to 2018
Research & Development Solutions’ selling, general and administrative expenses increased $22 million, or 3.2%, in 2019 as compared to 2018, which included a constant currency increase of approximately $34 million, or 4.9%, and a positive impact of approximately $12 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.
Contract Sales & Medical Solutions
| Year Ended December 31, | Change | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||||||||||||
| Revenues | $ | 814 | $ | 810 | $ | 915 | $ | 4 | 0.5 | % | $ | (105 | ) | (11.5 | )% | |||||||||||||
| Costs of revenue, exclusive of depreciation and amortization | 701 | 682 | 768 | 19 | 2.8 | (86 | ) | (11.2 | ) | |||||||||||||||||||
| Selling, general and administrative expenses | 61 | 67 | 78 | (6 | ) | (9.0 | ) | (11 | ) | (14.1 | ) | |||||||||||||||||
| Segment profit | $ | 52 | $ | 61 | $ | 69 | $ | (9 | ) | (14.8 | )% | $ | (8 | ) | (11.6 | )% |
Revenues
2019 compared to 2018
Contract Sales & Medical Solutions’ revenues were $814 million in 2019, an increase of $4 million, or 0.5%, over 2018. This increase was comprised of a constant currency revenue growth of approximately $13 million, or 1.6%, and a negative impact of approximately $9 million from the effects of foreign currency fluctuations. The constant currency growth was largely due to volume increases in the Americas region.
Costs of Revenue, exclusive of Depreciation and Amortization
2019 compared to 2018
Contract Sales & Medical Solutions’ costs of revenue, exclusive of depreciation and amortization, increased $19 million, or 2.8%, in 2019 as compared to 2018. This increase included a constant currency growth of approximately $26 million, or 3.8%, and a positive impact of approximately $7 million from the effects of foreign currency fluctuations. The constant currency cost of revenue increase was due an increase in compensation and related expenses from higher headcount to support revenue growth.
Selling, General and Administrative Expenses
2019 compared to 2018
Contract Sales & Medical Solutions’ selling, general and administrative expenses decreased $6 million, or 9.0%, in 2019 as compared to 2018, primarily related to cost saving initiatives.
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 $837 million at December 31, 2019 ($293 million of which was in the United States), a decrease from $891 million at December 31, 2018.
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 February 13, 2019, the Board increased the stock repurchase authorization under the “Repurchase Program by $2.0 billion, which increased the total amount that has been authorized under the Repurchase Program to $7.725 billion since the plan’s inception in October 2013. The Repurchase Program does not obligate the Company to repurchase any particular amount of common stock, and it may be modified, extended, suspended or discontinued at any time.
As of December 31, 2019, the Company has remaining authorization to repurchase up to $1.3 billion 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.
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.
Debt
As of December 31, 2019, we had $11.7 billion of total indebtedness, excluding $1.1 billion 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.
Our long-term debt arrangements contain customary restrictive covenants and, as of December 31, 2019, we believe we were in compliance with our restrictive covenants in all material respects.
Senior Secured Credit Facilities and Senior Notes
At December 31, 2019, 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 approximately $6,811 million, which consisted of $5,677 million principal amount of debt outstanding, $3 million of issued standby letters of credit, and $1,131 million of available borrowing capacity on the $1,500 million revolving credit facility. 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.
For information regarding the Senior Secured Credit Facilities and senior notes, see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Receivables Financing Facility
For information regarding receivables financing facility, see Note 10 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. As of December 31, 2019, no additional amounts of revolving loans were available under the receivables financing facility.
Years ended December 31, 2019, 2018 and 2017
Cash Flow from Operating Activities
| Year Ended December 31, | ||||||||||||
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| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Net cash provided by operating activities | $ | 1,417 | $ | 1,254 | $ | 970 |
2019 compared to 2018
Cash provided by operating activities increased $163 million in 2019 as compared to 2018. The increase is primarily due to improved collections on receivables, higher cash-related net income and the timing of income tax and other payables.
Cash Flow from Investing Activities
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Net cash used in investing activities | $ | (1,190 | ) | $ | (810 | ) | $ | (1,190 | ) |
2019 compared to 2018
Cash used in investing activities increased $380 million in 2019 as compared to 2018. The increase was primarily due to higher cash used for the acquisition of property, equipment and software ($123 million) and for the acquisition of businesses ($279 million).
Cash Flow from Financing Activities
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Net cash used in financing activities | $ | (276 | ) | $ | (452 | ) | $ | (72 | ) |
2019 compared to 2018
Cash used in financing activities decreased $176 million in 2019 as compared to 2018. The decrease in cash used in financing activities was primarily related to fewer share repurchases ($456 million), proceeds from debt issuance ($269 million), partially offset by repayment of revolving credit facility, net of proceeds ($370 million) and debt repayment ($167 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, 2019:
| (in millions) | 2020 | 2021 - 2022 | 2023 - 2024 | Thereafter | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Long-term debt, including interest(1) | $ | 484 | $ | 1,254 | $ | 4,508 | $ | 7,529 | $ | 13,775 | ||||||||||
| Operating leases | 160 | 234 | 135 | 86 | 615 | |||||||||||||||
| Data acquisition | 355 | 429 | 132 | 7 | 923 | |||||||||||||||
| Purchase obligations(2) | 17 | 19 | 14 | 5 | 55 | |||||||||||||||
| Commitments to unconsolidated affiliates(3) | — | — | — | — | — | |||||||||||||||
| Benefit obligations(4) | 29 | 28 | 32 | 82 | 171 | |||||||||||||||
| Uncertain income tax positions(5) | 23 | 19 | 4 | 1 | 47 | |||||||||||||||
| Total | $ | 1,068 | $ | 1,983 | $ | 4,825 | $ | 7,710 | $ | 15,586 |
| (1) | Interest payments on our debt are based on the interest rates in effect on December 31, 2019. |
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| (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. |
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| (3) | We are currently committed to invest $120 million in private equity funds. As of December 31, 2019, we have funded approximately $77.5 million of these commitments and we have approximately $42.5 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. |
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| (4) | Amounts represent expected future benefit payments for our pension and postretirement benefit plans, as well as expected contributions for 2020 for our funded pension benefit plans. We made cash contributions totaling approximately $29 million to our defined benefit plans in 2019, and we estimate that we will make contributions totaling approximately $29 million to our defined benefit plans in 2020. 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 2020. |
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| (5) | As of December 31, 2019, our liability related to uncertain income tax positions was approximately $134 million, $87 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. |
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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
The majority of the Company’s contracts within the Research & Development Solutions segment are service contracts for clinical research that represent a single performance obligation. The Company provides a significant integration service resulting in a combined output, which is clinical trial data that meets the relevant regulatory standards and can be used by the customer to progress to the next phase of a clinical trial or solicit approval of a treatment by the applicable regulatory body. The performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of the arrangement and furthers progress of the clinical trial. The Company recognizes revenue 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 other pass through expenses for the Company’s clinical monitors). This cost-based method of revenue recognition requires the Company to make estimates of costs to complete its projects on an ongoing basis. Significant judgment is required to evaluate assumptions related to these estimates. The effect of revisions to estimates related to the transaction price or costs to complete a project are recorded in the period in which the estimate is revised. Most contracts may be terminated upon 30 to 90 days notice by the customer; however, in the event of termination, most contracts require payment for services rendered through the date of termination, as well as for subsequent services rendered to close out the contract.
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.
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.
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. Any future impairment 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; |
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| • | 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; |
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| • | We estimate the dividend yield to be zero as we do not currently anticipate paying any future dividends; |
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| • | We estimate the average expected life of the award based on our historical experience; and |
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| • | We estimate forfeitures based on our historical analysis of actual forfeitures. |
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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.
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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