filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of IQVIA Holdings Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of this assessment and based on the criteria in the COSO framework, management has concluded that, as of December 31, 2019, the Company’s internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
| /s/ Ari Bousbib | /s/ Michael R. McDonnell | |
| Ari Bousbib Chairman, Chief Executive Officer and President (Principal Executive Officer*)* | Michael R. McDonnell Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
February 18, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of IQVIA Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of IQVIA Holdings Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive (loss) income, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2019, including the related notes and financial statement schedules listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018**,** and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition – Estimating Measure of Progress for Clinical Research Services
As described in Notes 1 and 20 to the consolidated financial statements, revenue of the Research & Development Solutions segment for the year ended December 31, 2019, is $5,788 million, the majority of which relates to service contracts for clinical research that represent a single performance obligation. The Company recognized revenue for these contracts over time using a cost-based input method. Revenue was recognized based on progress on the performance obligation, which was 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 required management to make estimates of costs to complete its projects on an ongoing basis.
The principal considerations for our determination that performing procedures relating to revenue recognition - estimating measure of progress for clinical research services - is a critical audit matter are the high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence related to the cost estimates made by management, due to significant judgment by management when determining the total expected costs to complete its contracts, specifically the estimation of direct labor and third-party costs.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the estimation of the total cost to complete clinical research service contracts. These procedures also included, among others, testing management’s process for determining the estimate of total costs to complete its contracts, which included evaluating the reasonableness of significant assumptions made by management including direct labor and third party-costs, evaluating the appropriateness of changes to management’s estimate of total costs to complete throughout the duration of the contract, testing actual direct costs incurred, and evaluating management’s ability to reasonably estimate the total expected costs to complete contracts, which included performing a comparison of management’s prior period cost estimates to final actual costs.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 18, 2020
We have served as the Company’s auditor since 2002.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Revenues | $ | 11,088 | $ | 10,412 | $ | 9,702 | ||||||
| Costs of revenue, exclusive of depreciation and amortization | 7,300 | 6,746 | 6,301 | |||||||||
| Selling, general and administrative expenses | 1,734 | 1,716 | 1,622 | |||||||||
| Depreciation and amortization | 1,202 | 1,141 | 1,011 | |||||||||
| Impairment charges | — | — | 40 | |||||||||
| Restructuring costs | 75 | 68 | 63 | |||||||||
| Income from operations | 777 | 741 | 665 | |||||||||
| Interest income | (9 | ) | (8 | ) | (7 | ) | ||||||
| Interest expense | 447 | 414 | 346 | |||||||||
| Loss on extinguishment of debt | 24 | 2 | 19 | |||||||||
| Other (income) expense, net | (37 | ) | 5 | 13 | ||||||||
| Income before income taxes and equity in earnings of unconsolidated affiliates | 352 | 328 | 294 | |||||||||
| Income tax expense (benefit) | 116 | 59 | (992 | ) | ||||||||
| Income before equity in earnings (losses) of unconsolidated affiliates | 236 | 269 | 1,286 | |||||||||
| Equity in (losses) earnings of unconsolidated affiliates | (9 | ) | 15 | 10 | ||||||||
| Net income | 227 | 284 | 1,296 | |||||||||
| Net income attributable to non-controlling interests | (36 | ) | (25 | ) | (19 | ) | ||||||
| Net income attributable to IQVIA Holdings Inc. | $ | 191 | $ | 259 | $ | 1,277 | ||||||
| Earnings per share attributable to common stockholders: | ||||||||||||
| Basic | $ | 0.98 | $ | 1.27 | $ | 5.86 | ||||||
| Diluted | $ | 0.96 | $ | 1.24 | $ | 5.74 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 195.1 | 203.7 | 217.8 | |||||||||
| Diluted | 199.6 | 208.2 | 222.6 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
| Year Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 227 | $ | 284 | $ | 1,296 | |||||||
| Comprehensive (loss) income adjustments: | |||||||||||||
| Unrealized (losses) gains on derivative instruments, net of income tax expense (benefit) of $4, ($5) and $1 | (15 | ) | 1 | 4 | |||||||||
| Defined benefit plan adjustments, net of income tax (benefit) expense of $5, ($4) and $3 | (30 | ) | (8 | ) | 5 | ||||||||
| Foreign currency translation, net of income tax (benefit) expense of ($30), $50 and ($201) | (39 | ) | (258 | ) | 611 | ||||||||
| Reclassification adjustments: | |||||||||||||
| (Gains) losses on derivative instruments included in net income, net of income tax expense of $—, $1 and $— | (1 | ) | (12 | ) | (1 | ) | |||||||
| Amortization of actuarial losses and prior service costs included in net income | — | 1 | 1 | ||||||||||
| Comprehensive income (loss) | 142 | 8 | 1,916 | ||||||||||
| Comprehensive (income) loss attributable to non-controlling interests | (38 | ) | (22 | ) | (26 | ) | |||||||
| Comprehensive income (loss) attributable to IQVIA Holdings Inc. | $ | 104 | $ | (14 | ) | $ | 1,890 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | 2019 | 2018 | ||||||
| ASSETS | ||||||||
| Cash and cash equivalents | $ | 837 | $ | 891 | ||||
| Trade accounts receivable and unbilled services, net | 2,582 | 2,394 | ||||||
| Prepaid expenses | 138 | 151 | ||||||
| Income taxes receivable | 56 | 69 | ||||||
| Investments in debt, equity and other securities | 62 | 47 | ||||||
| Other current assets and receivables | 451 | 322 | ||||||
| Total current assets | 4,126 | 3,874 | ||||||
| Property and equipment, net | 458 | 434 | ||||||
| Operating lease right-of-use assets | 496 | — | ||||||
| Investments in debt, equity and other securities | 65 | 41 | ||||||
| Investments in unconsolidated affiliates | 87 | 101 | ||||||
| Goodwill | 12,159 | 11,800 | ||||||
| Other identifiable intangibles, net | 5,514 | 5,951 | ||||||
| Deferred income taxes | 119 | 109 | ||||||
| Deposits and other assets | 227 | 239 | ||||||
| Total assets | $ | 23,251 | $ | 22,549 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 2,512 | $ | 2,295 | ||||
| Unearned income | 1,014 | 1,007 | ||||||
| Income taxes payable | 108 | 100 | ||||||
| Current portion of long-term debt | 100 | 100 | ||||||
| Other current liabilities | 211 | 32 | ||||||
| Total current liabilities | 3,945 | 3,534 | ||||||
| Long-term debt, less current portion | 11,545 | 10,907 | ||||||
| Deferred income taxes | 646 | 736 | ||||||
| Operating lease liabilities | 396 | — | ||||||
| Other liabilities | 456 | 418 | ||||||
| Total liabilities | 16,988 | 15,595 | ||||||
| Commitments and contingencies (Note 1) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock and additional paid-in capital, 400.0 shares authorized at December 31, 2019 and 2018, $0.01 par value, 253.0 shares issued and 192.3 shares outstanding at December 31, 2019; 251.5 shares issued and 197.5 shares outstanding at December 31, 2018 | 11,049 | 10,901 | ||||||
| Retained earnings | 998 | 807 | ||||||
| Treasury stock, at cost, 60.7 and 54.0 shares at December 31, 2019 and 2018, respectively | (5,733 | ) | (4,770 | ) | ||||
| Accumulated other comprehensive loss | (311 | ) | (224 | ) | ||||
| Equity attributable to IQVIA Holdings Inc.’s stockholders | 6,003 | 6,714 | ||||||
| Non-controlling interests | 260 | 240 | ||||||
| Total stockholders’ equity | 6,263 | 6,954 | ||||||
| Total liabilities and stockholders’ equity | $ | 23,251 | $ | 22,549 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Operating activities: | ||||||||||||
| Net income | $ | 227 | $ | 284 | $ | 1,296 | ||||||
| Adjustments to reconcile net income to cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 1,202 | 1,141 | 1,011 | |||||||||
| Amortization of debt issuance costs and discount | 13 | 11 | 9 | |||||||||
| Amortization of accumulated other comprehensive loss on terminated interest rate swaps | — | — | 3 | |||||||||
| Stock-based compensation | 146 | 113 | 106 | |||||||||
| Impairment of goodwill and identifiable intangible assets | — | — | 40 | |||||||||
| Loss (gain) on disposals of property and equipment, net | 1 | — | (1 | ) | ||||||||
| Loss (earnings) from unconsolidated affiliates | 9 | (15 | ) | (10 | ) | |||||||
| (Gain) loss on investments, net | (43 | ) | 3 | (8 | ) | |||||||
| Benefit from deferred income taxes | (157 | ) | (177 | ) | (1,221 | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Accounts receivable and unbilled services | (122 | ) | (297 | ) | (141 | ) | ||||||
| Prepaid expenses and other assets | (92 | ) | (66 | ) | (54 | ) | ||||||
| Accounts payable and accrued expenses | 240 | 368 | 90 | |||||||||
| Unearned income | (2 | ) | 7 | (68 | ) | |||||||
| Income taxes payable and other liabilities | (5 | ) | (118 | ) | (82 | ) | ||||||
| Net cash provided by operating activities | 1,417 | 1,254 | 970 | |||||||||
| Investing activities: | ||||||||||||
| Acquisition of property, equipment and software | (582 | ) | (459 | ) | (369 | ) | ||||||
| Net cash paid for acquisition of businesses | (588 | ) | (309 | ) | (854 | ) | ||||||
| Disposition of business, net of cash disposed | — | — | 12 | |||||||||
| (Purchases) sales of marketable securities, net | (3 | ) | (4 | ) | 2 | |||||||
| Investments in unconsolidated affiliates, net of payments received | — | (17 | ) | 15 | ||||||||
| (Investments in) proceeds from sale of equity securities | (22 | ) | (23 | ) | — | |||||||
| Other | 5 | 2 | 4 | |||||||||
| Net cash used in investing activities | (1,190 | ) | (810 | ) | (1,190 | ) | ||||||
| Financing activities: | ||||||||||||
| Proceeds from issuance of debt | 1,900 | 1,631 | 5,242 | |||||||||
| Payment of debt issuance costs | (47 | ) | (22 | ) | (50 | ) | ||||||
| Repayment of debt | (899 | ) | (732 | ) | (2,883 | ) | ||||||
| Proceeds from revolving credit facility | 2,522 | 2,445 | 1,921 | |||||||||
| Repayment of revolving credit facility | (2,776 | ) | (2,329 | ) | (1,767 | ) | ||||||
| Principal payments on capital lease obligations | — | — | (2 | ) | ||||||||
| Proceeds related to employee stock option plans | 11 | 15 | 91 | |||||||||
| Repurchase of common stock | (949 | ) | (1,405 | ) | (2,620 | ) | ||||||
| Distributions to non-controlling interest, net | (18 | ) | (31 | ) | — | |||||||
| Contingent consideration and deferred purchase price payments | (20 | ) | (24 | ) | (4 | ) | ||||||
| Net cash used in financing activities | (276 | ) | (452 | ) | (72 | ) | ||||||
| Effect of foreign currency exchange rate changes on cash | (5 | ) | (60 | ) | 53 | |||||||
| Decrease in cash and cash equivalents | (54 | ) | (68 | ) | (239 | ) | ||||||
| Cash and cash equivalents at beginning of period | 891 | 959 | 1,198 | |||||||||
| Cash and cash equivalents at end of period | $ | 837 | $ | 891 | $ | 959 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
| (in millions) | Common Stock Shares | Treasury Stock Shares | Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Non- controlling Interests | Total | |||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, December 31, 2016 | 248.3 | (12.9 | ) | 2 | 10,600 | (484 | ) | (1,000 | ) | (564 | ) | 227 | 8,781 | |||||||||||||||||||||||
| Issuance of common stock | 3.7 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Repurchase of common stock | — | (28.5 | ) | — | — | — | (2,374 | ) | — | — | (2,374 | ) | ||||||||||||||||||||||||
| Repurchase and retirement of common stock | (2.5 | ) | — | — | — | (255 | ) | — | — | — | (255 | ) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 180 | — | — | — | — | 180 | |||||||||||||||||||||||||||
| Distribution to non-controlling interest | — | — | — | — | — | — | — | (4 | ) | (4 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 1,277 | — | — | 19 | 1,296 | |||||||||||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | — | — | — | — | — | — | 4 | — | 4 | |||||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | — | — | — | — | — | 5 | — | 5 | |||||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | 604 | 7 | 611 | |||||||||||||||||||||||||||
| Balance, December 31, 2017 | 249.5 | (41.4 | ) | 2 | 10,780 | 538 | (3,374 | ) | 49 | 249 | 8,244 | |||||||||||||||||||||||||
| Issuance of common stock | 2.0 | — | 1 | 10 | — | — | — | — | 11 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | (12.6 | ) | — | — | — | (1,396 | ) | — | — | (1,396 | ) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 108 | — | — | — | — | 108 | |||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | — | (31 | ) | (31 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 259 | — | — | 25 | 284 | |||||||||||||||||||||||||||
| Unrealized gain on derivative instruments, net of tax | — | — | — | — | — | — | 1 | — | 1 | |||||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | — | — | — | — | — | (8 | ) | — | (8 | ) | |||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | (255 | ) | (3 | ) | (258 | ) | ||||||||||||||||||||||||
| Reclassification adjustments, net of tax | — | — | — | — | — | — | (11 | ) | — | (11 | ) | |||||||||||||||||||||||||
| Other | — | — | — | — | 10 | — | — | — | 10 | |||||||||||||||||||||||||||
| Balance, December 31, 2018 | 251.5 | (54.0 | ) | $ | 3 | $ | 10,898 | $ | 807 | $ | (4,770 | ) | $ | (224 | ) | $ | 240 | $ | 6,954 | |||||||||||||||||
| Issuance of common stock | 1.5 | — | — | 11 | — | — | — | — | 11 | |||||||||||||||||||||||||||
| Repurchase of common stock | — | (6.7 | ) | — | — | — | (963 | ) | — | — | (963 | ) | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | 137 | — | — | — | — | 137 | |||||||||||||||||||||||||||
| Distributions to non-controlling interest | — | — | — | — | — | — | — | (18 | ) | (18 | ) | |||||||||||||||||||||||||
| Net income | — | — | — | — | 191 | — | — | 36 | 227 | |||||||||||||||||||||||||||
| Unrealized losses on derivative instruments, net of tax | — | — | — | — | — | — | (15 | ) | — | (15 | ) | |||||||||||||||||||||||||
| Defined benefit plan adjustments, net of tax | — | — | — | — | — | — | (30 | ) | — | (30 | ) | |||||||||||||||||||||||||
| Foreign currency translation, net of tax | — | — | — | — | — | — | (41 | ) | 2 | (39 | ) | |||||||||||||||||||||||||
| Reclassification adjustments, net of tax | — | — | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||
| Balance, December 31, 2019 | 253.0 | (60.7 | ) | $ | 3 | $ | 11,046 | $ | 998 | $ | (5,733 | ) | $ | (311 | ) | $ | 260 | $ | 6,263 |
The accompanying notes are an integral part of these consolidated financial statements.
IQVIA HOLDINGS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- Summary of Significant Accounting Policies
The Company
IQVIA Holdings Inc. (together with its subsidiaries, the “Company” or “IQVIA”) is a leading global provider of advanced analytics, technology solutions and contract research services to the life sciences industry. 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, the Company delivers 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, the Company conducts business in more than 100 countries.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and operations of the Company, its subsidiaries and investments in which the Company has control. Amounts pertaining to the non-controlling ownership interests held by third parties in the operating results and financial position of the Company’s majority-owned subsidiaries are reported as non-controlling interests. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. These estimates are based on historical experience and various other assumptions believed reasonable under the circumstances. The Company evaluates its estimates on an ongoing basis and makes changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results may differ from those estimates.
Foreign Currencies
The Company’s financial statements are reported in United States dollars and, accordingly, the Company’s results of operations are impacted by fluctuations in exchange rates that affect the translation of its revenues and expenses denominated in foreign currencies into United States dollars for purposes of reporting its consolidated financial results. Assets and liabilities recorded in foreign currencies on the books of foreign subsidiaries are translated at the exchange rate on the balance sheet date. Revenues, costs and expenses are translated at average rates of exchange during the year. Translation adjustments resulting from this process are charged or credited to the accumulated other comprehensive (loss) income (“AOCI”) component of stockholders’ equity. The Company is subject to foreign currency transaction risk for fluctuations in exchange rates during the period of time between the consummation and cash settlement of a transaction. The Company earns revenue from its service contracts over a period of several months and, in some cases, over a period of several years. Accordingly, exchange rate fluctuations during this period may affect the Company’s profitability with respect to such contracts.
For operations outside the United States that are considered to be highly inflationary or where the United States dollar is designated as the functional currency, monetary assets and liabilities are remeasured using end-of-period exchange rates, whereas nonmonetary accounts are remeasured using historical exchange rates, and all remeasurement and transaction adjustments are recognized in other expense (income), net.
Cash Equivalents
The Company considers all highly liquid investments with an initial maturity of three months or less when purchased to be cash equivalents.
Derivatives
The Company uses derivative instruments to manage exposures to interest rates and foreign currencies. Derivatives are recorded on the balance sheet at fair value at each balance sheet date utilizing pricing models for non-exchange-traded contracts.
At inception, the Company designates whether or not the derivative instrument is an effective hedge of an asset, liability or firm commitment which is then classified as either a cash flow hedge or a fair value hedge. If determined to be an effective cash flow hedge, changes in the fair value of the derivative instrument are recorded as a component of Accumulated Other Comprehensive Income (“AOCI’) until realized. The Company includes the impact from these hedges in the same line item as the hedged item on the consolidated statements of cash flows. Changes in fair value of effective fair value hedges are recorded in earnings as an offset to the changes in the fair value of the related hedged item. Hedge ineffectiveness, if any, is immediately recognized in earnings. Changes in the fair values of derivative instruments that are not an effective hedge are recognized in earnings. When it is probable that a hedged forecasted transaction will not occur, the Company discontinues hedge accounting for the affected portion of the forecasted transaction and reclassifies gains or losses that were accumulated in AOCI to earnings in other expense (income), net for foreign exchange derivatives and interest expense for interest rate derivatives on the consolidated statements of income. Cash flows are classified consistent with the underlying hedged item. The Company has entered, and may in the future enter, into derivative contracts (caps, swaps, forwards, calls or puts, warrants, for example) related to its debt and forecasted foreign currency transactions.
Business Combinations
The Company uses 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. The Company uses 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.
The Company records and allocates to its 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. The Company reviews the carrying values of other identifiable intangible assets if the facts and circumstances indicate a possible impairment.
Long-Lived Assets
Property and equipment are stated at cost and are depreciated using the straight-line method over the shorter of the asset’s estimated useful life or the lease term, if related to leased property, as follows:
| Buildings and leasehold improvements | 3 - 40 years | |
|---|---|---|
| Equipment | 3 - 10 years | |
| Furniture and fixtures | 5 - 10 years | |
| Transportation equipment | 3 - 20 years |
Definite-lived identifiable intangible assets are amortized primarily using an accelerated method that reflects the pattern in which the Company expects to benefit from the use of the asset over its estimated remaining useful life as follows:
| Trademarks and trade names | 1 - 17 years | |
|---|---|---|
| Contract backlog and client relationships | 1 - 25 years | |
| Software and related assets | 1 - 10 years | |
| Databases | 1 - 9 years | |
| Non-compete agreements and other | 2 - 5 years |
Included in software and related assets is the capitalized cost of internal-use software used in supporting the Company’s business. Qualifying costs incurred during the application development stage are capitalized and amortized over their estimated useful lives. Costs are capitalized from completion of the preliminary project stage and when it is considered probable that the software will be used to perform its intended function, up until the time the software is placed into service. The Company recognized $196 million, $179 million and $134 million of amortization expense in 2019, 2018 and 2017, respectively, related to software and related assets.
The carrying values of property, equipment and intangible and other long-lived assets are reviewed for recoverability if the facts and circumstances suggest that a potential impairment may have occurred. If this review indicates that carrying values will not be recoverable, as determined based on undiscounted cash flow projections, the Company will record an impairment charge to reduce carrying values to estimated fair value. There were no impairments recognized in 2019 and 2018.
Revenue Recognition
The Company’s arrangements are primarily service contracts that range in duration from a few months to several years. The Company recognizes revenue when control of these services is transferred to the customer for an amount, referred to as the transaction price, that reflects the consideration to which the Company is expected to be entitled in exchange for those goods or services. The Company determines revenue recognition utilizing the following five steps: (1) identification of the contract with a customer, (2) identification of the performance obligations in the contract (promised goods or services that are distinct), (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations, and (5) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation. Cash payments made to customers as incentives to induce customers to enter into service agreements with the Company are amortized as a reduction of revenue over the period the services are performed. The Company records revenues net of any tax assessments by governmental authorities, such as value added taxes, that are imposed on and concurrent with specific revenue generating transactions.
The Company derives the majority of its revenues in the Technology & Analytics Solutions segment from various information and technology service offerings. Information offerings (primarily under fixed-price contracts) typically include multiple performance obligations including an ongoing subscription-based deliverable for which revenue is recognized ratably as earned over the contract period, and/or a one-time deliverable of data offerings for which revenue is recognized upon delivery. The customer is able to benefit from the provision of data as it is received. The Company’s subscription arrangements typically have terms ranging from one to three years and are generally non-cancelable and do not contain refund-type provisions. Technology services offerings 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 the Company’s normal pricing practices when sold separately with consideration of market conditions and other factors, including customer demographics and geographic location. Revenues for services engagements where the transfer of control occurs ratably over time are recognized on a straight-line basis over the term of the arrangement. Revenues from time and material contracts are recognized based on hours as the services are provided. Revenues from fixed price ad hoc services and consulting contracts are recognized over the contract term based on the ratio of the number of hours incurred for services provided during the period compared to the total estimated hours to be incurred over the entire arrangement (hours-based). Technology services offerings meet the over time criterion, as another party would not need to substantially re-perform the work already completed to satisfy the remaining obligations if the services were migrated.
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.
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 Company utilizes a single measure of progress for each performance obligation to recognize revenue, which includes deployment of sales representatives based on employee days worked; recruiting based on candidates recruited; sales force automation set-up based on hours worked; and sales force automation hosting and maintenance based on usage. These services meet the over time criterion as the customer consumes the benefit as activities are performed and another party would not need to substantially re-perform the work already completed to satisfy the remaining obligations if the services were migrated to another party.
Variable Consideration
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). Variable consideration is estimated 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 that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company and reevaluated each reporting period.
Reimbursed Expenses
The Company includes reimbursed expenses in revenues and costs of revenue as the Company is primarily responsible for fulfilling the promise to provide the specified service, including the integration of the related services into a combined output to the customer, which are inseparable from the integrated service. These costs include such items as payments to investigators and travel expenses for the Company’s clinical monitors and sales representatives, over which the Company has discretion in establishing prices. The Company controls the good or service and has inventory risk on contractually reimbursable expenses, as sometimes the Company is unable to obtain reimbursement from the customer for costs incurred.
Change Orders
Changes in the scope of work are common, especially under long-term contracts, and generally result in a change in transaction price. Change orders are evaluated on a contract-by-contract basis to determine if they should be accounted for as a new contract or as part of the existing contract. Generally, services from change orders are not distinct from the original performance obligation. As a result, the effect that the contract modification has on the contract revenue, and measure of progress, is recognized as an adjustment to revenue when it occurs.
Costs of Revenue
Costs of revenue include (i) compensation and benefits for billable employees and personnel involved in production, data management and delivery, and the costs of acquiring and processing data for the Company’s information offerings; (ii) costs of staff directly involved with delivering technology-related services offerings and engagements, and the costs of data purchased specifically for technology services engagements; (iii) reimbursed expenses that are comprised principally of payments to investigators who oversee clinical trials and travel expenses for the Company’s clinical monitors and sales representatives; and (iv) other expenses directly related to service contracts such as courier fees, laboratory supplies, professional services and travel expenses.
Trade Receivables, Unbilled Services and Unearned Income
In general, billings and payments are established by contractual provisions including predetermined payment schedules, which may or may not correspond to the timing of the transfer of control of the Company’s services under the contract. In general, the Company’s intention in its invoicing (payment terms) is to maintain cash neutrality over the life of the contract. Generally, the payment terms are 30 to 90 days based on contracts. Upfront payments, when they occur, are intended to cover certain expenses the Company incurs at the beginning of the contract. Neither the Company nor its customers view such upfront payments and contracted payment schedules as a means of financing. Unbilled services primarily arise from long-term contracts when a cost-based or hours-based input method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer.
Unearned income consists of advance payments and billings in excess of revenue recognized. As the contracted services are subsequently performed and the associated revenue is recognized, the unearned income balance is reduced by the amount of the revenue recognized during the period. Unearned income is classified as a current liability on the condensed consolidated balance sheet as the Company expects to recognize the associated revenue in less than one year.
Restructuring Costs
Restructuring costs, which primarily include termination benefits and facility closure costs, are recorded at estimated fair value. Key assumptions in determining the restructuring costs include the terms and payments that may be negotiated to terminate certain contractual obligations and the timing of employees leaving the Company.
Debt Fees
Fees incurred to issue debt are generally deferred and amortized as a component of interest expense over the estimated term of the related debt using the effective interest rate method.
Contingencies
The Company records accruals for claims, suits, investigations and proceedings when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews claims, suits, investigations and proceedings at least quarterly and records or adjusts accruals related to such matters to reflect the impact and status of any settlements, rulings, advice of counsel or other information pertinent to a particular matter. Legal costs associated with contingencies are charged to expense as incurred.
The Company is party to legal proceedings incidental to its business. While the outcome of these matters could differ from management’s expectations, the Company does not believe the resolution of these matters will have a material adverse effect to the Company’s financial statements.
Income Taxes
Certain items of income and expense are not recognized on the Company’s 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. The Company recorded a valuation allowance to reduce its deferred income tax assets for those deferred income tax items for which it was more likely than not that realization would not occur. The Company determined the amount of the valuation allowance based, in part, on the Company’s assessment of future taxable income and in light of the Company’s ongoing income tax strategies. If the estimate of future taxable income or tax strategies changes at any time in the future, the Company would record an adjustment to our valuation allowance. Recording such an adjustment could have a material effect on the Company’s 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. The Company does not consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the United States.
Pensions and Other Postretirement Benefits
The Company provides retirement benefits to certain employees, including defined benefit pension plans and postretirement medical plans. The determination of benefit obligations and expense is based on actuarial models. In order to measure benefit costs and obligations using these models, assumptions are made with regard to the discount rate, expected return on plan assets, cash balance crediting rate, lump sum conversion rate and the assumed rate of compensation increases. In addition, retiree medical care cost trend rates are a key assumption used exclusively in determining costs for the Company’s postretirement health care and life insurance benefit plans.
Stock-based Compensation
The Company accounts for stock-based compensation for stock options and stock appreciation rights under the fair value method and uses the Black-Scholes-Merton model to estimate the value of such stock-based awards granted to its employees and non-executive directors. Expected volatility is based upon the historical volatility of a peer group for a period equal to the expected term, as the Company does not have adequate history to calculate its own volatility and believes the expected volatility will approximate the historical volatility of the peer group. The Company does not currently anticipate paying dividends. The expected term represents the period of time the grants are expected to be outstanding. The risk-free interest rate is based on the United States Treasury yield curve in effect at the time of the grant.
The Company values its stock-based compensation for restricted stock awards and restricted stock units based on the closing market price of the Company’s common stock on the date of grant. The Company accounts for its stock-based compensation for performance awards based on the closing market price of the Company’s common stock on the date of grant and for performance awards that include market conditions based upon the Monte Carlo simulation model.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities on our condensed consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made before lease commencement and initial direct costs and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components that the Company has elected to account for as single lease components.
Earnings Per Share
The calculation of earnings per share is based on the weighted average number of common shares or common stock equivalents outstanding during the applicable period. The dilutive effect of common stock equivalents is excluded from basic earnings per share and is included in the calculation of diluted earnings per share. Potentially dilutive securities include outstanding stock options and unvested restricted stock units, restricted stock and performance awards. Employee equity share options, restricted stock units, restricted stock, performance awards and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding are calculated based on the average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of benefits that would be recorded in additional paid-in capital when the award becomes deductible for tax purposes are assumed to be used to repurchase shares.
Equity Method Investments
The Company’s investments in and advances to unconsolidated affiliates are accounted for under the equity method if the Company exercises significant influence or has an investment in a limited partnership that is considered to be greater than minor. These investments and advances are classified as investments in and advances to unconsolidated affiliates on the accompanying consolidated balance sheets. The Company records its pro rata share of the earnings, adjusted for accretion of basis difference, of these investments in equity in earnings (losses) of unconsolidated affiliates on the accompanying consolidated statements of income. The Company reviews its investments in and advances to unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable.
Treasury Stock
The Company records treasury stock purchases under the cost method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If the Company reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded in retained earnings.
Recently Issued Accounting Standards
Accounting pronouncements adopted as of December 31, 2019
In February 2018, the FASB issued new accounting guidance that will allow a reclassification from accumulated other comprehensive income to retained earnings for “stranded income tax effects” resulting from the Tax Act. Because the income statement impact related to the reduction of the historical corporate income tax rate under the Tax Act is required to be included in income tax expense, the guidance acknowledges that the income tax effects of items within accumulated other comprehensive income (“stranded income tax effects”) do not reflect the appropriate income tax rate. The Company adopted this new accounting guidance on January 1, 2019 using the aggregate portfolio approach. The Company elected the option to not reclassify accumulated other comprehensive income to retained earnings for “stranded income tax effects” resulting from the Tax Act.
In August 2017, the FASB issued new accounting guidance that will allow more financial and nonfinancial hedging strategies to be eligible for hedge accounting. It also amends the presentation and disclosure requirements and changes how companies assess hedge effectiveness. It is intended to more closely align hedge accounting with risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The Company adopted this new accounting guidance on January 1, 2019. The adoption of this new accounting guidance did not have a material effect on the Company’s consolidated financial statements.
In February 2016, the FASB issued new accounting guidance that requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The Company adopted this new accounting guidance on January 1, 2019 and elected the practical expedients upon transition that retained the lease classification, initial direct costs and determination of whether contracts are or contain a lease, for any leases that existed prior to adoption of the new guidance. The Company also elected the transition method which allows for disclosures to be updated prospectively and prior periods to be presented in accordance with previous guidance. The adoption of this standard had a material impact on the Company’s condensed consolidated balance sheets but did not have a material impact on the Company’s condensed consolidated results of operations or cash flows.
Accounting pronouncements issued but not adopted as of December 31, 2019
In January 2020, the FASB issued new accounting guidance that states any equity security transitioning from the alternative method of accounting to the equity method, or vice versa, due to an observable transaction, will be remeasured immediately before the transition. In addition, the new accounting guidance clarifies the accounting for certain non-derivative forward contracts or purchased call options to acquire equity securities stating such instruments will be measured using the fair value principles before settlement or exercise. The new accounting guidance will be effective for the Company on January 1, 2021 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
In December 2019, the FASB issued new accounting guidance to clarify and simplify the accounting for income taxes. Changes under the new guidance includes eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new accounting guidance will be effective for the Company on January 1, 2021. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.
In August 2018, the FASB issued new accounting guidance that clarifies and aligns the accounting for implementation costs for hosting arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new accounting guidance will be effective for the Company on January 1, 2020. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued new accounting guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The new accounting guidance will be effective for the Company on January 1, 2021. Early adoption is permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued new accounting guidance that modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The new accounting guidance will be effective for the Company on January 1, 2020. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In January 2017, the FASB issued new accounting guidance that simplifies the measurement of goodwill by eliminating the step two impairment test. Step two measures a goodwill impairment loss by comparing the implied fair value of goodwill with the carrying amount of that goodwill. The new guidance requires a comparison of the Company’s fair value of a reporting unit with the carrying amount and the Company is required to recognize an impairment charge for the amount by which the carrying amount exceeds the fair value. The new accounting guidance will be effective for the Company on January 1, 2020. Based on current impairment test results, the Company does not expect a material effect on the Consolidated Financial Statements. However, the impact of the new accounting guidance will depend on the performance of the reporting units and the market conditions at the time of adoption.
In June 2016, the FASB issued a new accounting standard intended to provide financial statement users with more decision-useful information about expected credit losses and other commitments to extend credit held by the reporting entity. The standard
replaces the incurred loss impairment methodology in current GAAP with one that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard will be effective for the Company on January 1, 2020. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s consolidated financial statements.
- Revenues by Geography, Concentration of Credit Risk and Remaining Performance Obligations
The Company attributes revenues to geographical region based upon where the services are performed. The following tables represent revenues by geographical region and reportable segment for the years ended December 31, 2019, 2018 and 2017:
| Year Ended December 31, 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Technology & Analytics Solutions | Research & Development Solutions | Contract Sales & Medical Solutions | Total | ||||||||||||
| Revenues: | ||||||||||||||||
| Americas | $ | 2,370 | $ | 2,693 | $ | 399 | $ | 5,462 | ||||||||
| Europe and Africa | 1,543 | 1,734 | 200 | 3,477 | ||||||||||||
| Asia-Pacific | 573 | 1,361 | 215 | 2,149 | ||||||||||||
| Total revenues | $ | 4,486 | $ | 5,788 | $ | 814 | $ | 11,088 |
| Year Ended December 31, 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Technology & Analytics Solutions | Research & Development Solutions | Contract Sales & Medical Solutions | Total | ||||||||||||
| Revenues: | ||||||||||||||||
| Americas | $ | 2,087 | $ | 2,553 | $ | 358 | $ | 4,998 | ||||||||
| Europe and Africa | 1,520 | 1,693 | 235 | 3,448 | ||||||||||||
| Asia-Pacific | 530 | 1,219 | 217 | 1,966 | ||||||||||||
| Total revenues | $ | 4,137 | $ | 5,465 | $ | 810 | $ | 10,412 |
| Year Ended December 31, 2017 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Technology & Analytics Solutions | Research & Development Solutions | Contract Sales & Medical Solutions | Total | ||||||||||||
| Revenues: | ||||||||||||||||
| Americas | $ | 1,801 | $ | 2,375 | $ | 430 | $ | 4,606 | ||||||||
| Europe and Africa | 1,372 | 1,663 | 251 | 3,286 | ||||||||||||
| Asia-Pacific | 509 | 1,067 | 234 | 1,810 | ||||||||||||
| Total revenues | $ | 3,682 | $ | 5,105 | $ | 915 | $ | 9,702 |
No individual country, except for the United States and the United Kingdom, accounted for 10% or more of total revenues for the year ended December 31, 2019 and 2018. For the year ended December 31, 2019, revenues in the United States and the United Kingdom accounted for 45% and 10% of total revenue, respectively. For the year ended December 31, 2018, revenues in the United States and the United Kingdom accounted for 43% and 11% of total revenue, respectively.
No individual country, except for the United States, accounted for 10% or more of total revenues for the year ended December 31, 2017. For the year ended December 31, 2017, revenue in the United States accounted for 42% of total revenue.
No individual customer represented 10% or more of total revenues for the years ended December 31, 2019, 2018 or 2017.
Transaction Price Allocated to the Remaining Performance Obligations
As of December 31, 2019, approximately $20.0 billion of revenue is expected to be recognized in the future from remaining performance obligations. The Company expects to recognize revenue on approximately 35% of these remaining performance obligations over the next twelve months, with the balance recognized thereafter. The customer contract transaction price allocated to the remaining performance obligations differs from backlog in that it does not include wholly unperformed contracts under which the customer has a unilateral right to cancel the arrangement. The Company applied the practical expedient that permits the omission of prior period information about its remaining performance obligations. No other practical expedients were applied.
- Trade Accounts Receivable, Unbilled Services and Unearned Income
Trade accounts receivables and unbilled services consist of the following:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| Trade accounts receivable: | ||||||||
| Billed | $ | 1,312 | $ | 1,279 | ||||
| Unbilled services | 1,286 | 1,130 | ||||||
| Trade accounts receivable and unbilled services | 2,598 | 2,409 | ||||||
| Allowance for doubtful accounts | (16 | ) | (15 | ) | ||||
| Trade accounts receivable and unbilled services, net | $ | 2,582 | $ | 2,394 |
Unbilled services and unearned income was as follows:
| December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | Change | |||||||||
| Unbilled services | $ | 1,286 | $ | 1,130 | $ | 156 | ||||||
| Unearned income | (1,014 | ) | (1,007 | ) | (7 | ) | ||||||
| Net balance | $ | 272 | $ | 123 | $ | 149 |
Unbilled services, which is comprised of approximately equal parts of unbilled receivables and contract assets as of December 31, 2019, increased by $156 million as compared to December 31, 2018. Contract assets are unbilled services for which invoicing is based on the timing of certain milestones related to service contracts for clinical research whereas unbilled receivables are billable upon the passage of time. Unearned income increased by $7 million over the same period resulting in an increase of $149 million in the net balance of unbilled services and unearned income between December 31, 2019 and 2018. Growth in the net balance is driven by the difference in timing of revenue recognition in accordance with ASC 606, Revenue from Contracts with Customers, related to the Company’s Research & Development Solutions contracts (which is based on the percentage of costs incurred) versus the timing of invoicing, which is based on certain milestones.
Bad debt expense recognized on the Company’s receivables and unbilled services was de minimis for the years ended December 31, 2019, 2018 and 2017.
- Investments
Debt, Equity and Other Securities
Current
The Company’s short-term investments in debt, equity and other securities consist primarily of trading investments in mutual funds and are measured at fair value with realized and unrealized gains and losses recorded in other expense (income), net on the accompanying consolidated statements of income.
Long-term
ASU 2016-01 became effective on January 1, 2018. ASU 2016-01 requires entities to measure equity investments (except those accounted for under the equity method, those that result in consolidation of the investee and certain other investments) at fair value and recognize any changes in fair value in net income at the end of each reporting period. Entities can no longer classify equity investments as trading or available for sale and can no longer recognize unrealized holding gains and losses on equity securities classified previously as available for sale in other comprehensive income (loss). Entities can no longer use the cost method of accounting as it was previously applied for equity securities that do not have readily determinable fair values.
For equity investments that do not have readily determinable fair values and do not qualify for the existing practical expedient in Accounting Standards Codification (“ASC”) 820 “Fair Value Measurement” (“ASC 820”) to estimate fair value using the net asset value per share of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer at each reporting period.
During the fourth quarter of 2018, the Company recorded the cumulative adoption of ASU 2016-01 within stockholders’ equity.
Unconsolidated Affiliates
The Company accounts for its investments in and advances to unconsolidated affiliates under the equity method of accounting and records its pro rata share of its losses or earnings from these investments in equity in earnings (losses) of unconsolidated affiliates. The following is a summary of the Company’s investments in and advances to unconsolidated affiliates:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| NovaQuest Pharma Opportunities Fund III, L.P. (“NQ Fund III”) | $ | 19 | $ | 30 | ||||
| NovaQuest Pharma Opportunities Fund IV, L.P. (“NQ Fund IV”) | 8 | 13 | ||||||
| NovaQuest Pharma Opportunities Fund V, L.P. (“NQ Fund V”) | 13 | 14 | ||||||
| NovaQuest Private Equity Fund I, L.P. (“NQ PE Fund I”) | 4 | 4 | ||||||
| CenduitTM (“Cenduit”) | — | 4 | ||||||
| NostraData Pty Ltd. (“NostraData”) | 8 | 7 | ||||||
| Inteliquet (“Inteliquet”) | 18 | 20 | ||||||
| Helparound ("Helparound") | 4 | — | ||||||
| Other | 13 | 9 | ||||||
| $ | 87 | $ | 101 |
Variable Interest Entities
As of December 31, 2019, the Company’s investments in unconsolidated variable interest entities (“VIEs”) and its estimated maximum exposure to loss were as follows:
| (in millions) | Investments in Unconsolidated VIEs | Maximum Exposure to Loss | ||||||
|---|---|---|---|---|---|---|---|---|
| NQ Fund III | $ | 19 | $ | 25 | ||||
| NQ Fund IV | 8 | 10 | ||||||
| NQ Fund V | 13 | 44 | ||||||
| NQ PE Fund I | 4 | 7 | ||||||
| Pappas Life Science Ventures V, L.P. | 2 | 5 | ||||||
| $ | 46 | $ | 91 |
- Derivatives
Foreign Exchange Risk Management
The Company transacts business in more than 100 countries and is subject to risks associated with fluctuating foreign exchange rates. Accordingly, the Company enters into foreign currency forward contracts to (i) hedge certain forecasted foreign exchange cash flows arising from service contracts (“Service Contract Hedging”) and (ii) hedge non-United States dollar anticipated intercompany royalties (“Royalty Hedging”). It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to reduce earnings and cash flow volatility associated with foreign exchange rate movements. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the British Pound, the Japanese Yen, the Swiss Franc and the Canadian dollar.
Service Contract Hedging and Royalty Hedging contracts are designated as cash flow hedges and are carried at fair value, with changes in the fair value recorded to AOCI. The change in fair value is reclassified from AOCI to earnings in the period in which the hedged transaction occurs. These contracts have various expiration dates through November 2020.
As of December 31, 2019 and 2018, the Company had open Service Contract Hedging and Royalty Hedging contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2020 and 2019 with notional amounts totaling $148 million and $202 million, respectively. For accounting purposes these hedges are considered highly effective. As of December 31, 2019 and 2018, the Company had recorded gross unrealized gains (losses) of $4 million and less than ($1) million and $5 million and ($3) million, respectively, related to these contracts. Upon expiration of the hedge instruments in 2019, the Company reclassified the unrealized holding gains and losses on the derivative instruments included in AOCI into earnings. The unrealized gains (losses) are included in other current assets and liabilities on the accompanying consolidated balance sheets as of December 31, 2019 and 2018.
Interest Rate Risk Management
The Company purchases interest rate caps and has entered into interest rate swap agreements for purposes of managing its exposure to interest rate fluctuations.
In April 2014, IMS Health entered into United States dollar and Euro denominated interest rate swap agreements (“2014 Swaps”) to hedge interest rate exposure on notional amounts of approximately $600 million of its borrowings. The 2014 Swaps commenced between April and June 2014 and expire at various times through March 2021. As of December 31, 2019, only one of the 2014 Swaps remain unexpired, with a notional value of $325 million. On this agreement, the Company pays a fixed rate of 1.6% and receives a variable rate of interest equal to the greater of three-month Euro Interbank Offered Rate (“EURIBOR”) or the equivalent to LIBOR, and 1%. During 2017, the 2014 Swaps ceased to be considered highly effective for accounting purposes and as such, the Company discontinued hedge accounting and prospective changes in the fair value of the Swaps are recognized in earnings.
On June 3, 2015, the Company entered into seven forward starting interest rate swaps (“2015 Swaps”) in an effort to limit its exposure to changes in the variable interest rate on its Senior Secured Credit Facilities (as defined below). Interest on the swaps began accruing on June 30, 2016, and the interest rate swaps expire at various times through March 2020. As of December 31, 2019, only three of the 2015 Swaps were still outstanding. The Company pays a fixed rate of 2.1% and receives a variable rate of interest equal to the three-month LIBOR on these agreements.
The critical terms of the 2015 Swaps are substantially the same as the underlying borrowings. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Company’s interest payments and for accounting purposes are considered highly effective. As such, the effective portion of the hedges is recorded as unrealized gains (losses) on derivatives included in AOCI and the ineffective portion of the hedges is recognized in earnings.
On July 19, 2018, the Company entered into two forward starting interest rate swaps (“2018 Swaps”) with a total notional value of $500 million in an effort to limit its exposure to changes in the variable interest rate on its Senior Secured Credit Facilities (as defined below). Interest on the 2018 Swaps began accruing on June 28, 2019 and the interest rate swaps expire on June 28, 2024. The Company pays a fixed rate of 3.0% and receives a variable rate of interest equal to the three-month LIBOR on the 2018 Swaps.
The fair value of these interest rate swaps represents the present value of the anticipated net payments the Company will make to the counterparty, which, when they occur, are reflected as interest expense on the consolidated statements of income. These interest rate swaps will result in a total debt mix of approximately 59% fixed rate debt and 41% variable rate debt.
Net Investment Risk Management
The Company designates its foreign currency denominated debt as a hedge of its net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the United States dollar, which is accounted for as a cash flow hedge. As of December 31, 2019, these borrowings (net of original issue discount) were €5,273 million ($5,915 million). The effective portion of foreign exchange gains or losses on the remeasurement of the debt is recognized in the cumulative translation adjustment component of AOCI with the related offset in long-term debt. Those amounts would be reclassified from AOCI to earnings upon the sale or substantial liquidation of these net investments. The amount of foreign exchange gains related to the net investment hedge included in the cumulative translation adjustment component of AOCI for the year ended December 31, 2019 was $97 million.
The fair values of the Company’s derivative instruments and the line items on the accompanying consolidated balance sheets to which they were recorded are summarized in the following table:
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Balance Sheet Classification | Assets | Liabilities | Notional | Assets | Liabilities | Notional | |||||||||||||||||||
| Derivatives designated as hedging instruments: | ||||||||||||||||||||||||||
| Foreign exchange forward contracts | Other current assets and liabilities | $ | 4 | — | $ | 148 | $ | 5 | $ | 3 | $ | 202 | ||||||||||||||
| Interest rate swaps | Other assets and liabilities | — | 27 | 875 | 3 | 9 | 890 | |||||||||||||||||||
| Interest rate caps | Deposits and other assets | — | — | — | 1 | — | 700 | |||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Interest rate swaps | Other liabilities | — | 3 | 325 | — | 5 | 432 | |||||||||||||||||||
| Total derivatives | $ | 4 | $ | 30 | $ | 9 | $ | 17 |
The pre-tax effect of the Company’s cash flow hedging instruments on other comprehensive (loss) income is summarized in the following table:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Foreign exchange forward contracts | $ | 2 | $ | (9 | ) | $ | (5 | ) | ||||
| Interest rate derivatives | (22 | ) | (6 | ) | 9 | |||||||
| Total | $ | (20 | ) | $ | (15 | ) | $ | 4 |
The Company expects approximately $3 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at December 31, 2019 to be reclassified into earnings within the next twelve months. The total amount of cash flow hedge effect on the income statement is immaterial for year ended December 31, 2019.
- Fair Value Measurements
The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| • | Level 1—Quoted prices in active markets for identical assets or liabilities. |
|---|
| • | Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
|---|
| • | Level 3—Unobservable inputs that are supported by little or no market activity. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
|---|
The carrying values of cash, cash equivalents, accounts receivable and accounts payable approximated their fair values at December 31, 2019 and 2018 due to their short-term nature. At December 31, 2019 and 2018, the fair value of total debt approximated $11,925 million and $10,850 million, respectively, as determined under Level 1 and Level 2 measurements for these financial instruments.
Recurring Fair Value Measurements
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured and reported at fair value on a recurring basis as of December 31, 2019:
| (in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||||||||||
| Marketable securities | $ | 79 | $ | — | $ | — | $ | 79 | ||||||||
| Derivatives | — | 4 | — | 4 | ||||||||||||
| Total | $ | 79 | $ | 4 | $ | — | $ | 83 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | — | $ | 30 | $ | — | $ | 30 | ||||||||
| Contingent consideration | — | — | 113 | 113 | ||||||||||||
| Total | $ | — | $ | 30 | $ | 113 | $ | 143 |
The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured and reported at fair value on a recurring basis as of December 31, 2018:
| (in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets: | ||||||||||||||||
| Marketable securities | $ | 63 | $ | — | $ | — | $ | 63 | ||||||||
| Derivatives | — | 9 | — | 9 | ||||||||||||
| Total | $ | 63 | $ | 9 | $ | — | $ | 72 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | — | $ | 17 | $ | — | $ | 17 | ||||||||
| Contingent consideration | — | — | 123 | 123 | ||||||||||||
| Total | $ | — | $ | 17 | $ | 123 | $ | 140 |
Below is a summary of the valuation techniques used in determining fair value:
Marketable securities—The Company values trading and available-for-sale securities using the quoted market value of the securities held.
Derivatives—Derivatives consist of foreign exchange contracts and interest rate swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates or using other observable inputs. The fair value of the interest rate swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities or using market inputs with mid-market pricing as a practical expedient for bid-ask spread.
Contingent consideration—The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Assumptions used to estimate the fair value of contingent consideration include various financial metrics (revenue performance targets and operating forecasts) and the probability of achieving the specific targets.
The following table summarizes the changes in Level 3 financial assets and liabilities measured on a recurring basis for the year ended December 31:
| Contingent Consideration | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance as of January 1 | $ | 123 | $ | 69 | $ | 18 | ||||||
| Business combinations | 40 | 53 | 57 | |||||||||
| Contingent consideration paid | (46 | ) | (24 | ) | (4 | ) | ||||||
| Revaluations included in earnings and foreign currency translation adjustments | (4 | ) | 25 | (2 | ) | |||||||
| Balance as of December 31 | $ | 113 | $ | 123 | $ | 69 |
The current portion of contingent consideration is included within accrued expenses and the long-term portion is included within other liabilities on the accompanying consolidated balance sheets. Revaluations of contingent consideration are recognized in other expense (income), net on the accompanying consolidated statements of income.
Non-recurring Fair Value Measurements
Certain assets are carried on the accompanying consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include equity investments that do not have readily determinable fair values that are assessed for impairment quarterly or annually and when a triggering event occurs, and goodwill and identifiable intangible assets that are tested for impairment annually and when a triggering event occurs. See Note 4 and 8 for additional information.
As of December 31, 2019, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaled approximately $17,808 million and were identified as Level 3. These assets are comprised of cost and equity method investments of $135 million, goodwill of $12,159 million and other identifiable intangibles, net of $5,514 million.
Cost and Equity Method Investments—The inputs available for valuing investments in non-public portfolio companies are generally not easily observable. The valuation of non-public investments requires judgment by the Company due to the absence of quoted market values, inherent lack of liquidity and the long-term nature of such assets. When a triggering event occurs, the Company considers a wide range of available market data when assessing the estimated fair value. Such market data includes observations of the trading multiples of public companies considered comparable to the private companies being valued as well as publicly disclosed merger transactions involving comparable private companies. In addition, valuations are adjusted to account for company-specific issues, the lack of liquidity inherent in a non-public investment and the fact that comparable public companies are not identical to the companies being valued. Such valuation adjustments are necessary because in the absence of a committed buyer and completion of due diligence similar to that performed in an actual negotiated sale process, there may be company-specific issues that are not fully known that may affect value. Further, a variety of additional factors are reviewed by the Company, including, but not limited to, financing and sales transactions with third parties, current operating performance and future expectations of the particular investment, changes in market outlook and the third-party financing environment. Because of the inherent uncertainty of valuations, estimated valuations may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
Goodwill—Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets resulting from business combinations. The Company performs a qualitative analysis to determine whether it is more likely than not that the estimated fair value of a reporting unit is less than its book value. This includes a qualitative analysis of macroeconomic conditions, industry and market considerations, internal cost factors, financial performance, fair value history and other company specific events. If this qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the book value for the respective reporting unit, the Company applies a two-step impairment test in which the Company determines whether the estimated fair value of the reporting unit is in excess of its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the estimated fair value of the reporting unit, the Company performs the second step of the impairment test to determine the implied estimated fair value of the reporting unit’s goodwill. The Company determines the implied estimated fair value of goodwill by determining the present value of the estimated future cash flows for each reporting unit and comparing to the net book value of assets and liabilities exclusive of goodwill. See Note 8 for additional information.
Definite-lived Intangible Assets—If a triggering event occurs, the Company determines the estimated fair value of definite-lived intangible assets by determining the present value of the expected cash flows. See Note 8 for additional information.
Indefinite-lived Intangible Asset—If a qualitative analysis indicates that it is more likely than not that the estimated fair value is less than the carrying value of an indefinite-lived intangible asset, the Company determines the estimated fair value of the indefinite-lived intangible asset (trade name) by determining the present value of the estimated royalty payments on an after-tax basis that it would be required to pay the owner for the right to use such trade name. If the carrying amount exceeds the estimated fair value, an impairment loss is recognized in an amount equal to the excess.
- Property and Equipment
The major classes of property and equipment were as follows:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| Land, buildings and leasehold improvements | $ | 331 | $ | 326 | ||||
| Equipment | 570 | 521 | ||||||
| Furniture and fixtures | 81 | 82 | ||||||
| Transportation equipment | 73 | 72 | ||||||
| Property and equipment, gross | 1,055 | 1,001 | ||||||
| Less accumulated depreciation | (597 | ) | (567 | ) | ||||
| Property and equipment, net | $ | 458 | $ | 434 |
Property and equipment depreciation expense was as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Depreciation expense | $ | 128 | $ | 125 | $ | 125 |
- Goodwill and Identifiable Intangible Assets
As of December 31, 2019, the Company has approximately $5,514 million of identifiable intangible assets, of which approximately $18 million, relating to a trade name, is deemed to be indefinite-lived and, accordingly, is not being amortized. Amortization expense associated with identifiable definite-lived intangible assets was as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Amortization expense | $ | 1,074 | $ | 1,016 | $ | 886 |
Estimated amortization expense for existing identifiable intangible assets is expected to be approximately $1,072 million, $801 million, $462 million, $386 million and $317 million for the years ending December 31, 2020, 2021, 2022, 2023 and 2024, respectively. Estimated amortization expense can be affected by various factors, including future acquisitions or divestitures of service and/or licensing and distribution rights or impairments.
The following is a summary of identifiable intangible assets:
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | ||||||||||||||||||
| Definite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Client relationships and backlog | $ | 4,809 | $ | (1,303 | ) | $ | 3,506 | $ | 4,620 | $ | (863 | ) | $ | 3,757 | ||||||||||
| Trademarks, trade names and other | 528 | (158 | ) | 370 | 526 | (108 | ) | 418 | ||||||||||||||||
| Databases | 1,836 | (1,185 | ) | 651 | 1,828 | (823 | ) | 1,005 | ||||||||||||||||
| Software and related assets | 1,620 | (665 | ) | 955 | 1,279 | (543 | ) | 736 | ||||||||||||||||
| Non-compete agreements | 32 | (18 | ) | 14 | 27 | (10 | ) | 17 | ||||||||||||||||
| $ | 8,825 | $ | (3,329 | ) | $ | 5,496 | $ | 8,280 | $ | (2,347 | ) | $ | 5,933 | |||||||||||
| Indefinite-lived identifiable intangible assets: | ||||||||||||||||||||||||
| Trade names | $ | 18 | $ | — | $ | 18 | $ | 18 | $ | — | $ | 18 |
The following is a summary of goodwill by segment for the years ended December 31, 2019 and 2018:
| (in millions) | Technology & Analytics Solutions | Research & Development Solutions | Contract Sales & Medical Solutions | Consolidated | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance as of December 31, 2017 | 10,348 | 1,385 | 117 | 11,850 | ||||||||||||
| Business combinations | 135 | 49 | 18 | 202 | ||||||||||||
| Impact of foreign currency fluctuations and other | (244 | ) | (7 | ) | (1 | ) | (252 | ) | ||||||||
| Balance as of December 31, 2018 | 10,239 | 1,427 | 134 | 11,800 | ||||||||||||
| Business combinations | 216 | 215 | 5 | 436 | ||||||||||||
| Impact of foreign currency fluctuations and other | (81 | ) | 4 | — | (77 | ) | ||||||||||
| Balance as of December 31, 2019 | $ | 10,374 | $ | 1,646 | $ | 139 | $ | 12,159 |
There were no goodwill impairment losses as of December 31, 2019 or 2018.
- Accrued Expenses
Accrued expenses consist of the following:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| Compensation, including bonuses, fringe benefits and payroll taxes | $ | 687 | $ | 660 | ||||
| Restructuring | 67 | 74 | ||||||
| Interest | 53 | 45 | ||||||
| Client contract related | 763 | 678 | ||||||
| Professional fees | 80 | 91 | ||||||
| Contingent consideration and deferred purchase price | 52 | 90 | ||||||
| Other | 235 | 220 | ||||||
| $ | 1,937 | $ | 1,858 |
- Credit Arrangements
The following is a summary of the Company’s revolving credit facilities at December 31, 2019:
| Facility | Interest Rates | |
|---|---|---|
| $1,500 million (revolving credit facility) | LIBOR in the relevant currency borrowed plus a margin of 1.50% at December 31, 2019 | |
| $25 million (receivables financing facility) | LIBOR Market Index Rate (1.76% at December 31, 2019) plus 0.90% | |
| £10 million (approximately $13 million) general banking facility | Bank’s base rate of 0.75% at December 31, 2019 plus 1% |
The following table summarizes the Company’s debt at the dates indicated:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (dollars in millions) | 2019 | 2018 | ||||||
| Senior Secured Credit Facilities: | ||||||||
| Term A Loan due 2023—U.S. Dollar LIBOR at average floating rates of 3.44% | $ | 770 | $ | 812 | ||||
| Term A Loan due 2023—Euro LIBOR at average floating rates of 1.50% | 387 | 416 | ||||||
| Term B Loan due 2024—U.S. Dollar LIBOR at average floating rates of 3.69% | 535 | 535 | ||||||
| Term B Loan due 2024—Euro LIBOR at average floating rates of 2.00% | 1,306 | 1,346 | ||||||
| Term B Loan due 2025—U.S. Dollar LIBOR at average floating rates of 3.69% | 733 | 741 | ||||||
| Term B Loan due 2025—U.S. Dollar LIBOR at average floating rates of 3.69% | 936 | 945 | ||||||
| Term B Loan due 2025—Euro LIBOR at average floating rates of 2.00% | 644 | 664 | ||||||
| Revolving Credit Facility due 2023: | ||||||||
| U.S. Dollar denominated borrowings—U.S. Dollar LIBOR at average floating rates of 3.26% | 154 | 620 | ||||||
| Japanese Yen denominated borrowings—Japanese Yen LIBOR at average floating rates of 1.50% | 212 | — | ||||||
| 5.0% Senior Notes due 2027—U.S. Dollar denominated | 1,100 | — | ||||||
| 5.0% Senior Notes due 2026—U.S. Dollar denominated | 1,050 | 1,050 | ||||||
| 2.875% Senior Notes due 2025—Euro denominated | 471 | 481 | ||||||
| 3.25% Senior Notes due 2025—Euro denominated | 1,598 | 1,631 | ||||||
| 3.5% Senior Notes due 2024—Euro denominated | 701 | 715 | ||||||
| 4.875% Senior Notes due 2023—U.S. Dollar denominated | — | 800 | ||||||
| 2.25% Senior Notes due 2028—Euro denominated | 808 | — | ||||||
| Receivables financing facility due 2022—U.S. Dollar LIBOR at average floating rates of 2.66% | 300 | 300 | ||||||
| Principal amount of debt | 11,705 | 11,056 | ||||||
| Less: unamortized discount and debt issuance costs | (60 | ) | (49 | ) | ||||
| Less: current portion | (100 | ) | (100 | ) | ||||
| Long-term debt | $ | 11,545 | $ | 10,907 |
Contractual maturities of long-term debt at December 31, 2019 are as follows:
| (in millions) | ||||
|---|---|---|---|---|
| 2020 | $ | 100 | ||
| 2021 | 100 | |||
| 2022 | 400 | |||
| 2023 | 1,372 | |||
| 2024 | 2,511 | |||
| Thereafter | 7,222 | |||
| $ | 11,705 |
At December 31, 2019, there were bank guarantees totaling approximately £0.8 million (approximately $1.1 million) issued against the availability of the general banking facility with a European headquartered bank through their operations in the United Kingdom.
Senior Secured Credit Agreement and Senior Notes
2019 Financing Transactions
At December 31, 2019, the Company’s Fourth Amended and Restated Credit Agreement, as amended (the “Credit Agreement”) provided financing through several senior credit facilities (collectively, the “Senior Secured Credit Facilities”) of approximately $6,811 million, which consisted of $5,677 million principal amounts of debt outstanding (as detailed in the table above), $3 million of issued standby letters of credit and $1,131 million of available borrowing capacity on the $1,500 million revolving credit facility. On December 18, 2019, the Company entered into Amendment No. 6 to the Credit Agreement; pursuant to the Amendment, that amended the interest rate applicable to the Issuer’s Term B Loan due 2024—U.S. Dollar LIBOR and Term B Loan due 2025—U.S. Dollar LIBOR was reduced to LIBOR plus 1.75% per annum and the LIBOR floor applicable to the Issuer’s Term B-1 Dollar Loans was reduced to 0% per annum. On August 9, 2019, the Company entered into Amendment No. 5 to the Credit Agreement that repriced the Euro LIBOR floor applicable to the Euro-denominated Term B Loan due 2024 and Term B Loan due 2025 to 0% per annum.
On August 13, 2019, IQVIA Inc. (the “Issuer”), a wholly owned subsidiary of the Company, completed the issuance and sale of €720 million in gross proceeds of the Issuer’s 2.25% Senior Notes due 2028 (the “2.25% Notes”). The 2.25% Notes were issued pursuant to an Indenture, dated August 13, 2019, among the Issuer, U.S. Bank National Association, as trustee of the 2.25% Notes, and certain subsidiaries of the Issuer as guarantors. The net proceeds from the notes offering, together with available cash, were used to redeem the Issuer’s outstanding 4.875% senior notes due 2023 (the “4.875% Notes”), and to pay fees and expenses related to the notes offering. On July 29, 2019, the Issuer issued a conditional notice of redemption with respect to the 4.875% Notes, for a total redemption price equal to the sum of the principal amount of the 4.875% Notes, accrued and unpaid interest on the 4.875% Notes to the redemption date and the applicable redemption premium. The Issuer’s obligations with respect to the 4.875% Notes were discharged on August 13, 2019. The 2.25% Notes are unsecured obligations of the Issuer, will mature on January 15, 2028 and bear interest at the rate of 2.25% per annum, with interest payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2020. The Issuer may redeem the Notes prior to their final stated maturity, subject to a customary make-whole premium, at any time prior to July 15, 2022 (subject to a customary “equity claw” redemption right) and thereafter subject to a redemption premium declining from 101.125% to 0.000%.
On May 10, 2019, the Issuer completed the issuance and sale of $1.1 billion in gross proceeds of the Issuer’s 5.00% Senior Notes due 2027 (the “5.00% Notes”). The 5.00% Notes were issued pursuant to an Indenture, dated May 10, 2019, among the Issuer, U.S. Bank National Association, as trustee of the 5.00% Notes, and certain subsidiaries of the Issuer as guarantors. The net proceeds from this notes offering were used to repay existing borrowings under the Issuer’s revolving credit facility, to pay fees and expenses related to the notes offering and for other general corporate purposes. The 5.00% Notes are unsecured obligations of the Issuer, will mature on May 15, 2027 and bear interest at the rate of 5.00% per annum, with interest payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 2019. The Issuer may redeem the 5.00% Notes prior to their final stated maturity, subject to a customary make-whole premium, at any time prior to May 15, 2022 (subject to a customary “equity claw” redemption right) and thereafter subject to a redemption premium declining from 2.500% to 0.000%.
2018 Financing Transactions
At December 31, 2018, the Company’s 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 amounts of debt outstanding (as detailed in the table above) and $880 million of available borrowing capacity on the $1,500 million revolving credit facility that expires in 2023.
On June 11, 2018, the Company entered into Amendment No. 4 to the Credit Agreement (“Amendment No. 4”) that amended the terms of the existing term A loans and revolving credit facility to extend the maturity from 2021 to 2023 and reduce the applicable interest rate from LIBOR plus a margin ranging from 1.75% to 2.50% to LIBOR plus a margin ranging from 1.25% to 2.00%. In connection with Amendment No. 4, the Company recognized a $2 million loss on extinguishment of debt, which includes fees and related expenses. The amendments with respect to the revolving credit facility and the term A loans became effective on June 13, 2018.
Under Amendment No. 4, the Company 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.
On April 6, 2018, the Company entered into Amendment No. 3 to the Credit Agreement that increased the amount of commitments available to the Company and certain of its subsidiaries to $1,500 million under the revolving credit facility. No other terms of the Credit Agreement were amended.
Receivables Financing Facility
On December 19, 2019, the Company amended its receivables financing facility to extend the term of the facility to December 19, 2022.
On December 5, 2014, the Company entered into a four-year arrangement to securitize certain of its accounts receivable. Under the receivables financing facility, certain of the Company’s accounts receivable are sold on a non-recourse basis by certain of its consolidated subsidiaries to another of its consolidated subsidiaries, a bankruptcy-remote special purpose entity (“SPE”). The SPE obtained a term loan and revolving loan commitment from a third-party lender, secured by liens on the assets of the SPE, to finance the purchase of the accounts receivable, which includes a $275 million term loan and a $25 million revolving loan commitment. The revolving loan commitment may be increased by an additional $35 million as amounts are repaid under the term loan. The Company has guaranteed the performance of the obligations of existing and future subsidiaries that sell and service the accounts receivable under the receivables financing facility. The assets of the SPE are not available to satisfy any of the Company’s obligations or any obligations of its subsidiaries. As of December 31, 2019, no additional amounts of revolving loans were available under the receivables financing facility.
Restrictive Covenants
The Company’s debt agreements provide for certain covenants and events of default customary for similar instruments, including a covenant not to exceed a specified ratio of consolidated senior secured net indebtedness to Consolidated EBITDA, as defined in the Credit Agreement and a covenant to maintain a specified minimum interest coverage ratio. If an event of default occurs under any of the Company’s or the Company’s subsidiaries’ financing arrangements, the creditors under such financing arrangements will be entitled to take various actions, including the acceleration of amounts due under such arrangements, and in the case of the lenders under the Credit Agreement, other actions permitted to be taken by a secured creditor. The Company’s long-term debt arrangements contain usual and customary restrictive covenants that, among other things, place limitations on the Company’s ability to declare dividends. At December 31, 2019, the Company was in compliance in all material respects with the financial covenants under the Company’s financing arrangements.
- Leases
The Company has operating leases for corporate offices, datacenters, motor vehicles and certain equipment, many of which contain renewal and escalation clauses. The leases expire at various dates through 2029 with options to cancel certain leases at various intervals. In determining the lease term at lease commencement, the Company includes the noncancellable term and the periods which the Company deems it is reasonably certain to exercise or not to exercise a renewal or cancellation option. As of December 31, 2019, the Company has additional operating leases, primarily for corporate offices, that have not yet commenced of $7 million. These operating leases will commence in the first quarter of 2020 with lease terms through 2025.
The components of lease expense were as follows:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (in millions) | Classification | 2019 | ||||
| Operating lease cost (1) | Selling, general and administrative expenses | $ | 193 | |||
| Total lease cost | $ | 193 |
| (1) | Includes variable lease costs, which are immaterial. |
|---|
Rental expenses under lease agreements were $197 million and $197 million in 2018 and 2017, respectively.
Other information related to leases was as follows:
| (in millions) | Year Ended December 31, 2019 | |||
| Supplemental Cash Flow: | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 195 | ||
| Right-of-use assets obtained in exchange for lease obligations: | ||||
| Operating leases | $ | 96 | ||
| Weighted Average Remaining Lease Term: | ||||
| Operating leases | 5.01 years | |||
| Weighted Average Discount Rate: | ||||
| Operating leases | 4.22 | % |
Future minimum lease payments under non-cancellable leases as of December 31, 2019 were as follows:
| (in millions) | Operating Leases | |||
|---|---|---|---|---|
| 2020 | $ | 160 | ||
| 2021 | 129 | |||
| 2022 | 105 | |||
| 2023 | 81 | |||
| 2024 | 54 | |||
| Thereafter | 86 | |||
| Total future minimum lease payments | 615 | |||
| Less imputed interest | (66 | ) | ||
| Total | $ | 549 | ||
| Reported as of December 31, 2019: | ||||
| Other current liabilities | $ | 153 | ||
| Operating lease liabilities | 396 | |||
| Total | $ | 549 |
The Company elected the alternative modified transition method and as such, included the following prior period information as previously disclosed in accordance with ASC 840.
The following is a summary of future minimum payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year at December 31, 2018:
| (in millions) | Operating Leases | |||
|---|---|---|---|---|
| 2019 | $ | 167 | ||
| 2020 | 136 | |||
| 2021 | 108 | |||
| 2022 | 90 | |||
| 2023 | 69 | |||
| Thereafter | 119 | |||
| Total minimum lease payments | $ | 689 |
- Contingencies
The Company and its subsidiaries are involved in legal and tax proceedings, claims and litigation arising in the ordinary course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where management currently believes it is probable that the Company will incur a loss and that the probable loss or range of loss can be reasonably estimated, the Company has recorded reserves in the consolidated financial statements based on its best estimates of such loss. In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any.
However, even in many instances where the Company has recorded an estimated liability, the Company is unable to predict with certainty the final outcome of the matter or whether resolution of the matter will materially affect the Company’s results of operations, financial position or cash flows. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.
The Company routinely enters into agreements with third parties, including our clients and suppliers, all in the normal course of business. In these agreements, the Company sometimes agrees to indemnify and hold harmless the other party for any damages such other party may suffer as a result of potential intellectual property infringement and other claims. The Company has not accrued a liability with respect to these matters generally, as the exposure is considered remote.
Based on its review of the latest information available, management does not expect the impact of pending legal and tax proceedings, claims and litigation, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or financial position. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which it is resolved. The following is a summary of certain legal matters involving the Company.
On February 13, 2014, a group of approximately 1,200 medical doctors and 900 private individuals filed a civil lawsuit with the Seoul Central District Court against IMS Korea and two other defendants, KPA and the Korean Pharmaceutical Information Center (“KPIC”). The civil lawsuit alleges KPA and KPIC collected their personal information in violation of applicable privacy laws without the necessary consent through a software system installed on pharmacy computer systems in Korea, and that personal information was transferred to IMS Korea and sold to pharmaceutical companies. On September 11, 2017, the District Court issued a final decision that the encryption in use by the defendants since June 2014 was adequate to meet the requirements of the Korean Personal Information Privacy Act (“PIPA”) and the sharing of non-identified information for market research purposes was allowed under PIPA. The District Court also found an earlier version of encryption was insufficient to meet PIPA requirements, but no personal data had been leaked or re-identified. The District Court did not award any damages to plaintiffs. Approximately 280 medical doctors and 200 private individuals appealed the District Court decision. On May 3, 2019, the Appellate Court issued a final decision in which it concluded all of the non-identified information transferred by KPIC to IMS Korea for market research purposes violated PIPA, but did not award any damages to plaintiffs (affirming the District Court’s decision on this latter point). On May 24, 2019, approximately 247 plaintiffs appealed the Appellate Court’s decision to the Supreme Court. The Company believes the appeal is without merit and intends to vigorously defend its position.
On July 23, 2015, indictments were issued by the Seoul Central District Prosecutors’ Office in South Korea against 24 individuals and companies alleging improper handling of sensitive health information in violation of, among others, South Korea’s Personal Information Protection Act. IMS Korea and two of its employees were among the individuals and organizations indicted. Although there is no assertion that IMS Korea used patient identified health information in any of its offerings, prosecutors allege that certain of IMS Korea’s data suppliers should have obtained patient consent when they converted sensitive patient information into non-identified data and that IMS Korea had not taken adequate precautions to reduce the risk of re-identification. On February 14, 2020, the Seoul Central District Court acquitted IMS Korea and its two employees of the charges of improper handling of sensitive health information.
On January 10, 2017, Quintiles IMS Health Incorporated and IMS Software Services Ltd. (collectively “IQVIA Parties”), filed a lawsuit in the U.S. District Court for the District of New Jersey against Veeva Systems, Inc. (“Veeva”) alleging Veeva unlawfully used IQVIA Parties intellectual property to improve Veeva data offerings, to promote and market Veeva data offerings and to improve Veeva technology offerings. IQVIA Parties seek injunctive relief, appointment of a monitor, the award of compensatory and punitive damages and reimbursement of all litigation expenses, including reasonable attorneys’ fees and costs. On March 13, 2017, Veeva filed counterclaims alleging anticompetitive business practices in violation of the Sherman Act and state laws. Veeva claims damages in excess of $200 million, and is seeking punitive damages and litigation costs, including attorneys’ fees. We believe the counterclaims are without merit, reject all counterclaims raised by Veeva and intend to vigorously defend IQVIA Parties’ position and pursue our claims against Veeva. Since the initial filings, the parties have filed additional litigations against each other, primarily concerning the use of IQVIA data with various other Veeva products. The parties are currently engaging in the discovery process.
- Stockholders’ Equity
Preferred Stock
The Company is authorized to issue 1.0 million shares of preferred stock, $0.01 per share par value. No shares of preferred stock were issued and outstanding as of December 31, 2019 or 2018.
Equity Repurchase Program
On February 13, 2019, the Company’s Board of Directors (the “Board”) increased the stock repurchase authorization under a previously approved equity repurchase program (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.
On October 30, 2013, the Board first approved the Repurchase Program, authorizing the repurchase of up to $125 million of either the Company’s common stock or vested in-the-money employee stock options, or a combination thereof. The Board increased the stock repurchase authorization under the Repurchase Program with respect to the repurchase of its common stock by $600 million, $1.5 billion, $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 the Company to repurchase any particular amount of common stock or vested in-the-money employee stock options, 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.
2019 Offerings
In March 2019, the Company completed an underwritten secondary public offering of 5,000,000 shares of its common stock held by certain of the Company’s remaining private equity sponsors (the “Selling Stockholders”), of which the Company repurchased 1,000,000 shares for an aggregate purchase price of approximately $140.8 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the Selling Stockholders. Pursuant to an agreement with the underwriters, the Company’s per-share purchase price for repurchased shares was the same as the per share purchase price payable by the underwriters to the Selling Stockholders.
2018 Offerings
In November 2018, the Company completed an underwritten secondary public offering of 6,000,000 shares of its common stock held by certain of the Company’s principal stockholders (the “November 2018 Selling Stockholders”), of which the Company repurchased 2,000,000 shares for an aggregate purchase price of approximately $247 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the November 2018 Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the November 2018 Selling Stockholders.
In June 2018, the Company completed an underwritten secondary public offering of 12,000,000 shares of its common stock held by certain of the Company’s principal stockholders (the “June Selling Stockholders”), of which the Company repurchased 4,000,000 shares for an aggregate purchase price of approximately $412 million. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the June Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the June Selling Stockholders.
Other Equity Repurchases
In August 2019, the Company agreed to purchase an aggregate of 1,000,000 shares of its common stock, par value $0.01 per share, in a private transaction from certain of its existing shareholders (the “Repurchase”). In addition to the Repurchase, certain of the Company’s remaining private equity sponsors informed the Company that they have sold 4,000,000 shares of the Company’s common stock pursuant to Rule 144 under the Securities Act of 1933, as amended, for a total of 5,000,000 shares.
In November 2017, the Company completed an underwritten secondary public offering of 10,000,000 shares of its common stock held by certain of the Company’s principal stockholders (the “November Selling Stockholders”), of which the Company repurchased 2,500,000 shares for an aggregate purchase price of approximately $255 million. These shares were repurchased outside of the Company’s existing Repurchase Program. The Company did not offer any stock in this transaction and did not receive any proceeds from the sale of the shares by the November Selling Stockholders. Pursuant to an agreement with the underwriter, the Company’s per-share purchase price for repurchased shares was the same as the per-share purchase price payable by the underwriter to the November Selling Stockholders.
Summary
Below is a summary of the share repurchases made both under and outside of the Repurchase Program:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Number of shares of common stock repurchased | 6.6 | 12.6 | 30.9 | |||||||||
| Aggregate purchase price | $ | 945 | $ | 1,396 | $ | 2,620 | ||||||
| Average price per share | $ | 143.02 | $ | 111.23 | $ | 84.80 |
Non-controlling Interests
The Company contributed businesses to a joint venture with Quest Diagnostics Incorporated (“Quest”) that was recorded at book value (carryover basis) because the Company owns 60% of the joint venture and maintains control of these businesses. As a result, Quest’s non-controlling interest in the joint venture, referred to as Q2 Solutions, is equal to 40%. Quest’s non-controlling interest was $260 million at December 31, 2019. During the year ended December 31, 2019, Q2 Solutions distributed dividends of $18 million to Quest and did not receive a contribution from Quest to fund ongoing operational and strategic activities.
Subsequent Events
On February 13, 2020, the Company agreed to purchase at market price an aggregate of 1,000,000 shares of its common stock, par value $0.01 per share, in a private transaction from certain of its existing shareholders (the “February 2020 Repurchase”). In addition to the February 2020 Repurchase, certain of the Company’s remaining private equity sponsors informed the Company that they have sold 4,000,000 shares of the Company’s common stock pursuant to Rule 144 under the Securities Act of 1933, as amended, for a total of 5,000,000 shares.
- Business Combinations
The Company completed several immaterial acquisitions during the year ended December 31, 2019. The Company’s assessment of fair value and the purchase price allocation related to these acquisitions is preliminary and subject to change upon completion. Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period (up to one year from the acquisition date). The accompanying consolidated financial statements include the results of the acquisitions subsequent to their respective closing dates. Pro forma information is not presented as pro forma results of operations would not be significantly different to the actual results of operations of the Company.
The following table provides certain financial information for these acquisitions, including the preliminary allocations of the purchase prices to certain intangible assets acquired and goodwill:
| (in millions) | Amortization Period | 2019 | 2018 | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Total cost of acquisitions, net of cash acquired(1) | $ | 667 | $ | 372 | ||||||
| Amounts recorded in the Consolidated Balance Sheets: | ||||||||||
| Goodwill | $ | 437 | $ | 202 | ||||||
| Portion of goodwill deductible for income tax purposes | 186 | 15 | ||||||||
| Intangible assets: | ||||||||||
| Customer relationships | 6-18 years | $ | 216 | $ | 126 | |||||
| Backlog | 2 years | 11 | 10 | |||||||
| Non-compete agreements | 3-5 years | 6 | 4 | |||||||
| Software | 3-8 years | 35 | 44 | |||||||
| Trade names | 1-8 years | 3 | 8 | |||||||
| Total intangible assets | $ | 271 | $ | 192 |
| (1) | Total cost of acquisitions, net of cash acquired, includes contingent consideration and deferred purchase payments of $79 million and $63 million for the years ended December 31, 2019 and 2018, respectively. |
|---|
- Restructuring
The Company has continued to take restructuring actions in 2019 to align its resources and reduce overcapacity to adapt to changing market conditions and integrate acquisitions. These actions include closing facilities, consolidating functional activities, eliminating redundant positions, and aligning resources with customer requirements. These restructuring actions are expected to continue into 2020. During the first quarter of 2019, there was also a decrease of $9 million in facility exit costs due to the reclassification of restructuring into a long-term operating lease liability related to the implementation of ASC 842, Leases.
The management approved plans resulted in approximately $75 million, $68 million and $63 million of restructuring expense, net of reversals, which consisted of severance, facility closure costs and other exit-related costs in 2019, 2018, and 2017, respectively.
The following amounts were recorded for the restructuring plans:
| (in millions) | Severance and Related Costs | Exit Costs | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2017 | $ | 80 | $ | 4 | $ | 84 | ||||||
| Expense, net of reversals | 45 | 23 | 68 | |||||||||
| Payments | (76 | ) | (6 | ) | (82 | ) | ||||||
| Foreign currency translation and other | (2 | ) | 6 | 4 | ||||||||
| Balance at December 31, 2018 | $ | 47 | $ | 27 | $ | 74 | ||||||
| Expense, net of reversals | 75 | — | 75 | |||||||||
| Payments | (57 | ) | (16 | ) | (73 | ) | ||||||
| Foreign currency translation and other | (1 | ) | (8 | ) | (9 | ) | ||||||
| Balance at December 31, 2019 | $ | 64 | $ | 3 | $ | 67 |
The reversals were due to changes in estimates primarily resulting from the redeployment of staff and higher than expected voluntary terminations. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. The Company expects the majority of the restructuring accruals at December 31, 2019 will be paid in 2020.
- Income Taxes
The components of income before income taxes and equity in earnings (losses) of unconsolidated affiliates are as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | (504 | ) | $ | (521 | ) | $ | (527 | ) | |||
| Foreign | 856 | 849 | 821 | |||||||||
| $ | 352 | $ | 328 | $ | 294 |
The components of income tax expense attributable to continuing operations are as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Current expense: | ||||||||||||
| Federal and state | $ | 11 | $ | 17 | $ | (3 | ) | |||||
| Foreign | 248 | 233 | 222 | |||||||||
| 259 | 250 | 219 | ||||||||||
| Deferred (benefit) expense: | ||||||||||||
| Federal and state | (109 | ) | (170 | ) | (1,167 | ) | ||||||
| Foreign | (34 | ) | (21 | ) | (44 | ) | ||||||
| (143 | ) | (191 | ) | (1,211 | ) | |||||||
| $ | 116 | $ | 59 | $ | (992 | ) |
The differences between the Company’s consolidated income tax expense attributable to continuing operations and the expense computed at the United States statutory income tax rate of 21% in 2019, 21% in 2018 and 35% in 2017 were as follows:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Federal income tax expense at statutory rate | $ | 74 | $ | 69 | $ | 103 | ||||||
| State and local income taxes, net of federal effect | — | (2 | ) | (14 | ) | |||||||
| Research and development | (21 | ) | (20 | ) | (9 | ) | ||||||
| Foreign nontaxable interest income | — | — | (7 | ) | ||||||||
| United States taxes recorded on foreign earnings(*) | 9 | 40 | 6 | |||||||||
| Tax contingencies | 27 | 16 | 17 | |||||||||
| Foreign Derived Intangible Income (“FDII”) | 20 | (25 | ) | — | ||||||||
| Foreign rate differential | 26 | 27 | (97 | ) | ||||||||
| Equity compensation | (14 | ) | (8 | ) | (19 | ) | ||||||
| Non-taxable gain on acquisition | (5 | ) | — | — | ||||||||
| Non-controlling interest | (6 | ) | (3 | ) | (5 | ) | ||||||
| Tax Act impact | — | (35 | ) | (966 | ) | |||||||
| Other | 6 | — | (1 | ) | ||||||||
| $ | 116 | $ | 59 | $ | (992 | ) |
(*) Includes impact of GILTI, and other U.S. taxes on foreign earnings.
In 2019 the U.S. Treasury Department issued final regulations on the transition tax and proposed regulations on FDII, which was introduced by the Tax Act described below. While the final regulations related to the transition tax did not have a material impact on the Company, 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, the company 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. Staff Accounting Bulletin No. 118 (“SAB 118”) addresses situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete an accounting assessment and allows companies to record provisional amounts during a measurement period not to extend beyond one year. Subsequent changes to provisional amounts are reported in the period in which they are determined.
In 2018 the Company recorded a $35 million benefit related to finalizing the accounting related to the Tax Act. Additionally, in 2018 the Company recorded a benefit of $25 million related to FDII, as well as a tax expense of $35 million related to GILTI, as a result of the new provisions of the Tax Act.
In 2017, due to the Tax Act, the Company revalued its U.S. deferred tax assets and liabilities and recorded a benefit to deferred income taxes of $966 million.
Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $2,997 million at December 31, 2019. With the enactment of the Tax Act, the Company does not consider any of its foreign earnings as indefinitely reinvested.
The income tax effects of temporary differences from continuing operations that give rise to significant portions of deferred income tax assets (liabilities) are presented below:
| December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| Deferred income tax assets: | ||||||||
| Net operating loss and capital loss carryforwards | $ | 246 | $ | 244 | ||||
| Tax credit carryforwards | 332 | 300 | ||||||
| Accrued expenses and unearned income | 55 | 70 | ||||||
| Employee benefits | 168 | 181 | ||||||
| Operating lease liability | 119 | — | ||||||
| Other | 79 | 51 | ||||||
| 999 | 846 | |||||||
| Valuation allowance for deferred income tax assets | (266 | ) | (226 | ) | ||||
| Total deferred income tax assets | 733 | 620 | ||||||
| Deferred income tax liabilities: | ||||||||
| Amortization and depreciation | (1,105 | ) | (1,209 | ) | ||||
| Operating lease right-of-use assets | (119 | ) | — | |||||
| Other | (36 | ) | (38 | ) | ||||
| Total deferred income tax liabilities | (1,260 | ) | (1,247 | ) | ||||
| Net deferred income tax liabilities | $ | (527 | ) | $ | (627 | ) |
During 2019 the net deferred tax liabilities decreased mainly due to amortization of intangibles related to the merger between Quintiles and IMS health (“Merger”).
The Company had federal, state and local, and foreign tax loss carryforwards and tax credits, the tax effect of which was $622 million as of December 31, 2019. Of this amount, $31 million has an indefinite carryforward period, and the remaining $591 million expires at various times beginning in 2020. Some of the federal losses are subject to limitations under the Internal Revenue Code, however, management expects these losses to be utilized during the carryforward periods.
In 2019, the Company increased its valuation allowance by $40 million to $266 million at December 31, 2019 from $226 million at December 31, 2018. The valuation allowance increased primarily due to current year branch basket foreign tax credits that the Company has determined are not more likely than not to be used before their expiration. The valuation allowance also increased due to an increase in the value of the U.S. state net operating losses.
A reconciliation of the beginning and ending amount of gross unrecognized income tax benefits is presented below:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Balance at January 1 | $ | 94 | $ | 82 | $ | 64 | ||||||
| Additions based on tax positions related to the current year | 5 | 4 | 11 | |||||||||
| Additions for income tax positions of prior years | 33 | 26 | 13 | |||||||||
| Impact of changes in exchange rates | — | (2 | ) | 4 | ||||||||
| Settlements with tax authorities | (1 | ) | (2 | ) | (2 | ) | ||||||
| Reductions for income tax positions of prior years | (6 | ) | — | (2 | ) | |||||||
| Reductions due to the lapse of the applicable statute of limitations | (5 | ) | (14 | ) | (6 | ) | ||||||
| Balance at December 31 | $ | 120 | $ | 94 | $ | 82 |
As of December 31, 2019, the Company had total gross unrecognized income tax benefits of $120 million associated with over 100 jurisdictions in which the Company conducts business that, if recognized, would reduce the Company’s effective income tax rate.
The Company’s policy for recording interest and penalties relating to uncertain income tax positions is to record them as a component of income tax expense in the accompanying consolidated statements of income. In 2019, 2018 and 2017, the amount of interest and penalties recorded as an addition to income tax expense in the accompanying consolidated statements of income was $2 million, $0 million and $3 million, respectively. As of December 31, 2019 and 2018, the Company had accrued approximately $18 million and $16 million, respectively, of interest and penalties.
The Company believes that it is reasonably possible that a decrease of up to $13 million in gross unrecognized income tax benefits for federal, state and foreign exposure items may be necessary within the next 12 months due to lapse of statutes of limitations or uncertain tax positions being effectively settled. The Company believes that it is reasonably possible that a decrease of up to $23 million in gross unrecognized income tax benefits for foreign items may be necessary within the next 12 months due to payments. For the remaining uncertain income tax positions, it is difficult at this time to estimate the timing of the resolution.
The Company conducts business globally and, as a result, files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the tax years that remain open for examination by tax authorities in the most significant jurisdictions in which the Company operates:
| United States | 2015-2018 | |
|---|---|---|
| India | 2006-2019 | |
| Japan | 2013-2018 | |
| United Kingdom | 2018 | |
| Switzerland | 2014-2018 |
In certain of the jurisdictions noted above, the Company operates through more than one legal entity, each of which has different open years subject to examination. The table above presents the open years subject to examination for the most material of the legal entities in each jurisdiction. Additionally, it is important to note that tax years are technically not closed until the statute of limitations in each jurisdiction expires. In the jurisdictions noted above, the statute of limitations can extend beyond the open years subject to examination.
Due to the geographic breadth of the Company’s operations, numerous tax audits may be ongoing throughout the world at any point in time. Income tax liabilities are recorded based on estimates of additional income taxes that may be due upon the conclusion of these audits. Estimates of these income tax liabilities are made based upon prior experience and are updated in light of changes in facts and circumstances. However, due to the uncertain and complex application of income tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be materially different from these estimates. In such an event, the Company will record additional income tax expense or income tax benefit in the period in which such resolution occurs.
- Employee Benefit Plans
Pension and Postretirement Benefit Plans
The Company sponsors both funded and unfunded defined benefit pension plans. These plans provide benefits based on various criteria, including, but not limited to, years of service and salary. The Company also sponsors an unfunded postretirement benefit plan in the United States that provides health and prescription drug benefits to retirees who meet the eligibility requirements. The Company uses a December 31 measurement date for all pension and postretirement benefit plans.
The following table summarizes changes in the benefit obligation, the plan assets and the funded status of the pension benefit plans:
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| (in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Obligation and funded status: | ||||||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Projected benefit obligation at beginning of year | $ | 335 | $ | 349 | $ | 513 | $ | 559 | ||||||||
| Service costs | 12 | 13 | 25 | 26 | ||||||||||||
| Interest cost | 14 | 12 | 9 | 9 | ||||||||||||
| Actuarial (gains) losses | 50 | (30 | ) | 55 | (29 | ) | ||||||||||
| Business combinations | — | — | — | 1 | ||||||||||||
| Benefits paid | (10 | ) | (9 | ) | (19 | ) | (21 | ) | ||||||||
| Contributions | — | — | 2 | 2 | ||||||||||||
| Amendments | — | — | — | 2 | ||||||||||||
| Curtailments | — | — | (5 | ) | (3 | ) | ||||||||||
| Settlements | — | — | (1 | ) | (12 | ) | ||||||||||
| Foreign currency fluctuations and other | — | — | 12 | (21 | ) | |||||||||||
| Projected benefit obligation at end of year | 401 | 335 | 591 | 513 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets at beginning of year | 330 | 360 | 366 | 391 | ||||||||||||
| Actual return on plan assets | 77 | (24 | ) | 34 | (2 | ) | ||||||||||
| Contributions | 4 | 3 | 26 | 29 | ||||||||||||
| Benefits paid | (10 | ) | (9 | ) | (19 | ) | (21 | ) | ||||||||
| Settlements | — | — | (1 | ) | (11 | ) | ||||||||||
| Foreign currency fluctuations and other | — | — | 12 | (20 | ) | |||||||||||
| Fair value of plan assets at end of year | 401 | 330 | 418 | 366 | ||||||||||||
| Funded status | $ | — | $ | (5 | ) | $ | (173 | ) | $ | (147 | ) |
The following table summarizes the amounts recognized in the consolidated balance sheets related to the pension benefit plans:
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| (in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Deposits and other assets | $ | 45 | $ | 36 | $ | 11 | $ | 17 | ||||||||
| Accrued expenses | 2 | 2 | 13 | 11 | ||||||||||||
| Other long-term liabilities | 42 | 38 | 171 | 153 | ||||||||||||
| AOCI | 13 | 11 | (30 | ) | 7 |
At December 31, 2019, the benefit obligation for other postretirement benefits was $2 million, with $1 million recorded in accrued expenses and $1 million included within other long-term liabilities; and the amount recognized in AOCI was less than $1 million.
The following table summarizes the accumulated benefit obligation for all pension benefit plans:
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| (in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Accumulated benefit obligation | $ | 395 | $ | 330 | $ | 557 | $ | 476 |
The following table provides the information for pension plans with an accumulated benefit obligation in excess of plan assets and projected benefit obligations in excess of plan assets:
| Pension Benefits | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||
| December 31 | ||||||||||||||||
| (in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Plans with accumulated benefit obligation in excess of plan assets: | ||||||||||||||||
| Accumulated benefit obligation | $ | 47 | $ | 43 | $ | 485 | $ | 189 | ||||||||
| Fair value of plan assets | 4 | 3 | 334 | 59 | ||||||||||||
| Plans with projected benefit obligation in excess of plan assets: | ||||||||||||||||
| Projected benefit obligation | $ | 49 | $ | 43 | $ | 519 | $ | 223 | ||||||||
| Fair value of plan assets | 4 | 3 | 335 | 59 |
The components of net periodic benefit cost changes in plan assets and benefit obligations recognized in other comprehensive loss were as follows:
| Pension Benefits | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| (in millions) | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Service cost | $ | 12 | $ | 13 | $ | 13 | $ | 25 | $ | 26 | $ | 26 | ||||||||||||
| Interest cost | 14 | 12 | 11 | 9 | 9 | 9 | ||||||||||||||||||
| Expected return on plan assets | (25 | ) | (27 | ) | (24 | ) | (16 | ) | (15 | ) | (14 | ) | ||||||||||||
| Amortization of actuarial losses | — | — | — | 0 | 1 | 1 | ||||||||||||||||||
| Curtailment gain | — | — | — | (5 | ) | (3 | ) | — | ||||||||||||||||
| Settlement gain | — | — | — | 0 | (1 | ) | — | |||||||||||||||||
| Net periodic benefit cost | 1 | (2 | ) | — | 13 | 17 | 22 | |||||||||||||||||
| Other changes in plan assets and benefit obligations recognized in other comprehensive loss: | ||||||||||||||||||||||||
| Actuarial loss (gain) – current years | (2 | ) | 22 | (4 | ) | 32 | (15 | ) | (4 | ) | ||||||||||||||
| Prior service cost - current year | — | — | — | — | 2 | — | ||||||||||||||||||
| Curtailment gain - current year | — | — | — | 5 | 3 | — | ||||||||||||||||||
| Settlement gain - current year | — | — | — | — | 1 | — | ||||||||||||||||||
| Amortization of actuarial losses | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||
| Total recognized in other comprehensive loss (income) | (2 | ) | 22 | (4 | ) | 37 | (10 | ) | (5 | ) | ||||||||||||||
| Total recognized in net periodic benefit cost and other comprehensive loss (income) | $ | (1 | ) | $ | 20 | $ | (4 | ) | $ | 50 | $ | 7 | $ | 17 |
All components of net periodic benefit cost other than service cost are recorded in other expense (income), net on the accompanying consolidated statements of income.
On October 26, 2018, the High Court of the United Kingdom issued a judgement relating to Guaranteed Minimum Pensions (“GMPs”) in the Lloyds case. The judgement concluded the schemes should be amended to equalize pension benefits for men and women in relation to guaranteed minimum pension benefits. A preliminary assessment by the Company’s actuarial advisors estimated an impact of approximately $1.7 million between the two United Kingdom pension schemes, which has been recognized in AOCI as a prior service cost in 2018.
Assumptions
The weighted average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||
| Discount rate | 4.42 | % | 3.69 | % | 4.17 | % | 1.99 | % | 1.91 | % | 1.89 | % | 3.80 | % | 2.90 | % | 2.90 | % | ||||||||||||||||||
| Rate of compensation increases | 3.00 | % | 3.00 | % | 3.00 | % | 4.54 | % | 4.54 | % | 5.17 | % | — | — | — | |||||||||||||||||||||
| Expected return on plan assets | 7.67 | % | 7.69 | % | 7.94 | % | 4.02 | % | 4.17 | % | 4.16 | % | — | — | — |
The weighted average assumptions used to determine benefit obligations were as follows at December 31:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | |||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
| Discount rate | 3.52 | % | 4.42 | % | 1.45 | % | 1.98 | % | 2.70 | % | 3.80 | % | ||||||||||||
| Rate of compensation increases | 3.00 | % | 3.00 | % | 2.78 | % | 3.20 | % | — | — |
The discount rate represents the interest rate used to determine the present value of the future cash flows currently expected to be required to settle the Company’s defined benefit plan obligations. The discount rates are derived using weighted average yield curves on AA-rated corporate bonds. The cash flows from the Company’s expected benefit obligation payments are then matched to the yield curve to derive the discount rates. At December 31, 2019, the discount rate ranged from 2.70% to 3.58% for the Company’s United States pension plan and postretirement benefit plan. At December 31, 2019, the discount rate ranged from 1.68% to 2.10% for the Company’s United Kingdom pension plans. The United States and United Kingdom plans represent approximately 75% of the consolidated benefit obligation as of December 31, 2019. The discount rates in other non-U.S. countries ranged from 0.17% to 8.37% at December 31, 2019.
The Company’s assumption for the expected return on plan assets was determined by the weighted average of the long-term expected rate of return on each of the asset classes invested as of the balance sheet date. For plan assets invested in government bonds, the expected return was based on the yields on the relevant indices as of the balance sheet date. There is considerable uncertainty for the expected return on plan assets invested in equity and diversified growth funds. The expected rate of return on plan assets for the United States pension plans was 7.75% at January 1, 2020. Outside the United States, the range of applicable expected rates of return was 1.0% to 5.00% as of January 1, 2020, compared to 1.0% to 7.22% as of January 1, 2019. The expected return on assets (“EROA”) was $41 million and $42 million and the actual return on assets was $108 million and $(26) million for the years ended December 31, 2019 and 2018, respectively.
Under the Company’s United States qualified retirement plan, participants have a notional retirement account that increases with pay and investment credits. The rate used to determine the investment credit (cash balance crediting rate) varies monthly and is equal to 1/12th of the yield on 30-year U.S. Government Treasury Bonds, with a minimum of 0.25%. At retirement, the account is converted to a monthly retirement benefit.
At December 31, 2019, the Company’s health care cost trend rate for the next seven years was assumed to be 6.0% and the assumed ultimate cost trend rate was 4.5%. The Company assumed that ultimate cost trend rate is reached in 2023.
Assumed health care cost trend rates could have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates at December 31, 2019 would have a de minimis effect on the total of service and interest cost and on the accumulated postretirement benefit obligation.
Plan Assets
The Company’s pension plan weighted average asset allocations, by asset category, were as follows:
| Plan Assets at December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| United States Plans | Non-United States Plans | Total | ||||||||||||||||||||||
| Asset Category | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||||
| Equity securities | 70.82 | % | 67.58 | % | 42.88 | % | 45.22 | % | 56.56 | % | 55.83 | % | ||||||||||||
| Debt securities | 24.13 | 27.34 | 19.22 | 16.18 | 21.62 | 21.48 | ||||||||||||||||||
| Real estate | 5.05 | 5.08 | — | — | 2.48 | 2.41 | ||||||||||||||||||
| Other | — | — | 37.00 | 38.60 | 19.33 | 20.28 | ||||||||||||||||||
| Total | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |
The target asset allocation for the Company’s pension plans were as follows:
| Asset Category | United States Plans | Non-United States Plans | Total | |||
|---|---|---|---|---|---|---|
| Equity securities | 60-80% | 35-50% | 45-65% | |||
| Debt securities | 20-30% | 10-20% | 10-30% | |||
| Real estate | 0-10% | —% | 0-5% | |||
| Other | —% | 30-45% | 10-30% |
The following table summarizes United States plan assets measured at fair value:
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Category | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| Domestic equities | $ | 30 | $ | — | $ | 30 | $ | 31 | $ | — | $ | 31 | ||||||||||||
| International equities | 16 | — | 16 | 13 | — | 13 | ||||||||||||||||||
| Corporate bonds | 58 | — | 58 | 54 | — | 54 | ||||||||||||||||||
| Real estate | 20 | — | 20 | 16 | — | 16 | ||||||||||||||||||
| Total assets in the fair value hierarchy | 124 | — | 124 | 114 | — | 114 | ||||||||||||||||||
| Common/collective trusts measured at net asset value (“NAV”)(1) | — | — | 277 | — | — | 216 | ||||||||||||||||||
| Total | $ | 124 | $ | — | $ | 401 | $ | 114 | $ | — | $ | 330 |
The following table summarizes non-United States plan assets measured at fair value:
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Asset Category | Level 1 | Level 2 | Total | Level 1 | Level 2 | Total | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
| International equities | $ | 2 | $ | 56 | $ | 58 | $ | 2 | $ | 53 | $ | 55 | ||||||||||||
| Debt issued by national, state or local government | 2 | 78 | 80 | 2 | 57 | 59 | ||||||||||||||||||
| Diversified growth fund | — | — | — | — | — | — | ||||||||||||||||||
| Investments funds | — | 9 | 9 | — | 8 | 8 | ||||||||||||||||||
| Insurance contracts | — | 153 | 153 | — | 136 | 136 | ||||||||||||||||||
| Other | — | 5 | 5 | — | 5 | 5 | ||||||||||||||||||
| Total assets in the fair value hierarchy | 4 | 301 | 305 | 4 | 259 | 263 | ||||||||||||||||||
| Assets measured at NAV(1) | — | — | 113 | — | — | 103 | ||||||||||||||||||
| Total | $ | 4 | $ | 301 | $ | 418 | $ | 4 | $ | 259 | $ | 366 |
| (1) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the above plan asset tables are intended to permit reconciliation of the fair value of plan assets in the fair value hierarchy to the plan asset amounts presented in the above funded status table as of December 31, 2019 and 2018. |
|---|
Investments in mutual funds are valued at quoted market prices. Investments in common/collective trusts and pooled funds are valued at the NAV as reported by the trust. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. Insurance contracts are valued at the amount of the benefit liability. The Company has no Level 3 assets that rely on unobservable inputs to measure fair value.
Investment Policies and Strategies
The Company invests primarily in a diversified portfolio of equity securities that provide for long-term growth within reasonable and prudent levels of risk. The asset allocation targets established by the Company are strategic and applicable to the plan’s long-term investing horizon. The portfolio is constructed and maintained to provide adequate liquidity to meet associated liabilities and minimize long-term expense and provide prudent diversification among asset classes in accordance with the principles of modern portfolio theory. The plan employs a diversified mix of actively managed investments around a core of passively managed index exposures in each asset class. Within each asset class, rapid market shifts, changes in economic conditions or an individual fund manager’s outlook may cause the asset allocation to fall outside the prescribed targets. The majority of the Company’s plan assets are measured quarterly against benchmarks established by the Company’s investment advisors and the Company’s Asset Management Committee, who review actual plan performance and have the authority to recommend changes as deemed appropriate. Assets are rebalanced periodically to their strategic targets to maintain the plan’s strategic risk/reward characteristics. The Company periodically conducts asset liability modeling studies to ensure that the investment strategy is aligned with the obligations of the plans and that the assets will generate income and capital growth to meet the cost of current and future benefits that the plans provide. The pension plans do not have investments in Company stock at December 31, 2019 or 2018.
The portfolio for the Company’s United Kingdom pension plans seek to invest in a range of suitable assets of appropriate liquidity that will generate in the most effective manner possible, income and capital growth to ensure that there are sufficient assets to meet benefit payments when they fall due, while controlling the long-term costs of the plans and avoiding short-term volatility of investment returns. The plans seek to achieve these objectives by investing in a mixture of real (equities) and monetary (fixed interest) assets. It recognizes that the returns on real assets, while expected to be greater over the long-term than those on monetary assets, are likely to be more volatile. A mixture across asset classes should nevertheless provide the level of returns required by the plans. The trustee periodically conducts asset liability modeling exercises to ensure the investments are aligned with the appropriate benchmark to better reflect the plans’ liabilities. The trustee also undertakes to review this benchmark on a regular basis.
Cash Flows
Contributions
The Company expects to contribute approximately $29 million in required contributions to its pension and postretirement benefit plans during 2020. The Company may make additional contributions into its pension plans in 2020 depending on, among other factors, how the funded status of those plans change or in order to meet minimum funding requirements as set forth in employee benefit and tax laws, plus additional amounts the Company may deem to be appropriate.
Estimated future benefit payments and subsidy receipts
The following benefit payments (net of expected participant contributions) for pension benefits are expected to be paid as follows:
| (in millions) | Pension Benefits | |||
|---|---|---|---|---|
| 2020 | 36 | |||
| 2021 | 37 | |||
| 2022 | 39 | |||
| 2023 | 41 | |||
| 2024 | 44 | |||
| Years 2025 through 2029 | 246 | |||
| $ | 443 |
Benefit payments (net of expected participant contributions) for other postretirement benefits are expected to be de minimis over the periods presented.
Defined Contribution Plans
Defined contribution or profit sharing plans are offered in Australia, Austria, Belgium, Bulgaria, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Israel, Japan, Malaysia, the Netherlands, New Zealand, Poland, Slovakia, South Africa, Sweden, Switzerland, Taiwan, Thailand, the United States and the United Kingdom. In some cases, these plans are required by local laws or regulations.
In the United States, the Company has a 401(k) plan under which the Company matches employee deferrals at varying percentages and specified limits of the employee’s salary. In 2019, 2018, and 2017, the Company expensed $56 million, $49 million and $47 million, respectively, related to matching contributions.
Certain key executives of the Company participate in an unfunded defined contribution executive retirement plan, assumed in the Merger, which was frozen to additional accruals for future service contributions in 2012. Participants continue to receive an annual investment credit based on the average of the annual yields at the end of each month on the AA-AAA rated 10 plus year maturity component of the Merrill Lynch United States Corporate Bond Master Index.
Plans Accounted for as Postretirement Benefits
The Company provides certain executives with postretirement medical, dental and life insurance benefits. These benefits are individually negotiated arrangements in accordance with their individual employment arrangements. The above tables do not include the Company’s expense or obligation associated with providing these benefits. The obligation related to these benefits was approximately $10 million as of December 31, 2019, and the Company’s expense for the year then ended was de minimis.
Stock Incentive Plans
Stock incentive plans provide incentives to eligible employees, officers and directors in the form of non-qualified stock options, incentive stock options, stock appreciation rights (“SARs”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance awards, covered annual incentive awards, cash-based awards and other stock-based awards, in each case subject to the terms of the stock incentive plans.
In April 2017, the Company’s 2017 Incentive and Stock Award Plan (the “2017 Plan”) was approved by the Company’s stockholders. The 2017 Plan consolidates the unused share pools under the Company’s 2014 Incentive and Stock Award Plan (the “2014 Plan”), the Company’s 2013 Stock Incentive Plan (the “2013 Plan”), the Company’s 2010 Equity Incentive Plan (the “2010 Plan”) and the Company’s 2008 Stock Incentive Plan (the “2008 Plan”), and together with the 2010 Plan, the 2013 Plan and the 2014 Plan (the “Prior Plans”), makes shares underlying outstanding awards granted under (but not ultimately delivered) the Prior Plans eligible for use in connection with new awards under the 2017 Plan. The 2017 Plan provides for the grant of stock options, SARs, restricted and deferred stock (including RSUs), performance awards, dividend equivalents, other stock-based awards and cash-based awards.
The fair value of stock options and SARs is estimated using the Black-Scholes-Merton option-pricing model. The fair value of restricted stock and RSUs is based on the closing market price of the Company’s common stock on the date of grant. The fair value of the performance shares related to compound annual earnings per share (“EPS”) growth and/or other internal performance measures is equal to the closing market price of the Company’s common stock on the date of grant. The fair value of performance shares related to relative total shareholder return (“TSR”) is determined based on a Monte Carlo simulation model.
The Company recognized stock-based compensation expense of $146 million, $113 million and $106 million in 2019, 2018 and 2017, respectively. Stock-based compensation expense is included in selling, general and administrative expenses on the accompanying consolidated statements of income. The associated future income tax benefit recognized was $22 million, $19 million and $21 million in 2019, 2018 and 2017, respectively. As of December 31, 2019, there was approximately $82 million of total unrecognized stock-based compensation expense related to outstanding non-vested stock-based compensation arrangements, which the Company expects to recognize over a weighted average period of 0.80 years.
As of December 31, 2019, there were 11.4 million shares available for future grants under all of the Company’s stock incentive plans.
The Company used the following assumptions when estimating the value of the stock-based compensation for stock options and SARs issued as follows:
| Year Ended December 31, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | |||||||
| Expected volatility | 23 – 24% | 22 – 24% | 22 – 25% | ||||||
| Weighted average expected volatility | 23% | 22% | 24% | ||||||
| Expected dividends | 0.0% | 0.0% | 0.0% | ||||||
| Expected term (in years) | 3.7 – 6.7 | 1.0 – 6.7 | 1.0 – 6.9 | ||||||
| Risk-free interest rate | 1.55 – 2.56% | 2.05 – 3.00% | 1.16 – 2.32% |
Stock Options
The option price is determined by the Board at the date of grant and the options expire 10 years from the date of grant. The vesting schedule for options granted to employees is either (i) 25% per year beginning on the first anniversary of the date of grant; or (ii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant.
The Company’s stock option activity in 2019 is as follows:
| (in millions, except number of options and exercise price) | Number of Options | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 2,574,224 | $ | 34.09 | $ | 211 | |||||||
| Exercised | (1,099,428 | ) | 32.56 | |||||||||
| Canceled | (16,455 | ) | 64.96 | |||||||||
| Outstanding at December 31, 2019 | 1,458,341 | $ | 34.90 | $ | 174 |
The total intrinsic value of options exercised was approximately $124 million, $117 million and $157 million in 2019, 2018 and 2017, respectively. The Company received cash of approximately $36 million, $48 million and $102 million in 2019, 2018 and 2017, respectively, from options exercised.
Selected information regarding the Company’s stock options as of December 31, 2019 is as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number of Options | Exercise Price Range | Weighted Average Exercise Price | Weighted Average Remaining Life (in Years) | Number of Options | Weighted Average Exercise Price | |||||||||||||||||||||||||
| 305,657 | $ | 8.34 | — | $ | 8.34 | $ | 8.34 | 0.87 | 305,657 | $ | 8.34 | |||||||||||||||||||
| 319,740 | 11.46 | — | 24.59 | 17.81 | 1.27 | 319,740 | 17.81 | |||||||||||||||||||||||
| 347,341 | 25.53 | — | 47.87 | 36.04 | 3.15 | 347,341 | 36.04 | |||||||||||||||||||||||
| 335,343 | 50.79 | — | 64.67 | 60.76 | 5.07 | 281,443 | 60.01 | |||||||||||||||||||||||
| 150,260 | $ | 64.86 | — | $ | 64.93 | $ | 64.92 | 4.73 | 150,260 | $ | 64.92 |
The weighted average remaining contractual life of the options outstanding and exercisable as of December 31, 2019 is 2.9 years and 2.7 years, respectively. The total aggregate intrinsic value of the exercisable stock options and the stock options expected to vest as of December 31, 2019 was approximately $174 million.
Stock Appreciation Rights – Stock Settled
The exercise price of the stock-settled SARs (“SSRs”) is equal to the closing market price of the Company’s common stock as of the grant date and expire on the tenth anniversary of the date of grant. The SSRs are eligible to vest either (i) in equal increments of 25% on each of the first four anniversaries of the date of grant or (ii) in three equal annual installments on each of the first three anniversaries of the date of grant.
The Company’s SSR activity in 2019 is as follows:
| (in millions, except number of SSRs and exercise price) | Number of SSRs | Weighted Average Exercise Price | Aggregate Intrinsic Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 4,155,528 | $ | 81.97 | $ | 142 | |||||||
| Granted | 1,076,560 | 132.13 | ||||||||||
| Exercised | (723,433 | ) | 78.25 | |||||||||
| Canceled | (193,783 | ) | 98.55 | |||||||||
| Outstanding at December 31, 2019 | 4,314,872 | $ | 94.37 | $ | 260 |
The total intrinsic value of SSRs exercised was approximately $47 million in 2019.
The weighted average remaining contractual life of the SSRs outstanding and exercisable as of December 31, 2019 is 7.6 years and 6.7 years, respectively. The total aggregate intrinsic value of the exercisable SSRs and the SSRs expected to vest as of December 31, 2019 was approximately $256 million.
Stock Appreciation Rights – Cash Settled
The Company’s cash settled SARs (“CSRs”) require the Company to settle in cash an amount equal to the difference between the fair value of the Company’s common stock on the date of exercise and the grant price, multiplied by the number of CSRs being exercised. These awards vest either (i) 25% per year or (ii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant; or (iii) one-third per year beginning on the first anniversary of the date of grant.
The Company’s CSR activity in 2019 is as follows:
| (in millions, except number of CSRs and grant price) | Number of CSRs | Weighted Average Grant Price | Aggregate Intrinsic Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 247,397 | $ | 57.98 | $ | 14 | |||||||
| Granted | 11,597 | 131.82 | ||||||||||
| Exercised | (76,885 | ) | 56.03 | |||||||||
| Canceled | (10,269 | ) | 85.98 | |||||||||
| Outstanding at December 31, 2019 | 171,840 | $ | 62.15 | $ | 16 |
As of December 31, 2019, 2018 and 2017, the weighted average fair value per share of the CSRs granted was $99.27, $66.92 and $52.53, respectively. The Company paid approximately $7 million, $5 million and $4 million to settle exercised CSRs in 2019, 2018 and 2017, respectively.
The weighted average remaining contractual life of the CSRs outstanding and exercisable as of December 31, 2019 is 5.1 years and 4.5 years, respectively. The total aggregate intrinsic value of the exercisable CSRs and the CSRs expected to vest as of December 31, 2019 was approximately $16 million.
Restricted Stock Units – Stock Settled
The Company’s RSUs will settle in shares of the Company’s common stock within 45 days of the applicable vesting date. In general, RSUs granted to employees vest either (i) 25% per year beginning on the first anniversary of the date of grant; (ii) one-third per year beginning on the first anniversary of the grant date; (iii) 33% on the third anniversary of the date of grant and 67% on the fourth anniversary of the date of grant or (iv) 100% at the end of the three-year period following the grant date. Members of the Company’s board of directors receive RSUs that are fully vested when granted.
The Company’s RSU activity in 2019 is as follows:
| Number of RSUs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 385,458 | $ | 83.60 | |||||
| Granted (1) | 262,630 | 133.59 | ||||||
| Vested | (189,847 | ) | 76.28 | |||||
| Canceled | (37,675 | ) | 108.48 | |||||
| Outstanding at December 31, 2019 | 420,566 | $ | 115.90 |
(1) Pursuant to the IQVIA Holdings Inc. Non-Employee Director Deferral Plan (the “Director Deferral Plan”), non-employee directors may elect to defer receipt of their cash retainers. If a director elects to defer his or her retainer, he or she will instead be credited with that value in deferred shares under the Director Deferral Plan. Deferred shares become payable in Company common stock following a termination of the director’s Board service or the director’s death, or upon a change in control of the Company. The Company granted 815 deferred RSUs in 2019.
As of December 31, 2019, there are 420,566 RSUs outstanding with an intrinsic value of approximately $65 million.
Restricted Stock Units – Cash Settled
The Company’s cash settled RSUs (“Cash RSUs”) require the Company to settle in cash an amount equal to the fair value of the Company’s common stock on the vest date multiplied by the number of vested Cash RSUs. These awards vest either (i) 100% at the end of the three-year period following the date of grant, or (ii) one-third per year beginning on the first grant date anniversary.
The Company’s Cash RSU activity in 2019 is as follows:
| Number of Cash RSUs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 13,361 | $ | 96.70 | |||||
| Granted | 13,085 | 131.82 | ||||||
| Vested | (2,953 | ) | 78.21 | |||||
| Canceled | (2,786 | ) | 125.14 | |||||
| Outstanding at December 31, 2019 | 20,707 | $ | 117.71 |
As of December 31, 2019, there are 20,707 Cash RSUs outstanding with an intrinsic value of approximately $3.0 million.
Restricted Stock Awards
Restricted stock awards (“RSAs”) vest either (i) in equal increments of 50% on each of the second and fourth anniversaries of the grant date; (ii) one-third per year beginning on the first anniversary of the date of grant; or (iii) 25% on each of the second and third anniversaries of the grant date and 50% on the fourth anniversary of the date of grant.
The Company’s RSA activity in 2019 is as follows:
| Number of RSAs | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 436,067 | $ | 79.04 | |||||
| Vested | (245,130 | ) | 79.68 | |||||
| Outstanding at December 31, 2019 | 190,937 | $ | 78.21 |
As of December 31, 2019, there are 190,937 RSAs outstanding with an intrinsic value of approximately $29.5 million.
Performance Awards
The Company awarded performance awards that contain service, performance-based and/or market-based vesting criteria. Vesting occurs if the recipient remains employed and depends on the degree to which performance goals are achieved during the two-year or three-year performance period (as defined in the award agreements).
The Company’s performance award activity in 2019 is as follows:
| Number of Performance Awards | Weighted Average Grant-Date Fair Value | |||||||
|---|---|---|---|---|---|---|---|---|
| Outstanding at December 31, 2018 | 850,576 | $ | 94.78 | |||||
| Granted | 273,211 | 144.81 | ||||||
| Canceled | (67,980 | ) | 103.75 | |||||
| Outstanding at December 31, 2019 | 1,055,807 | $ | 107.18 |
As of December 31, 2019, there are 1,055,807 performance awards outstanding with an intrinsic value of approximately $163 million.
Other
The Company sponsors a supplemental non-qualified deferred compensation plan, covering certain management employees, and maintains other statutory indemnity plans as required by local laws or regulations.
- Related Party Transactions
The Company has entered into other transactions with related parties that are not deemed to be material, including investments in and advances to unconsolidated affiliates that are discussed in Note 4.
- Property, Equipment and Software by Geography
The following table represents the Company’s property, equipment and software, net, by geographic region, which is further broken down to show each country that accounts for 10% or more of the totals:
| As of December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | ||||||
| Property, equipment and software, net: | ||||||||
| Americas: | ||||||||
| United States | $ | 1,130 | $ | 856 | ||||
| Other | 62 | 23 | ||||||
| Americas | 1,192 | 879 | ||||||
| Europe and Africa | 160 | 221 | ||||||
| Asia-Pacific | 61 | 70 | ||||||
| Total property, equipment and software, net | $ | 1,413 | $ | 1,170 |
- Segments
The following table presents the Company’s operations by reportable segment. The Company is managed through three reportable segments, Technology & Analytics Solutions, Research & Development Solutions and Contract Sales & Medical Solutions. Technology & Analytics Solutions provides mission critical information, technology solutions and real world solutions and services to the Company’s life science clients. Research & Development Solutions, which primarily serves biopharmaceutical customers, provides outsourced clinical research and clinical trial related services. Contract Sales & Medical Solutions provides health care provider (including contract sales) and patient engagement services to both biopharmaceutical customers and the broader healthcare market. Prior period segment results have been recast to conform to immaterial changes to management reporting in 2017.
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. Asset information by segment is not presented, as this measure is not used by the chief operating decision maker to assess the Company’s performance.
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Revenues | ||||||||||||
| Technology & Analytics Solutions | $ | 4,486 | $ | 4,137 | $ | 3,682 | ||||||
| Research & Development Solutions | 5,788 | 5,465 | 5,105 | |||||||||
| Contract Sales & Medical Solutions | 814 | 810 | 915 | |||||||||
| Total revenues | 11,088 | 10,412 | 9,702 | |||||||||
| Costs of revenue | ||||||||||||
| Technology & Analytics Solutions | 2,663 | 2,343 | 1,967 | |||||||||
| Research & Development Solutions | 3,936 | 3,721 | 3,566 | |||||||||
| Contract Sales & Medical Solutions | 701 | 682 | 768 | |||||||||
| Total costs of revenue | 7,300 | 6,746 | 6,301 | |||||||||
| Selling, general and administrative expenses | ||||||||||||
| Technology & Analytics Solutions | 722 | 753 | 717 | |||||||||
| Research & Development Solutions | 711 | 689 | 678 | |||||||||
| Contract Sales & Medical Solutions | 61 | 67 | 78 | |||||||||
| General corporate and unallocated | 240 | 207 | 149 | |||||||||
| Total selling, general and administrative expenses | 1,734 | 1,716 | 1,622 | |||||||||
| Segment profit | ||||||||||||
| Technology & Analytics Solutions | 1,101 | 1,041 | 998 | |||||||||
| Research & Development Solutions | 1,141 | 1,055 | 861 | |||||||||
| Contract Sales & Medical Solutions | 52 | 61 | 69 | |||||||||
| Total segment profit | 2,294 | 2,157 | 1,928 | |||||||||
| General corporate and unallocated | (240 | ) | (207 | ) | (149 | ) | ||||||
| Depreciation and amortization | (1,202 | ) | (1,141 | ) | (1,011 | ) | ||||||
| Impairment charges | — | 0 | (40 | ) | ||||||||
| Restructuring costs | (75 | ) | (68 | ) | (63 | ) | ||||||
| Total income from operations | $ | 777 | $ | 741 | $ | 665 |
- Earnings Per Share
The following table reconciles the basic to diluted weighted average shares outstanding:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Basic weighted average common shares outstanding | 195.1 | 203.7 | 217.8 | |||||||||
| Effect of dilutive stock options and share awards | 4.5 | 4.5 | 4.8 | |||||||||
| Diluted weighted average common shares outstanding | 199.6 | 208.2 | 222.6 |
The following table presents the weighted average number of outstanding stock-based awards not included in the computation of diluted earnings per share because they are subject to performance conditions or the effect of including such stock-based awards in the computation would be anti-dilutive:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Shares subject to performance conditions | 1.3 | 0.8 | 0.4 | |||||||||
| Shares subject to anti-dilutive stock-based awards | 0.7 | 0.9 | 1.0 | |||||||||
| Total shares excluded from diluted earnings per share | 2.0 | 1.7 | 1.4 |
The vesting of performance awards is contingent upon the achievement of certain performance targets. The performance awards are not included in diluted earnings per share until the performance targets are probable. Stock-based awards will have a dilutive effect under the treasury method when the respective period’s average market value of the Company’s common stock exceeds the exercise proceeds.
- Comprehensive Income
Below is a summary of the components of AOCI:
| (in millions) | Foreign Currency Translation | Derivative Instruments | Defined Benefit Plans | Income Taxes | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at December 31, 2016 | (617 | ) | 10 | 21 | 22 | (564 | ) | |||||||||||||
| Other comprehensive income before reclassifications | 403 | 5 | 8 | 197 | 613 | |||||||||||||||
| Reclassification adjustments | — | (1 | ) | 1 | — | — | ||||||||||||||
| Balance at December 31, 2017 | (214 | ) | 14 | 30 | 219 | 49 | ||||||||||||||
| Other comprehensive loss before reclassifications | (205 | ) | (4 | ) | (12 | ) | (41 | ) | (262 | ) | ||||||||||
| Reclassification adjustments | — | (11 | ) | 1 | (1 | ) | (11 | ) | ||||||||||||
| Balance at December 31, 2018 | (419 | ) | (1 | ) | 19 | 177 | (224 | ) | ||||||||||||
| Other comprehensive loss before reclassifications | (11 | ) | (19 | ) | (35 | ) | (21 | ) | (86 | ) | ||||||||||
| Reclassification adjustments | — | (1 | ) | — | — | (1 | ) | |||||||||||||
| Balance at December 31, 2019 | $ | (430 | ) | $ | (21 | ) | $ | (16 | ) | $ | 156 | $ | (311 | ) |
Below is a summary of the adjustments for (gains) losses reclassified from AOCI into the consolidated statements of income and the affected financial statement line item:
| Year Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | Affected Financial Statement Line Item | 2019 | 2018 | 2017 | ||||||||||
| Derivative instruments: | ||||||||||||||
| Interest rate swaps and caps | Interest expense | $ | — | $ | — | $ | — | |||||||
| Foreign exchange forward contracts | Revenues | 5 | 1 | 7 | ||||||||||
| Foreign exchange forward contracts | Other expense (income), net | (6 | ) | (12 | ) | (8 | ) | |||||||
| Total before income taxes | (1 | ) | (11 | ) | (1 | ) | ||||||||
| Income tax expense | — | 1 | — | |||||||||||
| Total net of income taxes | $ | (1 | ) | $ | (12 | ) | $ | (1 | ) | |||||
| Defined benefit plans: | ||||||||||||||
| Amortization of actuarial losses | See Note 17 | $ | — | $ | 1 | $ | 1 | |||||||
| Income tax expense | — | — | — | |||||||||||
| Total net of income taxes | $ | — | $ | 1 | $ | 1 |
- Supplemental Cash Flow Information
The following table presents the Company’s supplemental cash flow information:
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | 2019 | 2018 | 2017 | |||||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Interest paid | $ | 421 | $ | 398 | $ | 320 | ||||||
| Income taxes paid, net of refunds | $ | 215 | $ | 211 | $ | 195 |
- Quarterly Financial Data (Unaudited)
The following table summarizes the Company’s unaudited quarterly results of operations:
| 2019 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenues | $ | 2,684 | $ | 2,740 | $ | 2,769 | $ | 2,895 | ||||||||
| Income from operations | 210 | 197 | 204 | 166 | ||||||||||||
| Net income | 67 | 71 | 69 | 20 | ||||||||||||
| Net income attributable to non-controlling interests | (9 | ) | (11 | ) | (12 | ) | (4 | ) | ||||||||
| Net income attributable to IQVIA Holdings Inc. | $ | 58 | $ | 60 | $ | 57 | $ | 16 | ||||||||
| Basic earnings per share(2) | $ | 0.29 | $ | 0.31 | $ | 0.29 | $ | 0.09 | ||||||||
| Diluted earnings per share(2) | $ | 0.29 | $ | 0.30 | $ | 0.29 | $ | 0.09 |
| 2018 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenues | $ | 2,563 | $ | 2,567 | $ | 2,594 | $ | 2,688 | ||||||||
| Income from operations | 183 | 170 | 181 | 207 | ||||||||||||
| Net income | 73 | 68 | 67 | 76 | ||||||||||||
| Net income attributable to non-controlling interests | (4 | ) | (7 | ) | (7 | ) | (7 | ) | ||||||||
| Net income attributable to IQVIA Holdings Inc.(1) | $ | 69 | $ | 61 | $ | 60 | $ | 69 | ||||||||
| Basic earnings per share(2) | $ | 0.33 | $ | 0.30 | $ | 0.30 | $ | 0.34 | ||||||||
| Diluted earnings per share(2) | $ | 0.32 | $ | 0.29 | $ | 0.29 | $ | 0.34 |
| (1) | During the fourth quarter of 2018, the Company identified and recorded certain adjustments related to prior periods and as a result increased pre-tax income by $22 million (net income by $15 million). The Company has evaluated the effects of the out of period adjustments and concluded they are not material to the fourth quarter 2018 financial results, nor to any of the previously issued annual or quarterly financial information. |
|---|
| (2) | The sum of the quarterly per share amounts may not equal per share amounts reported for year-to-date periods. This is due to changes in the number of weighted average shares outstanding and the effects of rounding for each period. |
|---|
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