UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2014

or

For the transition period from                     to                    

Commission File Number: 001-36381

 

IMS HEALTH HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

83 Wooster Heights Road, Danbury, CT 06810

(Address of principal executive offices and Zip Code)

(203) 448-4600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 

 

 

 

 

 

 

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IMS HEALTH HOLDINGS INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(unaudited)

  

  

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).

 

 

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IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

  

  

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).

 

 

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IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

  

  

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).

 

 

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IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

  

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited).

 

 

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Basis of Presentation and Recently Issued Accounting Standards

Background

IMS Health Holdings, Inc. (the “Company”) is a leading global information and technology services company providing clients in the healthcare industry with comprehensive solutions to measure and improve their performance. The Company has one of the largest and most comprehensive collections of healthcare information in the world, spanning sales, prescription and promotional data, medical claims, electronic medical records and social media. The Company standardizes, organizes, structures and integrates this data by applying its sophisticated analytics and leveraging its global technology infrastructure to help its clients run their organizations more efficiently and make better decisions to improve their operational and financial performance. The Company has a presence in over 100 countries and generated 63% of its 2013 revenue from outside the United States.

The Company serves key healthcare organizations and decision makers around the world, spanning the breadth of life science companies, including pharmaceutical, biotechnology, consumer health and medical device manufacturers, as well as distributors, providers, payers, government agencies, policymakers, researchers and the financial community. The Company’s information and technology services offerings, which it has developed with significant investment over its 60-year history, are deeply integrated into its clients’ workflow.

On February 26, 2010, the Company was acquired by affiliates of TPG Global, LLC (together with its affiliates, “TPG”), CPP Investment Board Private Holdings, Inc. (“CPPIB-PHI”), a wholly owned subsidiary of the Canada Pension Plan Investment Board (together with its affiliates, “CPPIB”), and Leonard Green & Partners, L.P. (“LGP” and collectively with TPG and CPPIB, the “Sponsors”) in an all-cash transaction.

Initial Public Offering

On April 4, 2014, the Company’s common stock began trading on the New York Stock Exchange under the symbol “IMS”. On April 9, 2014, the Company completed its Initial Public Offering (“IPO”) of its common stock at a price to the public of $20.00 per share. The Company issued and sold 52 million shares of common stock in the IPO. The selling shareholders offered and sold 22.75 million shares of common stock in the IPO, including 9.75 million shares that were offered and sold by the selling shareholders pursuant to the full exercise of the underwriters’ allotment to purchase additional shares. As of September 30, 2014, the Sponsors collectively remained the majority shareholders of the Company. The Company raised net proceeds of approximately $987 million from the IPO, after deducting underwriting discounts, commissions and related expenses totaling $53 million. The Company did not receive any of the proceeds from the sale of the shares sold by the selling shareholders.

Substantially all of the Company’s net proceeds of the IPO, approximately $500 million of borrowings under new term loans, $140 million of borrowings under the revolving credit facility and approximately $400 million of cash on the balance sheet were used to (i) fund the redemption of the Company’s 12.5% Senior Notes and Senior PIK Notes (defined in Note 6 below) and pay related fees and expenses, (ii) pay $30 million in the aggregate to holders of outstanding cash settled stock appreciation rights (“Phantom SARs”) granted under the Company’s 2010 Equity Incentive Plan (the “2010 Equity Plan”) and (iii) pay a one-time fee of $72 million to terminate the management services agreement with the Sponsors.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. The Condensed Consolidated Financial Statements do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, all of which are of a normal recurring nature, considered necessary for a fair statement of financial position, results of operations and comprehensive loss, cash flows and shareholders’ equity for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. The December 31, 2013 Condensed Consolidated Statement of Financial Position was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The Condensed Consolidated Financial Statements and related notes should be read in conjunction with the audited Consolidated Financial Statements and related notes of IMS Health Holdings, Inc. included in the Company’s prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission (the “SEC”) on April 4, 2014 (the “Prospectus”). Certain prior year amounts have been reclassified to conform to the 2014 presentation. Amounts presented in the Condensed Consolidated Financial Statements may not add due to rounding.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Recently Issued Accounting Standards

In August 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on management’s responsibility to assess an entity’s ability to continue as a going concern and provide related footnote disclosures in certain circumstances.  The guidance is effective for the Company’s interim and annual periods beginning after December 15, 2016.  The Company does not believe the adoption of this guidance will impact its consolidated financial statements or disclosures.  

In June 2014, the FASB issued guidance on accounting for share-based payments that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. The guidance is effective for the Company’s interim and annual periods beginning January 1, 2016. The Company does not believe the adoption of this guidance will have a material impact to its consolidated financial statements.

In May 2014, the FASB issued revised guidance on the recognition of revenue from contracts with customers. The guidance provides that revenue should be recognized for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires enhanced disclosures and is effective for the Company’s interim and annual periods beginning January 1, 2017. The Company is currently evaluating this guidance to determine any potential impact that it may have on its financial results.

 

Note 2. Acquisitions

The Company makes acquisitions in order to expand its products, services and geographic reach. During the three months ended September 30, 2014, the Company completed the acquisitions of Aileron Solutions, LLC (U.S.), Global Channel Marketing Solutions (U.S.) and additional consumer health businesses of Nielsen Holdings N.V. in certain European markets. Aileron uses anonymous medical claims data to provide analytic services to pharmaceutical, biotechnology, and medical device companies for the purpose of identifying healthcare professionals that will most benefit from information regarding medical device, diagnostics, or prescription products. This acquisition accelerates the Company’s services in two primary growth areas: oncology specialty and the medical device and diagnostic channel. Global Channel Marketing Solutions is a multi-channel marketing company that helps life sciences companies transform their customer engagements through multi-channel marketing operations support and solutions. Additionally, during the first six months of 2014, the Company completed the acquisitions of Forcea NV, a Belgium-based company that specializes in business intelligence applications and analytics for hospitals and life sciences organizations, the consumer health business of Nielsen Holdings N.V. in certain other European markets and Kent Capital in the U.S. The total cost for these acquisitions was approximately $60 million, of which $56 million was paid during the nine months ended September 30, 2014 and the balance will be paid in 2015 subject to certain conditions. Acquisition-related costs related to these acquisitions were $2 million and $3 million for the three and nine months ended September 30, 2014, respectively, and were expensed as incurred and recorded in Selling and administrative expense, exclusive of depreciation and amortization. These business combinations were accounted for under the acquisition method of accounting, and as such, the aggregate purchase prices were allocated on a preliminary basis to the assets acquired and liabilities assumed based on estimated fair values as of the closing dates. The purchase price allocation will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocation are not expected to have a material impact on the Company’s results of operations. The Condensed Consolidated Financial Statements include the results of the acquisitions subsequent to their closing. Had these acquisitions occurred as of the beginning of 2013, the impact on the Company’s results of operations would not have been material. In connection with these acquisitions, the Company recorded goodwill of approximately $31 million, of which $18 million is deductible for tax purposes, computer software of $2 million (weighted-average amortization period of 5 years) and intangible assets of approximately $29 million during the nine months ended September 30, 2014. The intangible assets acquired were comprised of client relationships and other of $24 million (weighted-average amortization period of 7.2 years) and databases of $5 million (weighted-average amortization period of 3 years).

During the nine months ended September 30, 2014, the Company recorded measurement period adjustments related to acquisitions that occurred in 2013. These adjustments did not have a material impact on the Company’s Condensed Consolidated Financial Statements for any period reported, and therefore, the Company did not retrospectively adjust the Condensed Consolidated Statement of Financial Position as of December 31, 2013.

Contingent consideration

Under the terms of certain acquisition-related purchase agreements, the Company may be required to pay additional amounts as contingent consideration based on the achievement of certain financial performance related metrics, ranging from $0 to $25 million through 2017. The Company’s contingent consideration recorded on the balance sheet was approximately $25 million and $65 million at September 30, 2014 and December 31, 2013, respectively. The fair value measurement of this contingent consideration is classified within Level 3 of the fair value hierarchy (see Note 5) and reflects the Company’s own assumptions in measuring fair values using the income approach. In developing these estimates, the Company considered certain performance projections, historical results, and industry trends.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

 

Note 3. Goodwill and Identifiable Intangible Assets

The following table sets forth changes in the Company’s goodwill for the nine months ended September 30, 2014.

  

  

The gross carrying amounts, related accumulated amortization and the weighted average amortization periods of the Company’s intangible assets are listed in the following table:

  

  

Intangible asset amortization expense was $73 million and $71 million during the three months ended September 30, 2014 and 2013, respectively, and $220 million and $214 million for the nine months ended September 30, 2014 and 2013, respectively. Based on current estimated useful lives, amortization expense associated with intangible assets at September 30, 2014 is estimated to be as follows:

  

  

Note 4. Severance, Impairment and Other Charges

As a result of ongoing cost reduction efforts, the Company recorded severance charges consisting of global workforce reductions to streamline its organization. The following table sets forth the activity in the Company’s severance-related reserves for the nine months ended September 30, 2014:  

 

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Other charges

During the nine months ended September 30, 2014, the Company recorded impairment charges of $10 million, $7 million of which related to impaired leases for properties in the U.S. and $3 million for the write-down of certain assets and contract-related charges for which the Company will not realize any future economic benefits.  

During the three and nine months ended September 30, 2013, the Company recorded impairment charges of $6 million and $7 million, respectively, related to impaired leases for properties vacated in the U.S. and contract-related charges for which the Company will not realize any future economic benefits.

 

Note 5. Derivatives and Fair Value

Foreign exchange risk management

The Company transacts business in more than 100 countries and is subject to risks associated with changing foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on non–functional currency assets and liabilities and to hedge non-U.S. Dollar anticipated royalties (“Royalty Hedging”). Additionally, through March 2014, the Company utilized foreign currency forward contracts to minimize the impact of foreign exchange movements on EBITDA. These contracts will unwind through the end of 2014. It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the Japanese Yen, the Swiss Franc and the Canadian Dollar.

The forward contracts entered into for balance sheet risk management purposes are not designated as hedges and are carried at fair value, with changes in the fair value recorded to Other income (loss), net in the Condensed Consolidated Statements of Comprehensive (Loss) Income. These contracts do not subject the Company to material balance sheet risk because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

Unrealized and realized gains and losses on the contracts entered into for managing foreign exchange movement on EBITDA did not qualify for hedge accounting, and therefore were not deferred and were included in the Condensed Consolidated Statements of Comprehensive (Loss) Income in Other income (loss), net.

The forward contracts entered into for Royalty Hedging purposes are designated as hedges and are carried at fair value, with changes in the fair value recorded to Accumulated Other Comprehensive Income (Loss) (“AOCI”). The change in fair value is reclassified from AOCI to earnings in the quarter in which the hedged royalty is paid.  

For derivatives designated as hedges, the Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives are highly effective in offsetting changes in fair values or cash flows of hedged items. If it is determined that a derivative ceases to be highly effective as a hedge, the Company will discontinue hedge accounting with respect to that derivative prospectively. 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 income (loss), net on the Condensed Consolidated Statements of Comprehensive (Loss) Income. Cash flows are classified consistent with the underlying hedged item.

In April 2014, the Company designated Euro currency borrowings as hedges of its foreign currency exposures of the net investment in certain foreign affiliates. As of September 30, 2014, these borrowings (net of original issue discount) were €869 million ($1,093 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 hedges included in cumulative translation adjustment for the three and nine months ended September 30, 2014 was $94 million and $105 million, respectively.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

The following table details the components of foreign exchange gain (loss) included in Other income (loss), net on the Condensed Consolidated Statements of Comprehensive (Loss) Income:

 

  

The foreign exchange forward contracts outstanding designated as hedges have various expiration dates through September 2015. The foreign exchange forward contracts outstanding not designated as hedges have various expiration dates through December 2014. Foreign exchange forward contracts are recorded at estimated fair value. The estimated fair values of the forward contracts are based on quoted market prices.

Interest rate risk management

The Company purchases interest rate caps and entered into interest rate swap agreements for purposes of managing its risk in interest rate fluctuations.

In April 2014, the Company purchased U.S. Dollar denominated interest rate caps (“2014 Caps”) for a total notional value of $1 billion at strike rates ranging between 2% and 3%. These caps are effective at various times between April 2014 and April 2016, and expire at various times between April 2017 and April 2019. The total premiums paid were $21 million. The 2014 Caps are designated as cash flow hedges. The 2014 Caps are in addition to the U.S. Dollar and Euro denominated interest rate caps that the Company purchased in May 2010 (“2010 Caps”). The 2010 Caps have strike rates of 4% and expire at various times through January 2015. The 2010 Caps are not designated as cash flow hedges.

The Company also entered into U.S. Dollar and Euro denominated interest rate swap agreements in April 2014 (“2014 Swaps”) to hedge interest rate exposure on notional amounts of approximately $600 million of its borrowings. The 2014 swaps were effective between April and June 2014, and expire at various times from March 2017 through March 2021. On these agreements, the Company pays a fixed rate ranging from 1.4% to 2.1% and receives a variable rate of interest equal to the greater of three-month U.S. Dollar London Interbank Offered Rate (“LIBOR”) or three-month Euro Interbank Offered Rate (“EURIBOR”), and 1%. The 2014 Swaps are designated as cash flow hedges. The Company also entered into interest rate swap agreements in May 2010 (“2010 Swaps”) to hedge interest rate exposure on notional amounts of $375 million of its borrowings. The 2010 Swaps were effective January 2012, and expire at various times through January 2016. On these agreements, the Company pays a fixed rate ranging from 3% to 3.3% and receives a variable rate of interest equal to the three-month LIBOR. The 2010 Swaps are not designated as cash flow hedges.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

The fair values of derivative instruments in the Condensed Consolidated Statements of Financial Position are as follows:

 

  

 

The effects of derivative instruments on the Condensed Consolidated Statements of Comprehensive (Loss) Income are as follows:

 

  

The pre-tax gain (loss) recognized in earnings on derivatives not designated as hedging instruments was as follows:

 

Changes in the fair value of derivatives that are designated as cash flow hedges are recorded in AOCI to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings. The Company expects $17 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at September 30, 2014 to be reclassified into earnings within the next twelve months.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Fair value disclosures

The Company is subject to authoritative guidance which requires a three-level hierarchy for disclosure of fair value measurements as follows:

 

The carrying values of cash, cash equivalents, restricted cash, accounts receivable and accounts payable approximated their fair values at September 30, 2014 and December 31, 2013 due to the short-term nature of these instruments. At September 30, 2014 and December 31, 2013, the fair value of total debt approximated $3,910 million and $5,280 million, respectively, as determined under Level 2 measurements based on quoted prices for these financial instruments.

Recurring measurements

The following tables summarize assets and liabilities measured at fair value on a recurring basis at the dates indicated:

 

 

  

Short-term investments consist of government bond funds. Derivatives consist of foreign exchange contracts and interest rate caps and swaps. The fair value of foreign exchange contracts is based on observable market inputs of spot and forward rates. The fair value of the interest rate caps and swaps is the estimated amount that the Company would receive or pay to terminate such agreements, taking into account market interest rates and the remaining time to maturities.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

The following table summarizes Level 3 acquisition-related contingent consideration liabilities (see Note 2) carried at fair value on a recurring basis with the use of unobservable inputs for the period indicated.

 

During the third quarter of 2014, the Company paid $25 million as a final settlement for an earn-out related to a 2013 acquisition.  The settlement resulted in a $9 million change in the fair value of the contingent consideration liability.

Non-recurring measurements

During the second quarter of 2014, the Company recorded a $7 million impairment charge for a leased facility, resulting in a fair value measurement of $9 million at June 30, 2014. The fair value was based on a third party market assessment, a Level 2 measurement. Additionally during the second quarter of 2014, the Company wrote off the value of computer software that was no longer in use to zero and recorded an impairment charge of $2 million. The fair value reflects an internal review of the net realizable value of the software and thus is a Level 3 measurement.

Devaluation of Venezuelan Bolívars

In February 2013, the Venezuelan government announced the devaluation of its currency. The official exchange rate was adjusted from 4.30 Bolívars to each U.S. Dollar to 6.30. The Company’s Swiss operating subsidiary, IMS AG, maintains certain account balances in Bolívars (mainly cash and cash equivalents). As these balances are held in a non-functional currency of IMS AG, the Company is required to mark-to-market these balances at each reporting date and reflect these movements as gains or losses in income. Additionally, since January 2010, Venezuela has been designated as hyper-inflationary, and as such, all foreign currency fluctuations are recorded in income for certain account balances at the Company’s local Venezuelan operating subsidiary. The Company recorded a pre-tax charge of approximately $14 million to Other income (loss), net, in the first quarter of 2013 related to the remeasurement of the IMS AG Venezuelan Bolívar account balances and the remeasurement of certain local Bolívar account balances.

In 2014, the Venezuelan government significantly expanded the use of the Supplementary Foreign Currency Administration System (“SICAD”) I exchange market and created a third exchange market called SICAD II. These markets have exchange rates significantly less favorable than the official exchange rate. As a result, the Company assessed its legal eligibility to access the available foreign exchange mechanisms, the transactions that would be eligible, and the Company’s past and expected future ability to transact through those mechanisms. Based on the Company’s analysis, the Company believes SICAD II represents the rate which best reflects the economics of the Company’s Venezuelan business activity, and as such, the Company concluded that it should utilize the SICAD II exchange rate to remeasure its Venezuelan Bolívar account balances as of June 30, 2014. The SICAD II rate at June 30, 2014 was approximately 50 Bolívars to one U.S. Dollar. As a result of the change to the SICAD II rate, the Company recorded a pre-tax charge of $49 million to foreign exchange loss within Other income (loss), net in the second quarter of 2014. The Company continued to remeasure its Venezuela account balances at the SICAD II rate of approximately 50 Bolívars to one U.S. Dollar as of September 30, 2014. The net assets held and revenue generated by our Venezuelan subsidiaries were not material to our consolidated results as of September 30, 2014.

 

 

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Note 6. Debt

The following table summarizes the Company’s debt at the dates indicated:  

  

 

Scheduled principal payments due on the Company’s debt as of September 30, 2014 for the remainder of 2014 and thereafter were as follows:

 

  

Senior Secured Credit Facilities

In March 2014, IMS Health Incorporated (“IMS Health”), an indirect wholly-owned subsidiary of the Company, and certain of its subsidiaries, as co-borrowers, entered into an amendment (the “2014 Amendment”) to amend and restate the Second Amended and Restated Credit and Guaranty Agreement, which until such date governed IMS Health’s Senior Secured Credit Facilities (the amended and restated credit agreement resulting from the 2014 Amendment, the “2014 Credit Agreement”). The 2014 Amendment added commitments in respect of new Term A loans (the “New Term Loans”) in the aggregate dollar equivalent amount of $500 million, increased outstanding commitments under the revolving credit facility to $500 million, modified certain interest rates and covenants and made additional modifications to IMS Health’s Senior Secured Credit Facilities. The commitments in respect of the New Term Loans mature in March 2019. The New Term Loans were funded in April 2014 concurrent with the Company’s IPO. See Note 1 for further information on the IPO. In addition to the New Term Loans, the Company has Term B loan commitments and in March 2014, IMS Health reduced the borrowing margins and the EUR LIBOR floor by 25 basis points each, respectively, extended the maturity date to March 2021 for these existing Term B loans and increased the capacity to $500 million and extended the maturity date to March 2019 for the existing Revolving Credit Facility. As a result of the 2014 Amendment, the Company recorded $11 million of debt extinguishment losses and $2 million of third party fees in Other income (loss), net during the nine months ended September 30, 2014.

In February 2013, IMS Health and certain of its subsidiaries entered into an amendment of the then existing senior secured term loans due 2017 (“Term Loan Amendment”) to reduce its borrowing costs. IMS Health reduced the borrowing margins and LIBOR floors by 50 basis points and 25 basis points, respectively, for both the USD and EUR tranches of debt. As a result of the Term Loan Amendment, the Company recorded $9 million of debt extinguishment losses and $3 million of third party fees in Other income (loss), net during the nine months ended September 30, 2013.

In October 2012, IMS Health and certain of its subsidiaries completed a recapitalization (the “Recapitalization”). The Recapitalization included an amendment (the “Amendment”) to its Amended and Restated Credit and Guaranty Agreement for additional term loans and (a) extended the maturity date of the Revolving Credit Facility to August 2017; and (b) increased the maximum leverage ratio.

IMS Health is required to make scheduled quarterly payments on the Term A loans at rates that vary from 1.25% to 2.50% of the original principal amount of the term loans, with the remaining balance paid at maturity. Additionally IMS Health is required to make scheduled quarterly payments on the Term B loans each equal to approximately 0.25% of the original principal amount of the term loans, with the remaining balance paid at maturity. IMS Health is also required to pay an annual commitment fee that ranges from 0.30% to 0.40% in respect of any unused commitments under the revolving credit facility.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

At September 30, 2014, IMS Health, IMS AG and IMS Japan K.K., as co-borrowers, had a $500 million revolving credit facility, of which $228 million was unused. The Senior Secured Credit Facilities are secured by a security interest in substantially all of Healthcare Technology Intermediate Holdings, Inc.’s, IMS Health’s and the U.S. subsidiary guarantors’ tangible and intangible assets, including the stock of IMS Health and certain of IMS Health’s U.S. restricted subsidiaries and a portion of the stock of IMS Health’s non-U.S. restricted subsidiaries directly owned by Healthcare Technology Intermediate Holdings, Inc., IMS Health or a U.S. subsidiary guarantor. In addition, the obligations of IMS AG are guaranteed by certain of its Swiss restricted subsidiaries and are secured by certain assets of IMS AG and the Swiss guarantors, including the stock of the Swiss guarantors, and the obligations of IMS Japan K.K. are secured by certain of its assets.  There have been no borrowings by IMS AG or IMS Japan K.K. to date.

Senior Notes

In February 2010, IMS Health issued an aggregate principal amount of $1 billion of senior unsecured notes due 2018 (“Old 12.5% Senior Notes”). In order to effect the Recapitalization, the Company conducted an exchange offer and consent solicitation to exchange the Old 12.5% Senior Notes for new 12.5% Senior Notes due 2018 (“New 12.5% Senior Notes” and, together with Old 12.5% Senior Notes, “12.5% Senior Notes”), and to solicit consents to proposed amendments to the indenture governing the Old 12.5% Senior Notes to permit the Recapitalization. The requisite consents were obtained and 99.96% of the holders of the Old 12.5% Senior Notes agreed to participate in the exchange and received New 12.5% Senior Notes in an equal principal amount. In connection with the IPO, the 12.5% Senior Notes were redeemed in April 2014 at a price equal to 100% of the principal amount of $1 billion, plus accrued interest of $17 million and a make-whole premium of $136 million. The Company incurred a loss on extinguishment of debt of $189 million in the second quarter of 2014, consisting of the make-whole premium and the write-off of $53 million of debt issuance costs and discounts. See Note 1 for further information on the IPO.

The Recapitalization also included a new offering of $500 million aggregate principal amount of 6% Senior Notes due 2020 (the “6% Senior Notes”). Interest is payable semi-annually each year. The 6% Senior Notes are guaranteed on a senior unsecured basis by IMS Health’s wholly-owned domestic subsidiaries that are guarantors under the Senior Secured Credit Facilities. The 6% Senior Notes have a three-year no call redemption period.

Senior PIK Notes

In August 2013, Healthcare Technology Intermediate, Inc., a wholly-owned subsidiary of the Company, issued $750 million of Senior PIK Notes. The Senior PIK Notes were unsecured obligations of Healthcare Technology Intermediate, Inc. and had a maturity date of September 1, 2018. Interest was to be paid semi-annually in March and September of each year, commencing March 1, 2014. The proceeds, along with cash provided by the Company, were used to pay an approximate $753 million dividend to shareholders of the Company and for the payment of fees and expenses of the transaction of approximately $17 million. In connection with the IPO, the Senior PIK Notes were redeemed in April 2014 at a price equal to 100% of the principal amount of $750 million, plus accrued interest of $6 million and a make-whole premium of $15 million. The Company incurred a loss on extinguishment of debt of $30 million in the second quarter of 2014, consisting of the make-whole premium and the write-off of $15 million of debt issuance costs. See Note 1 for further information on the IPO.

Costs 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. As of September 30, 2014, the unamortized balance of original issue discount reflected as a reduction to long term debt and fees and expenses related to the issuance of the debt included in Other assets was $24 million and $59 million, respectively. The Company recorded interest expense of $3 million and $9 million for the three months ended September 30, 2014 and 2013, respectively, and $15 million and $27 million for the nine months ended September 30, 2014 and 2013, respectively, related to the amortization of these balances.

The financing arrangements provide for certain covenants and events of default customary for similar instruments, including in the case of the Senior Secured Credit Facilities beginning with the fiscal quarter ending June 30, 2014, a covenant not to exceed a specified ratio of consolidated senior secured net indebtedness to Consolidated EBITDA, as defined in the 2014 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 revolving credit facility and New Term Loans, other actions permitted to be taken by a secured creditor. At September 30, 2014, the Company was in compliance with the financial covenants under the Company’s financing arrangements.

 

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Note 7. Pension and Postretirement Benefits

The following table summarizes the components of net periodic benefit cost for the Company’s pension benefits.

 

  

The Company’s net periodic benefit (credit) cost for its postretirement benefits was a credit of less than $1 million and $1 million for the three and nine months ended September 30, 2014, respectively, and a cost of less than $1 million and $1 million for the three and nine months ended September 30, 2013, respectively. During the nine months ended September 30, 2014, the Company contributed approximately $18 million to its pension and postretirement benefit plans and expects to contribute an additional $2 million for the remainder of 2014.

 

Note 8. Shareholders’ Equity

On March 24, 2014, the Company effected a 10-to-1 reverse stock split of its common stock. In connection with the split, the par value of the Company’s common stock changed from $0.001 per share to $0.01 per share. Unless otherwise noted, all references in these financial statements to number of shares, price per share and weighted average number of shares outstanding of common stock have been adjusted to reflect the reverse stock split on a retroactive basis. The split also applied to any outstanding equity-based awards.

The Company amended its Certificate of Incorporation on April 9, 2014, in connection with the closing of the IPO. The Amended and Restated Certificate of Incorporation authorizes the Board of Directors, at its discretion, to issue up to 50,000,000 shares of preferred stock with a par value of $0.01 per share. The preferred stock is issuable in series, which may vary as to certain rights and preferences. As of September 30, 2014, no preferred shares have been issued. The Amended and Restated Certificate of Incorporation also set the number of authorized common shares at 700,000,000 shares.

 

Note 9. Stock-Based Compensation

In March 2014, the Company’s board of directors adopted the IMS Health Holdings, Inc. 2014 Incentive and Stock Award Plan (the “2014 Equity Plan”). Both annual award opportunities and equity-based awards for certain key employees, including the Company’s named executive officers, non-employee directors, consultants and other persons who provide substantial services to the Company, are granted under the 2014 Equity Plan. The 2014 Equity Plan provides for grants of stock options (including incentive stock options), stock appreciation rights, restricted and deferred stock (including restricted stock units), dividend equivalents, other stock-based awards and performance awards, including annual incentive awards.

In the first nine months of 2014, the Company granted to employees options to purchase 135,000 shares of its common stock in the aggregate, at an exercise price equal to $19.50, 15,000 cash settled stock appreciation rights (“Phantom SARs”) at an exercise price equal to $19.50, and granted to employees and non-employee directors approximately 1,442,000 restricted stock units. The stock options are subject to time- and performance-based vesting over a five-year period. The Phantom SARs vested and were automatically exercised at the time of the IPO. See Note 1 for further information. The restricted stock units granted to employees vest in equal increments of fifty percent on each of the second and fourth anniversaries of the grant date. The restricted stock units granted to non-employee directors vest in full on the first anniversary of the grant date. The stock options and Phantom SARs were granted under the 2010 Equity Plan and the restricted stock units were granted under both the 2010 Equity Plan and the 2014 Equity Plan.

In August 2013, the board of directors of the Company declared a cash dividend of $2.60 per share. In accordance with the terms of the 2010 Equity Plan, option holders received $2.60 per share in respect of vested options and a corresponding $2.60 per share reduction in the exercise price of unvested options. The other terms of the equity awards, including vesting schedules, remained unchanged. The Company did not record a charge for modification of the exercise price for unvested awards as the modification was provided for by the terms of the 2010 Equity Plan.

 

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Note 10. Income Taxes

The Company operates in more than 100 countries around the world and its earnings are taxed at the applicable income tax rate in each of these countries. As required, the Company computes interim taxes based on an estimated annual effective tax rate.

The Company recorded a provision for income taxes of $11 million for the three months ended September 30, 2014 and a benefit for income taxes of $141 million for the nine months ended September 30, 2014, which resulted in effective tax rates of 20.4% and 41.6%, respectively. The tax provision for the three months ended September 30, 2014 was primarily impacted by non-taxable income in the U.S. related to a change in the fair value of a contingent consideration liability. The tax benefit for the nine months ended September 30, 2014 was primarily due to a significant amount of deductible expenses in the U.S. related to the redemption of the Company’s 12.5% Senior Notes and Senior PIK Notes, the termination of the management services agreement with affiliates of the Sponsors, and non-executive Phantom SARs compensation expense. In addition, the effective tax rate in both periods was impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate and by deferred U.S. income tax expense related to non-U.S. earnings net of associated tax credits. The Company also recorded a tax benefit of $6 million in the second quarter of 2014 as a result of the conclusion of a U.S. Federal income tax examination for 2010 and 2011. Also, under Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) (now incorporated into Accounting Standards Codification Topic 740, Income Taxes), the Company recorded $5 million of tax expense related to unrecognized tax benefits that if recognized would favorably impact the effective tax rate. Included in this amount is $2 million of interest and penalties.

The Company recorded a benefit for income taxes of $20 million for the three months ended September 30, 2013 and $6 million for the nine months ended September 30, 2013, which resulted in effective tax rates of 50.5% and 97.0%, respectively. The tax benefit in both periods was impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate and by deferred U.S. income tax expense related to non-U.S. earnings net of associated tax credits.  In addition, the tax benefit in both periods was impacted by a tax reduction of $10 million as a result of the conclusion of U.S. audits. Also, under FIN 48, the Company recorded $4 million of tax expense related to unrecognized tax benefits that if recognized would favorably impact the effective tax rate. Included in this amount is $2 million of interest and penalties.

The Company files numerous consolidated and separate income tax returns in U.S. (federal and state) and non-U.S. jurisdictions. The Company is no longer subject to U.S. federal income tax examination by tax authorities for years before 2012. Further, with few exceptions, the Company is no longer subject to tax examination in state and local jurisdictions for years prior to 2009 and in its material non-U.S. jurisdictions prior to 2008. It is reasonably possible that within the next twelve months the Company could realize $2 million of unrecognized tax benefits as a result of the expiration of certain statutes of limitation.

 

Note 11. 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 Condensed Consolidated Financial Statements based on its best estimates of such loss. In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. However, even in many instances where the Company has recorded an estimated liability, the Company is unable to predict with certainty the final outcome of the matter or whether resolution of the matter will materially affect the Company’s results of operations, financial position or cash flows. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.

The Company routinely enters into agreements with its suppliers to acquire data and with its clients to sell data, all in the normal course of business. In these agreements, the Company sometimes agrees to indemnify and hold harmless the other party for any damages such other party may suffer as a result of potential intellectual property infringement and other claims related to the use of the data. The Company has not accrued a liability with respect to these matters, as the exposure is considered remote.

Based on its review of the latest information available, management does not expect the impact of pending tax and legal 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.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

IMS Health Government Solutions Voluntary Disclosure Program Participation

The Company’s wholly-owned subsidiary, IMS Government Solutions Inc. (“IMS Government Solutions”), is primarily engaged in providing services and products under contracts with the U.S. government. U.S. government contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. government have the ability to investigate whether contractors’ operations are being conducted in accordance with such requirements. U.S. government investigations, whether relating to these contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take years to complete and may result in no adverse action against the Company.

IMS Government Solutions discovered potential noncompliance with various contract clauses and requirements under its General Services Administration Contract (the “GSA Contract”) which was awarded in 2002 to its predecessor company, Synchronous Knowledge Inc. (Synchronous Knowledge Inc. was acquired by IMS Health in May 2005). The potential noncompliance arose from three primary areas: first, at the direction of the government, work performed under one task order was invoiced under another task order without the appropriate modifications to the orders being made; second, personnel who did not meet strict compliance with the labor categories component of the qualification requirements of the GSA Contract were assigned to contracts; and third, certain discounts that were given to commercial customers were not also offered to the government, in alleged violation of the GSA Contract’s Price Reductions Clause. Upon discovery of the potential noncompliance, the Company began remediation efforts, promptly disclosed the potential noncompliance to the U.S. government, and was accepted into the Department of Defense Voluntary Disclosure Program. The Company filed its Voluntary Disclosure Program Report (“Disclosure Report”) on August 29, 2008. Based on the Company’s findings as disclosed in the Disclosure Report, the Company recorded a reserve of approximately $4 million for this matter in 2008. During 2010, the Company recorded an additional reserve of approximately $2 million as a result of its ongoing investigation relating to this matter. In September 2014, the General Services Administration offered to settle the third matter described above (i.e., the Price Reductions Clause aspect of the Disclosure Report) for $1.5 million, in-line with the amount the Company had recorded for this area of potential noncompliance. The Company is discussing the terms of settlement with the government for this Price Reductions Clause issue. The Company is currently unable to determine the outcome of all of these matters pending the resolution of the Voluntary Disclosure Program process and its ultimate liability arising from these matters could exceed its current reserves.

Symphony Health Solutions litigation

On July 24, 2013, Symphony Health Solutions filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against IMS Health alleging that IMS Health is actively engaging in anticompetitive business practices in violation of the Sherman Antitrust Act and Pennsylvania state law. The complaint seeks trebled actual damages in an unspecified amount, punitive damages, costs and injunctive relief. The Company believes the complaint is without merit, rejects all claims raised and will vigorously defend IMS Health’s position.

 

Note 12. Related Party

Due to related party relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.

Management services agreement

The Company had a management services agreement with affiliates of the Sponsors pursuant to which they would provide management services to the Company. In conjunction with the Company’s IPO, the management services agreement was terminated for a settlement amount of $72 million and the Company recorded this charge as a component of Selling and administrative expenses, exclusive of depreciation and amortization in the Condensed Consolidated Statements of Comprehensive (Loss) Income in the second quarter of 2014. Prior to the termination of the management services agreement, the Company paid an additional $2 million during the first quarter of 2014 in management fees pursuant to the management services agreement. During the three and nine months ended September 30, 2013, the Company paid $2 million and $6 million, respectively, in management fees.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Transactions with other Sponsor portfolio companies

The Sponsors are private equity firms that have investments in companies that do business with IMS Health in the ordinary course of business. The Company believes these transactions are conducted on an arms-length basis. The following is a summary of the activity with companies in which the Sponsors have investments:

 

 

Note 13. Operations by Business Segment

Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company operates a globally consistent business model, offering pharmaceutical business information and related services to its clients in more than 100 countries.

The Company maintains regional geographic management who are responsible for bringing the Company’s full suite of offerings to their respective markets and to facilitate local execution of its global strategies. However, the Company maintains global leaders for the majority of its critical business processes; and the most significant performance evaluations and resource allocations made by the Company’s chief operating decision maker is made on a global basis. As such, the Company has concluded that it maintains one operating and reportable segment.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

Geographic financial information:

The following represents selected geographic information for the regions in which the Company operates.  

 

Notes to Geographic Financial Information:

 

 

 

Note 14. Earnings per Share

Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed, when the result is dilutive, using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options and restricted stock units.

Employee stock options, restricted stock units and similar equity instruments granted by the Company are treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include restricted stock units and the dilutive effect of in-the-money options which is 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.

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IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

In periods of net loss, basic loss per share and diluted loss per share are the same since the effect of potential common shares is anti-dilutive and therefore excluded.

The following table presents the composition of basic and diluted weighted average shares outstanding:

 

  

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements (unaudited) and related notes and with the audited Consolidated Financial Statements and the notes thereto included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on April 4, 2014 (the “Prospectus”). This discussion and analysis includes forward-looking statements that involve risks and uncertainties. You should read the “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” sections of this Quarterly Report on Form 10-Q and the Prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The terms “Company,” “IMS,” “we,” “our” or “us,” as used herein, refer to IMS Health Holdings, Inc. and its consolidated subsidiaries unless otherwise stated or indicated by context. Amounts presented may not add due to rounding.

Background

We are a leading global information and technology services company providing clients in the healthcare industry with comprehensive solutions to measure and improve their performance. We have one of the largest and most comprehensive collections of healthcare information in the world, spanning sales, prescription and promotional data, medical claims, electronic medical records and social media. We standardize, organize, structure and integrate this data by applying our sophisticated analytics and leveraging our global technology infrastructure to help our clients run their organizations more efficiently and make better decisions to improve their operational and financial performance. We have a presence in over 100 countries and we generated 63% of our 2013 revenue from outside the United States.

We serve key healthcare organizations and decision makers around the world, spanning the breadth of life science companies, including pharmaceutical, biotechnology, consumer health and medical device manufacturers, as well as distributors, providers, payers, government agencies, policymakers, researchers and the financial community. Our information and technology services offerings, which we have developed with significant investment over our 60-year history, are deeply integrated into our clients’ workflow.

Initial Public Offering

On April 4, 2014, our common stock began trading on the New York Stock Exchange under the symbol “IMS”. On April 9, 2014, we completed our Initial Public Offering (“IPO”) of our common stock at a price to the public of $20.00 per share. We issued and sold 52 million shares of common stock in the IPO. The selling shareholders offered and sold 22.75 million shares of common stock in the IPO, including 9.75 million shares that were offered and sold by the selling shareholders pursuant to the full exercise of the underwriters’ allotment to purchase additional shares. As of September 30, 2014, affiliates of TPG Global, LLC (together with its affiliates, “TPG”), CPP Investment Board Private Holdings, Inc. (“CPPIB-PHI”), a wholly owned subsidiary of the Canada Pension Plan Investment Board (together with its affiliates, “CPPIB”), and Leonard Green & Partners, L.P. (“LGP” and collectively with TPG and CPPIB, the “Sponsors”) collectively remained our majority shareholders. We raised net proceeds of approximately $987 million from the IPO, after deducting underwriting discounts, commissions and related expenses totaling $53 million. We did not receive any of the proceeds from the sale of the shares sold by the selling shareholders.

Substantially all of our net proceeds of the IPO, approximately $500 million of borrowings under new term loans, $140 million of borrowings under our revolving credit facility and approximately $400 million of cash on the balance sheet were used to (i) fund the redemption of our 12.5% Senior Notes and Senior PIK Notes (defined in the Debt section below) and pay related fees and expenses, (ii) pay $30 million in the aggregate to holders of outstanding cash settled stock appreciation rights (“Phantom SARs”) granted under our 2010 Equity Incentive Plan and (iii) pay a one-time fee of $72 million to terminate our management services agreement with the Sponsors.

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Acquisitions

We make acquisitions to enhance our capabilities and offerings in certain areas, including technology services. During the three months ended September 30, 2014, we completed the acquisitions of Aileron Solutions, LLC (U.S.), Global Channel Marketing Solutions (U.S.) and additional consumer health businesses of Nielsen Holdings N.V. in certain European markets. Aileron uses anonymous medical claims data to provide analytic services to pharmaceutical, biotechnology, and medical device companies for the purpose of identifying healthcare professionals that will most benefit from information regarding medical device, diagnostics, or prescription products. This acquisition accelerates our services in two primary growth areas: oncology specialty and the medical device and diagnostic channel. Global Channel Marketing Solutions is a multi-channel marketing company that helps life sciences companies transform their customer engagements through multi-channel marketing operations support and solutions. Additionally, during the first six months of 2014, we completed the acquisitions of Forcea NV, a Belgium-based company that specializes in business intelligence applications and analytics for hospitals and life sciences organizations, the consumer health business of Nielsen Holdings N.V. in certain other European markets and Kent Capital in the U.S. The purchase price allocation for these acquisitions will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocation are not expected to have a material impact on our results of operations. The total cost for these acquisitions was approximately $60 million, of which $56 million was paid during the nine months ended September 30, 2014 and the balance will be paid in 2015 subject to certain conditions. See Note 2 to our Condensed Consolidated Financial Statements for additional information with respect to these acquisitions. The results of operations of acquired businesses have been included since the date of acquisition and were not significant to our consolidated results of operations.

In addition to the completed acquisitions, we announced in June 2014 our intention to acquire certain Cegedim Information Solutions and Customer Relationship Management (CRM) businesses for €385 million (approximately $520 million, assuming an exchange rate of $1.35 to each Euro) in cash. Cegedim, headquartered in Paris, France, is a global technology and services company specializing in healthcare whose offerings help pharmaceutical companies manage their sales and marketing operations. In October 2014, we announced that following the successful completion of works council information and consultation requirements in certain countries, the Cegedim board of directors approved our offer and a definitive purchase agreement has been executed. We expect to finance this acquisition through a mix of cash on hand and existing credit facilities, with no material impact on our leverage ratio. The proposed transaction is subject to customary regulatory and other closing conditions. We anticipate the transaction will close in early 2015.

Results excluding the Effects of Foreign Currency Translation and Certain Charges

We report results in U.S. dollars, but we do business on a global basis. Exchange rate fluctuations affect the U.S. dollar value of foreign currency revenue and expenses and may have a significant effect on our results. The discussion of our financial results in this report includes comparisons with the prior year in constant currency terms, using consistent exchange rates. We believe this information facilitates comparison of the underlying results over time. During the first nine months of 2014, the U.S. dollar was generally stronger against the other currencies in which we transact business as compared to the first nine months of 2013. The revenue growth at actual currency rates was lower than the growth at constant currency exchange rates during the first nine months period. See “—How Exchange Rates Affect our Results” and “—Quantitative and Qualitative Disclosures about Market Risk” below for a more complete discussion regarding the impact of foreign currency translation on our business.

We also discuss below our revenue, operating income, operating costs of information, direct and incremental costs of technology services, selling and administrative expenses and operating margins excluding non-cash stock-based compensation charges, acquisition-related charges, restructuring and related charges, purchase accounting adjustments and sponsor monitoring fees as a supplement to our results presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We believe providing these non-GAAP measures is useful as it facilitates comparisons across the periods presented and more clearly indicates trends. Management uses these non-GAAP measures in its global decision making, including developing budgets and managing expenditures.

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Results of Operations

Summary of Results

 

Net Income (Loss) to Adjusted EBITDA Reconciliation

We have included a presentation of Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) because we believe it provides additional information regarding our performance and our ability to service our debt. In addition, management believes that Adjusted EBITDA is useful to assess our operating performance trends because it excludes certain material non-cash items, unusual or non-recurring items that are not expected to continue in the future and certain other items. Adjusted EBITDA is not presented in accordance with U.S. GAAP, and our computation of Adjusted EBITDA may vary from those used by other companies. Adjusted EBITDA should not be considered as an alternative to net income or loss, operating income or loss, cash flows from operating activities or any other measures of operating performance, liquidity or indebtedness derived in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and it should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP.

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Revenue

Total revenue grew 3.7% to $656 million for the three months ended September 30, 2014 compared to $633 million in the same quarter in the prior year, or 5.4% on a constant currency basis. Revenue from our information offerings was relatively flat in the third quarter of 2014 and grew 1.8% on a constant currency basis over the same period. Revenue from our technology services offerings grew 9.3% in the third quarter of 2014 and grew 10.8% on a constant currency basis over the same period. Constant currency growth in the Americas and EMEA (countries in Europe, the Middle East and Africa) regions contributed approximately 90% of our total revenue growth during the third quarter of 2014 compared to the same quarter of 2013. The constant currency increase in information offerings was driven by growth in almost all our geographies, with the largest contribution coming from EMEA. The constant currency increase in technology services offerings was driven by increases in commercial services throughout almost all of our geographies, with the largest contributions coming from the Americas and EMEA.

Total revenue grew 5.0% to $1,963 million for the nine months ended September 30, 2014 compared to $1,870 million in the same period in the prior year, or 5.8% on a constant currency basis. Revenue from our information offerings increased 0.9% in the first nine months of 2014 and grew 1.9% on a constant currency basis over the same period. Revenue from our technology services offerings grew 11.3% in the first nine months of 2014 and grew 11.7% on a constant currency basis over the same period. Constant currency growth in the Americas and EMEA regions contributed approximately 85% of our total revenue growth during the first nine months of 2014 compared to the same period of 2013. The constant currency increase in information offerings was driven by growth in EMEA and to a lesser extent, Asia Pacific. The constant currency increase in technology services offerings was driven by increases in commercial services throughout almost all of our geographies, with the largest contributions coming from the Americas and EMEA.

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Operating Costs of Information, exclusive of Depreciation and Amortization

Operating costs of information offerings increased $1 million, or 1.3%, in the three months ended September 30, 2014 compared to the same quarter in the prior year. Excluding the effect of foreign currency translation of $1 million, non-cash stock-based compensation charges and restructuring and related charges, operating costs of information increased 2.4% in the third quarter of 2014 compared to the third quarter of 2013. The constant currency increase in operating costs of information was primarily due to an increase in data costs of approximately $3 million and compensation costs of approximately $2 million, in part due to an increase in headcount of approximately 200 employees from September 2013.  This increase was partially offset by lower professional fees of approximately $2 million.

Operating costs of information offerings increased $22 million, or 4.6%, in the nine months ended September 30, 2014 compared to the same period in the prior year. Excluding the effect of foreign currency translation of $2 million, non-executive Phantom SARs compensation expense of $10 million, non-cash stock-based compensation charges and restructuring and related charges, operating costs of information increased 2.4% in the first nine months of 2014 compared to the first nine months of 2013. The constant currency increase in operating costs of information was primarily due to an increase in data costs of approximately $8 million and compensation costs of $7 million, in part due to an increase in headcount of approximately 200 employees from September 2013. This increase was partially offset by lower professional fees of approximately $3 million.

Direct and Incremental Costs of Technology Services, exclusive of Depreciation and Amortization

Direct and incremental costs of technology services offerings grew $17 million, or 13.2%, in the three months ended September 30, 2014 compared to the same quarter in the prior year. Excluding the effect of foreign currency translation non-cash stock-based compensation charges, direct and incremental costs of technology services grew 13.4% in the third quarter of 2014 compared to the third quarter of 2013. The constant currency increase in direct and incremental costs of technology services was driven primarily by increased compensation costs of $12 million, partially due to an increase in headcount of approximately 500 employees from September 2013 to support the growth in our technology services offerings.  Additionally, data costs and professional fees increased by approximately $4 million and $3 million, respectively, compared to the third quarter of 2013.

Direct and incremental costs of technology services offerings grew $46 million, or 12.3%, in the nine months ended September 30, 2014 compared to the same period in the prior year. Excluding non-cash stock-based compensation charges, direct and incremental costs of technology services grew 11.5% in the first nine months of 2014 compared to the first nine months of 2013. The constant currency increase in direct and incremental costs of technology services was driven primarily by increased compensation costs of approximately $35 million, due to an increase in headcount of approximately 500 employees from September 2013 to support the growth in our technology services offerings and normal annual merit salary increases. Additionally, professional fees and data costs increased by approximately $4 million and $3 million, respectively, compared to the first nine months of 2013.

Selling and Administrative Expenses, exclusive of Depreciation and Amortization

Selling and administrative expenses decreased $4 million, or 2.5%, in the three months ended September 30, 2014 compared to the same quarter in the prior year. Excluding the effect of foreign currency translation, sponsor monitoring fees, non-cash stock-based compensation charges and acquisition-related charges, selling and administrative expenses decreased 6.1% in the third quarter of 2014 compared to third quarter of 2013. The constant currency decrease in selling and administrative expenses included decreased professional fees, exclusive of legal fees, of approximately $8 million, higher deferrals to computer software for new product development and a decrease in the fair value estimate of our contingent consideration liability of approximately $9 million, partially offset by an increase in compensation of approximately $10 million, primarily resulting from normal annual merit salary increases, higher selling and administrative headcount of approximately 250 employees from September 2013 from acquisitions and increased sales staff to drive revenue and higher legal fees of $4 million.

Selling and administrative expenses grew $124 million, or 28.6%, in the nine months ended September 30, 2014 compared to the same period in the prior year. Included in Selling and administrative expenses for the nine months of 2014 was $72 million related to the termination of the management services agreement with affiliates of the Sponsors and $20 million of non-executive Phantom SARs compensation expense. Excluding the effect of foreign currency translation of $1 million, sponsor monitoring fees, non-executive Phantom SARs compensation expense, non-cash stock-based compensation charges and acquisition-related charges, selling and administrative expenses decreased 1.4% in the first nine months of 2014 compared to first nine months of 2013. The constant currency decrease in selling and administrative expenses included lower professional fees, exclusive of legal fees, of approximately $7 million, higher deferrals to computer software for new product development and a decrease in the fair value estimate of our contingent consideration liability of approximately $15 million, partially offset by an increase in compensation of approximately $22 million, primarily resulting from normal annual merit salary increases, higher selling and administrative headcount of approximately 250 employees from September 2013 from acquisitions and increased sales staff to drive revenue and an increase in legal fees of $9 million. Additionally, both occupancy and information technology costs increased by approximately $5 million each, related to the increased number of employees.

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Depreciation and Amortization

Depreciation and amortization charges increased $11 million, or 11.3%, in the three months ended September 30, 2014 compared to the same quarter in the prior year, primarily due to an increase in amortization of computer software. Depreciation and amortization charges increased $28 million, or 9.2%, in the nine months ended September 30, 2014. The increase was primarily due to higher depreciation expense, in part due to accelerated depreciation of assets related to a building lease that was impaired in the second quarter of 2014, and higher computer software and other intangibles amortization resulting from acquisitions in 2013 and the first half of 2014.

Severance, Impairment and Other Charges

Severance, impairment and other charges in the three and nine months ended September 30, 2014 were $4 million and $29 million, respectively. The third quarter of 2014 charge was primarily severance related.  The nine months of 2014 charge was primarily comprised of $19 million of severance and $7 million for impaired leases for properties in the U.S. Severance, impairment and other charges in the three and nine months ended September 30, 2013 were income of $1 million and expense of $1 million, respectively, primarily comprised of impaired leases for properties vacated in the U.S. and contract-related charges for which we will not realize any future economic benefits, offset by the reversal of severance accruals due to the favorable settlement of required termination benefits and strategic business changes. See Severance, Impairment and Other Charges below for further information.

Operating Income

Operating income was $93 million in the three months ended September 30, 2014, a decline of $7 million, or 7.4%, compared to the same quarter in the prior year. This decrease was due to increases in operating expenses discussed above, partially offset by the revenue growth. Operating income  for the third quarter of 2014 increased $1 million in constant currency terms compared to the third quarter of 2013. Absent the impact of non-cash stock-based compensation charges, acquisition-related charges, restructuring and related charges, purchase accounting adjustments, sponsor monitoring fees and non-executive Phantom SARs compensation expense, operating income increased 1.4% at reported foreign currency rates and 9.2% on a constant currency basis for the third quarter of 2014.

Operating income was $121 million in the first nine months ended September 30, 2014, a decline of $155 million, or 56.1%, compared to the same period in the prior year. This decrease was due to $72 million related to the termination of the management services agreement with affiliates of the Sponsors, $30 million of non-executive Phantom SARs compensation expense and other increases in operating expenses discussed above, partially offset by the revenue growth. Operating income for the first nine months of 2014 decreased $141 million in constant currency terms compared to the first nine months of 2013. Absent the impact of non-cash stock-based compensation charges, acquisition-related charges, restructuring and related charges, purchase accounting adjustments, sponsor monitoring fees and non-executive Phantom SARs compensation expense, operating income increased 5.9% at reported foreign currency rates and 10.1% on a constant currency basis for the first nine months of 2014.

Trends in Operating Margins

Operating margins were 14.1% and 15.8% for the three months ended September 30, 2014 and 2013, respectively. Margins were negatively impacted by sponsor monitoring fees, non-cash stock-based compensation charges, acquisition-related charges, restructuring and related charges and purchase accounting adjustments. Excluding these charges, operating margins were 17.0% and 17.4% in the third quarter of 2014 and 2013, respectively.

Operating margins were 6.2% and 14.8% for the first nine months ended September 30, 2014 and 2013, respectively. Margins were negatively impacted by sponsor monitoring fees, non-executive Phantom SARs compensation expense, non-cash stock-based compensation charges, acquisition-related charges, restructuring and related charges and purchase accounting adjustments. Excluding these charges, operating margins were 16.9% and 16.8% in the first nine months of 2014 and 2013, respectively.

Non-Operating Loss, net

Non-operating loss, net was $35 million in the three months ended September 30, 2014, a decrease of $105 million compared to the same quarter in the prior year. Included in the non-operating loss for the third quarter of 2014 was an $8 million gain related to the revaluation of other non-functional assets and liabilities, partially offset by a $4 million loss related to foreign exchange derivatives. Included in the non-operating loss for the third quarter of 2013 was a $34 million loss related to the translation of non-functional currency debt and a $17 million loss related to the revaluation of other non-functional assets and liabilities. Additionally, interest expense, net of interest income was $44 million lower than in the third quarter of 2013, primarily due to the redemption of our 12.5% Senior Notes and Senior PIK Notes in April 2014.

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Non-operating loss, net was $459 million in the first nine months ended September 30, 2014, an increase of $177 million compared to the same period in the prior year. Included in the non-operating loss for the first nine months of 2014 was $151 million of make-whole premium and $68 million for the write-off of debt issuance costs and discounts, both of which were related to the redemption of our 12.5% Senior Notes and Senior PIK Notes in April 2014, $13 million of debt extinguishment losses and third-party fees related to the 2014 amendment of our Senior Secured Credit Facilities and $49 million related to the remeasurement of our Venezuelan Bolívar account balances. Included in the non-operating loss for the first nine months of 2013 was $12 million of debt extinguishment losses and third-party fees related to the amendment of our Term loan B in February 2013 and a $14 million charge related to the official devaluation of Venezuela’s current exchange rate. See Note 5 to our Condensed Consolidated Financial Statements for further information on the remeasurement of our Venezuelan Bolívar account balances and Note 6 for the debt transactions. Additionally, revaluation of other non-functional assets and liabilities, translation of non-functional currency debt and hedge of non-U.S. dollar anticipated royalties were a $3 million loss in the first nine months of 2014 compared to a $15 million loss in the first nine months of 2013. Partially offsetting this variance was interest expense, net of interest income, which was $60 million lower than in the first nine months of 2013, primarily due to the redemption of our 12.5% Senior Notes and Senior PIK Notes in April 2014.

Taxes

We operate in more than 100 countries around the world and our earnings are taxed at the applicable income tax rate in each of these countries. As required, we compute interim taxes based on an estimated annual effective tax rate.

Our effective tax rate was an expense of 20.4% and a benefit of 50.5% for the three months ended September 30, 2014 and 2013, respectively. Our effective tax rate for the three months ended September 30, 2014 was primarily impacted by non-taxable income in the U.S. related to a change in the fair value of a contingent consideration liability, while our effective tax rate for the three months ended September 30, 2013 was primarily impacted by a tax reduction of $10 million as a result of the conclusion of U.S. audits. Our effective tax rate was a benefit of 41.6% and a benefit of 97.0% for the nine months ended September 30, 2014 and 2013, respectively. Our tax benefit for the nine months ended September 30, 2014 was primarily due to a significant amount of deductible expenses in the U.S. during 2014 related to the redemption of our 12.5% Senior Notes and Senior PIK Notes, the termination of the management services agreement with affiliates of the Sponsors and non-executive Phantom SARs compensation expense. Our tax benefit for the nine months ended September 30, 2013 was primarily due to a tax reduction of $10 million as a result of the conclusion of U.S. audits.

We file numerous consolidated and separate income tax returns in U.S. (federal and state) and non-U.S. jurisdictions. We are no longer subject to U.S. federal income tax examination by tax authorities for years before 2012. Further, with few exceptions, we are no longer subject to tax examination in state and local jurisdictions for years prior to 2009 and in our material non-U.S. jurisdictions prior to 2008. It is reasonably possible that within the next twelve months we could realize $2 million of unrecognized tax benefits as a result of the expiration of certain statutes of limitation.

Operations by Geographic Region

Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. We operate a globally consistent business model, offering pharmaceutical business information and related services to our clients in more than 100 countries.

We maintain regional geographic management who are responsible for bringing our full suite of offerings to their respective markets and to facilitate local execution of its global strategies. However, we maintain global leaders for the majority of our critical business processes; and the most significant performance evaluations and resource allocations made by our chief operating decision maker are made on a global basis. As such, we have concluded that we maintain one operating and reportable segment.

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The following represents selected geographic information for the regions in which we operate.  

 

Notes to Geographic Financial Information:

 

Americas Region

Revenue in the Americas region grew 3.0% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, revenue grew 5.3% in the third quarter of 2014 compared to the third quarter of 2013. Revenue in the Americas region grew 4.2% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, revenue grew 5.8% in the first nine months of 2014 compared to the first nine months of 2013. Technology services offerings accounted for the majority of the growth for both the three and nine months of 2014, primarily driven by the U.S.

Operating income in the Americas region decreased 8.6% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, operating income decreased 2.6% in the third quarter of 2014 compared to the third quarter of 2013. The decrease in constant currency operating income in 2014 was a result of increases in operating expenses of $18 million to support the revenue growth in the region, partially offset by the revenue growth. Operating income in the Americas region decreased 9.0% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, operating income decreased 5.8% in the first nine months of 2014 compared to the first nine months of 2013. The decrease in constant currency operating income in 2014 was a result of non-executive Phantom SARS compensation expense of approximately $12 million, impairment of a leased property of $7 million and increases in other operating expenses of $44 million to support the revenue growth in the region, partially offset by revenue growth.

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EMEA Region

Revenue in the EMEA region grew 6.1% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, revenue grew 6.6% in the third quarter of 2014 compared to the third quarter of 2013. The constant currency increase in revenue in EMEA was the result of strong growth in our technology services offerings in North Europe and Africa and in our information offerings in South Europe and Middle East. Revenue in the EMEA region grew 8.5% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, revenue grew 6.5% in the first nine months of 2014 compared to the first nine months of 2013. The constant currency increase in revenue in EMEA was the result of strong growth in our technology services offerings in North Europe and Africa and Central Europe and in our information offerings in South Europe and Middle East. Eastern Europe had strong growth in both offerings.

Operating income in the EMEA region declined 4.2% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, operating income declined 0.7% in the third quarter of 2014 compared to the third quarter of 2013. The decrease in constant currency operating income in 2014 was a result of increases in operating expenses of $16 million to support the revenue growth, partially offset by revenue growth in the region. Operating income in the EMEA region grew 3.3% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, operating income grew 1.7% in the first nine months of 2014 compared to the first nine months of 2013. The increase in constant currency operating income in 2014 was a result of revenue growth in the region, partially offset by non-executive Phantom SARS compensation expense of approximately $10 million and increases in other operating expenses of $32 million to support the revenue growth.

Asia Pacific Region

Revenue in the Asia Pacific region grew 0.5% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, revenue grew 3.0% in the third quarter of 2014 compared to the third quarter of 2013. The constant currency increase in revenue was driven by overall growth in China and to a lesser degree, other Asia Pacific areas. Revenue in the Asia Pacific region declined 0.2% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, revenue grew 4.0% in the first nine months of 2014 compared to the first nine months of 2013. The constant currency increase in revenue was driven by growth in information offerings in China and both information and technology services offerings in Japan.

Operating income in the Asia Pacific region declined 9.2% in the three months ended September 30, 2014 compared to the same quarter in the prior year. On a constant currency basis, operating income declined 4.4% in the third quarter of 2014 compared to the third quarter of 2013. The decrease in constant currency operating income in 2014 was a result of increases in operating expenses of $5 million due to continued investments in the region to drive growth, partially offset by the revenue increase. Operating income in the Asia Pacific region declined 11.3% in the first nine months ended September 30, 2014 compared to the same period in the prior year. On a constant currency basis, operating income declined 4.5% in the first nine months of 2014 compared to the first nine months of 2013. The decrease in constant currency operating income in 2014 was a result of increases in operating expenses of $18 million due to continued investments in the region to drive growth, partially offset by the revenue increase.

How Exchange Rates Affect our Results

We operate globally, deriving a significant portion of our operating income from non-U.S. operations. As a result, fluctuations in the value of foreign currencies in which we transact business relative to the U.S. dollar may increase the volatility of U.S. dollar operating results. We enter into foreign currency forward contracts to partially offset the effect of currency fluctuations and the impact of these forward contracts is reflected in Other income (loss), net on the Condensed Consolidated Statements of Comprehensive (Loss) Income. Foreign currency translation decreased our U.S. dollar revenue growth by approximately 1.7 percentage points in the third quarter of 2014 and 0.8 percentage points in the first nine months of 2014, while the impact on operating income growth decreased our operating income by 8.4 and increased our operating loss 4.7 percentage points in the third quarter and first nine months of 2014, respectively.

Non-U.S. monetary assets are maintained in currencies other than the U.S. dollar, principally the Euro and the Japanese Yen, and as such, the reported values of these assets may be significantly affected by fluctuations in foreign exchange rates. At September 30, 2014, the Euro and Japanese Yen exchange rates were devalued against the U.S. Dollar compared to December 31, 2013. Where monetary assets are held in the functional currency of the local entity, changes in the value of these currencies relative to the U.S. dollar are reflected in accumulated other comprehensive income in the Condensed Consolidated Statements of Financial Position. The effect of exchange rate changes, which included the charges taken for our Venezuelan operations in both years, decreased the U.S. dollar amount of cash and cash equivalents by $62 million and $31 million during the first nine months of 2014 and 2013, respectively.

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Liquidity and Capital Resources

We fund our liquidity needs for capital investment, working capital, and other financial commitments through cash flow from operations and our credit facility. At September 30, 2014, cash and cash equivalents were $354 million and our total indebtedness was $3,899 million. Additionally, we had $228 million available for borrowing under our senior secured credit facility. In addition to operating cash flows, other factors that affect our overall management of liquidity include capital expenditures, software development costs, acquisitions, debt service requirements, adequacy of our revolving credit facility and access to the capital markets.

On April 9, 2014, we completed our initial public offering (“IPO”) of our common stock at a price to the public of $20.00 per share. We issued and sold 52 million shares of common stock in the IPO. The selling shareholders offered and sold 22.75 million shares of common stock in the IPO, including 9.75 million shares that were offered and sold by the selling shareholders pursuant to the full exercise of the underwriters’ allotment to purchase additional shares. We raised net proceeds of approximately $987 million from the IPO, after deducting underwriting discounts, commissions and related expenses totaling $53 million. We did not receive any of the proceeds from the sale of shares by the selling shareholders.

Substantially all of our net proceeds from the IPO, approximately $500 million of borrowings under new term loans, $140 million of borrowings under our revolving credit facility and approximately $400 million of cash on the balance sheet were used to (i) fund the redemption of our 12.5% Senior Notes and Senior PIK Notes (defined in the Debt section below) and pay related fees and expenses, (ii) pay $30 million in the aggregate to holders of outstanding cash-settled stock appreciation rights granted under our 2010 Equity Incentive Plan (“Phantom SARs”) and (iii) pay a one-time fee of $72 million to terminate our management services agreement with the Sponsors.

Our de-leveraging in connection with the IPO improved our credit ratings and financial position and enabled us to issue long-term debt at favorable market rates, including issuance of new Term Loan A debt in April 2014 of $500 million at an average floating rate of 2.5% and re-price and extend tenor on our existing $2,777 million of Term Loan B debt. Because we retired our highest cost debt, our interest expense is estimated to decline by 50% on an annualized basis, compared with a 20% reduction in debt.

We believe we will have available resources to meet both our short-term and long-term liquidity requirements, including our debt service. We expect the cash flow from our operations, combined with existing cash and amounts available under the secured revolving credit facility, will provide sufficient liquidity to fund our current obligations, projected working capital requirements, restructuring obligations and capital spending over the next year. While our board of directors will review our dividend policy from time to time, we currently do not intend to pay dividends in the foreseeable future. In addition we may, from time to time, purchase, repay, redeem or retire any of our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise. Over the next twelve months, we currently expect that we will use our cash and cash equivalents primarily to fund:

Cash Flows

Cash and cash equivalents decreased $371 million to $354 million at September 30, 2014 compared to $725 million at December 31, 2013. The decrease reflects cash used in operating activities of $37 million, investing activities of $207 million and financing activities of $65 million, and a decrease of $62 million due to the effect of exchange rate changes.

Net cash used in operating activities amounted to $37 million for the nine months ended September 30, 2014 compared to cash provided of $336 million for the nine months ended September 30, 2013. Cash flows from operating activities for the first nine months of 2014 reflects $72 million paid to terminate the management services agreement with affiliates of our Sponsors, $151 million in make-whole premiums related to the repayment of our 12.5% Senior Notes and Senior PIK Notes and $30 million paid to the holders of the outstanding Phantom SARs. Additionally, income tax paid, net of refunds, was $68 million higher in 2014, primarily due to a $47 million refund in 2013 related to the conclusion of a U.S. tax audit and due to increased taxable profits in 2014 in non-U.S. jurisdictions. Interest paid was $6 million lower in 2014, primarily due to the redemption of the 12.5% Senior Notes and the Senior PIK Notes in conjunction with our IPO in April 2014.

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Net cash used in investing activities amounted to $207 million for the nine months ended September 30, 2014, an increase in cash used of $33 million compared to the nine months ended September 30, 2013. The increase relates to higher capital expenditures, including the purchase of an office building in India, higher additions to computer software and a premium paid for the interest rate caps purchased in April 2014, partially offset by lower purchases of short-term investments and lower payments for acquisitions in the first nine months of 2014 compared to the first nine months of 2013.

Net cash used in financing activities amounted to $65 million for the nine months ended September 30, 2014, an increase in cash used of $17 million compared to the nine months ended September 30, 2013. Cash flows from financing activities for the first nine months of 2014 included the repayment of our 12.5% Senior Notes and Senior PIK Notes and the payment of contingent consideration relating to a 2013 acquisition, partially offset by the net proceeds received from the IPO, proceeds from the issuance of Term Loan A and borrowings, net of repayments under our revolving credit facility. Cash flows from financing activities for the first nine months of 2013 included the dividend paid to shareholders, partially offset by proceeds from our August 2013 debt offering.

Debt

At September 30, 2014, our principal amount of debt totaled $3,923 million. Management does not believe that this level of debt poses a material risk to us due to the following factors:

The following table summarizes our debt at the dates indicated:

 

Senior Secured Credit Facilities

In March 2014, IMS Health Incorporated (“IMS Health”), our indirect wholly-owned subsidiary, and certain of its subsidiaries, as co-borrowers, entered into an amendment (the “2014 Amendment”) to amend and restate the Second Amended and Restated Credit and Guaranty Agreement, which until such date governed IMS Health’s Senior Secured Credit Facilities (the amended and restated credit agreement resulting from the 2014 Amendment, the “2014 Credit Agreement”). The 2014 Amendment added commitments in respect of new Term A loans (the “New Term Loans”) in the aggregate dollar equivalent amount of $500 million, increased outstanding commitments under the revolving credit facility to $500 million, modified certain interest rates and covenants and made additional modifications to IMS Health’s Senior Secured Credit Facilities. The commitments in respect of the New Term Loans mature in March 2019. The New Term Loans were funded in April 2014 concurrent with the IPO. In addition to the New Term Loans, we have Term B loan commitments and in March 2014, IMS Health reduced the borrowing margins and the EUR LIBOR floor by 25 basis points each, respectively, extended the maturity date to March 2021 for these existing Term B loans and increased the capacity to $500 million and extended the maturity date to March 2019 for the existing Revolving Credit Facility. As a result of the 2014 Amendment, we recorded $11 million of debt extinguishment losses and $2 million of third party fees in Other income (loss), net during the nine months ended September 30, 2014.

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In February 2013, IMS Health and certain of its subsidiaries entered into an amendment of the then existing senior secured term loans due 2017 (“Term Loan Amendment”) to reduce our borrowing costs. IMS Health reduced the borrowing margins and LIBOR floors by 50 basis points and 25 basis points, respectively, for both the USD and EUR tranches of debt. As a result of the Term Loan Amendment, we recorded $9 million of debt extinguishment losses and $3 million of third party fees in Other income (loss), net during the nine months ended September 30, 2013.

In October 2012, IMS Health and certain of its subsidiaries completed a recapitalization (the “Recapitalization”). The Recapitalization included an amendment (the “Amendment”) to its Amended and Restated Credit and Guaranty Agreement for additional term loans and (a) extended the maturity date of the Revolving Credit Facility to August 2017; and (b) increased the maximum leverage ratio.

IMS Health is required to make scheduled quarterly payments on the Term A loans at rates that vary from 1.25% to 2.50% of the original principal amount of the term loans, with the remaining balance paid at maturity. Additionally IMS Health is required to make scheduled quarterly payments on the Term B loans each equal to approximately 0.25% of the original principal amount of the term loans, with the remaining balance paid at maturity. IMS Health is also required to pay an annual commitment fee that ranges from 0.30% to 0.40% in respect of any unused commitments under the revolving credit facility.

At September 30, 2014, IMS Health, IMS AG and IMS Japan K.K., as co-borrowers, had an aggregate $500 million revolving credit facility, of which $228 million was unused. The Senior Secured Credit Facilities are secured by a security interest in substantially all of Healthcare Technology Intermediate Holdings, Inc.’s, IMS Health’s and the U.S. subsidiary guarantors’ tangible and intangible assets, including the stock of IMS Health and certain of IMS Health’s U.S. restricted subsidiaries and a portion of the stock of IMS Health’s non-U.S. restricted subsidiaries directly owned by Healthcare Technology Intermediate Holdings, Inc., IMS Health or a U.S. subsidiary guarantor.  In addition, the obligations of IMS AG are guaranteed by certain of its Swiss restricted subsidiaries and are secured by certain assets of IMS AG and the Swiss guarantors, including the stock of the Swiss guarantors, and the obligations of IMS Japan K.K. are secured by certain of its assets.  There have been no borrowings by IMS AG or IMS Japan K.K. to date.

Senior Notes

In February 2010, IMS Health issued an aggregate principal amount of $1 billion of senior unsecured notes due 2018 (“Old 12.5% Senior Notes”). In order to effect the Recapitalization, we conducted an exchange offer and consent solicitation to exchange the Old 12.5% Senior Notes for new 12.5% Senior Notes due 2018 (“New 12.5% Senior Notes” and, together with Old 12.5% Senior Notes, “12.5% Senior Notes”), and to solicit consents to proposed amendments to the indenture governing the Old 12.5% Senior Notes to permit the Recapitalization. The requisite consents were obtained and 99.96% of the holders of the Old 12.5% Senior Notes agreed to participate in the exchange and received New 12.5% Senior Notes in an equal principal amount. In connection with the IPO, the 12.5% Senior Notes were redeemed in April 2014 at a price equal to 100% of the principal amount of $1 billion, plus accrued interest of $17 million and a make-whole premium of $136 million. We incurred a loss on extinguishment of debt of $189 million in the second quarter of 2014, consisting of the make-whole premium and the write-off of $53 million of debt issuance costs and discounts.

The Recapitalization also included a new offering of $500 million aggregate principal amount of 6% Senior Notes due 2020 (the “6% Senior Notes”). Interest is payable semi-annually each year. The 6% Senior Notes are guaranteed on a senior unsecured basis by IMS Health’s wholly-owned domestic subsidiaries that are guarantors under the Senior Secured Credit Facilities. The 6% Senior Notes have a three-year no call redemption period.

Senior PIK Notes

In August 2013, Healthcare Technology Intermediate, Inc., our wholly-owned subsidiary, issued $750 million of Senior PIK Notes. The Senior PIK Notes were unsecured obligations of Healthcare Technology Intermediate, Inc. and had a maturity date of September 1, 2018. Interest was to be paid semi-annually in March and September of each year, commencing March 1, 2014. The proceeds, along with cash provided by us, were used to pay an approximate $753 million dividend to our shareholders and for the payment of fees and expenses of the transaction of approximately $17 million. In connection with the IPO, the Senior PIK Notes were redeemed in April 2014 at a price equal to 100% of the principal amount of $750 million, plus accrued interest of $6 million and a make-whole premium of $15 million. We incurred a loss on extinguishment of debt of $30 million in the second quarter of 2014, consisting of the make-whole premium and the write-off of $15 million of debt issuance costs.

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Costs 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. As of September 30, 2014, the unamortized balance of original issue discount reflected as a reduction to long term debt and fees and expenses related to the issuance of the debt included in Other assets was $24 million and $59 million, respectively. We recorded interest expense of $3 million and $9 million for the three months ended September 30, 2014 and 2013, respectively, and $15 million and $27 million for the nine months ended September 30, 2014 and 2013, respectively, related to the amortization of these balances.

The financing arrangements provide for certain covenants and events of default customary for similar instruments, including in the case of the Senior Secured Credit Facilities beginning with the fiscal quarter ending June 30, 2014, a covenant not to exceed a specified ratio of consolidated senior secured net indebtedness to Consolidated EBITDA, as defined in the 2014 Credit Agreement and a covenant to maintain a specified minimum interest coverage ratio. If an event of default occurs under any of our or our subsidiaries’ financing arrangements, the creditors under such financing arrangements will be entitled to take various actions, including the acceleration of amounts due under such arrangements, and in the case of the lenders under the revolving credit facility and New Term Loans, other actions permitted to be taken by a secured creditor. At September 30, 2014, we were in compliance with the financial covenants under our financing arrangements.

Severance, Impairment and Other Charges

As a result of ongoing cost reduction efforts, we recorded severance charges consisting of global workforce reductions to streamline our organization. The following table sets forth the activity in our severance-related reserves for the nine months ended September 30, 2014:

 

Other charges

During the nine months ended September 30, 2014, we recorded impairment charges of $10 million, $7 million of which related to impaired leases for properties in the U.S. and $3 million for the write-down of certain assets and contract-related charges for which we will not realize any future economic benefits.

During the three and nine months ended September 30, 2013, we recorded impairment charges of $6 million and $7 million, respectively, related to impaired leases for properties vacated in the U.S. and contract-related charges for which we will not realize any future economic benefits.

Contingencies

We are exposed to certain known contingencies that are material to our investors. The facts and circumstances surrounding these contingencies and a discussion of their effect on us are included in Note 11 to our Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q. These contingencies may have a material effect on our liquidity, capital resources or results of operations. In addition, even where our reserves are adequate, the incurrence of any of these liabilities may have a material effect on our liquidity and the amount of cash available to us for other purposes.

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

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Contractual Obligations

Following the redemption of our 12.5% Senior Notes and Senior PIK Notes in April 2014 and the March 2014 amendment to our Senior Secured Credit facilities, our future scheduled debt principal payments and estimated interest payments, including payments on our interest rate swaps, based on rates as of September 30, 2014 are $49 million for the remainder of 2014, $193 million for 2015, $191 million for 2016, $195 million for 2017, $205 million for 2018 and $3,749 million thereafter.

Recently Issued Accounting Standards

Information relating to recently issued accounting standards is included in Note 1 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, and other future conditions. Forward-looking statements can be identified by words such as “anticipate,” “believe,” “envision,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue,” “contemplate” and other similar expressions, although not all forward-looking statements contain these identifying words. Examples of forward-looking statements include, among others, statements we make regarding:

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We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place significant reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Important factors that could cause actual results and events to differ materially from those indicated in the forward-looking statements include, among others, the following:

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements whether as a result of new information, future developments or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Other than the items noted below in the foreign exchange and interest rate risk sections, there have been no material changes to our quantitative and qualitative disclosures about market risk during the nine months ended September 30, 2014 as compared to the quantitative and qualitative disclosures about market risk described in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission (the “SEC”) on April 4, 2014 (the “Prospectus”).

Foreign exchange risk

We transact business in more than 100 countries and are subject to risks associated with changing foreign currency exchange rates. Exchange rate fluctuations affect the U.S. dollar value of foreign currency revenue and expenses and may have a significant effect on our results. A hypothetical 1% change in exchange rates relative to the U.S. dollar at September 30, 2014 would result in an approximate $6 to $7 million revenue impact related to the Euro, $2.5 million revenue impact related to the Japanese Yen and $6 million revenue impact related to all our non-U.S. dollar other currencies. The actual impact of exchange rate movements in the future could differ materially from this hypothetical analysis, based on the mix of our revenue and the timing and magnitude of individual exchange rate movements.

Commencing in the second quarter of 2014, we utilize foreign currency forward contracts to minimize the impact of foreign exchange movements on non–functional currency assets and liabilities. The forward contracts are not designated as hedges and do not subject us to material balance sheet risk because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. Additionally in the second quarter of 2014, we designated Euro currency borrowings as hedges of our foreign currency exposures of the net investment in certain foreign affiliates. As of September 30, 2014, these borrowings (net of original issue discount) were €869 million ($1,093 million). See Note 5 to the Condensed Consolidated Financial Statements for more information.

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Interest rate risk

In April 2014, we purchased U.S. Dollar denominated interest rate caps and U.S Dollar and Euro denominated interest rate swaps. These caps and swaps are designated as cash flow hedges and are being used to manage our exposure to interest rate changes. See Note 5 to the Condensed Consolidated Financial Statements for more information.

Venezuela

In February 2013, the Venezuelan government announced the devaluation of its currency and the official exchange rate was adjusted from 4.30 Bolívars to each U.S. dollar to 6.30. Our Swiss operating subsidiary, IMS AG, maintains certain account balances in Bolívars (mainly cash and cash equivalents). As these balances are held in a non-functional currency of IMS AG, we are required to mark-to-market these balances at each reporting date and reflect these movements as gains or losses in income. Approximately 2% of our consolidated cash and cash equivalents balance as of September 30, 2014 was held in Venezuelan Bolívars.

Since January 2010, Venezuela has been designated as hyper-inflationary, and as such, all foreign currency fluctuations are recorded in income for certain account balances at our local Venezuelan operating subsidiary. We recorded a pre-tax charge of approximately $14 million to Other income (loss), net in the first quarter of 2013 related to the remeasurement of the IMS AG Venezuelan Bolívar account balances and the remeasurement of certain local Venezuelan account balances.

In 2014, the Venezuelan government significantly expanded the use of the Supplementary Foreign Currency Administration System (“SICAD”) I exchange market and created a third exchange market called SICAD II. These markets have exchange rates significantly less favorable than the official exchange rate. As a result, we assessed our legal eligibility to access the available foreign exchange mechanisms, the transactions that would be eligible, and our past and expected future ability to transact through those mechanisms. Based on our analysis, we believe SICAD II represents the rate which best reflects the economics of our Venezuelan business activity, and as such, we concluded that we should utilize the SICAD II exchange rate to remeasure our Venezuelan Bolívar account balances as of June 30, 2014. The SICAD II rate at June 30, 2014 was approximately 50 Bolívars to one U.S. Dollar. As a result of the change to the SICAD II rate, we recorded a pre-tax charge of $49 million to foreign exchange loss within Other income (loss), net in the second quarter of 2014. We will continue to monitor any future impact of these mechanisms on the exchange rate we use to remeasure our Venezuelan subsidiary’s financial statements. The Company continued to remeasure its Venezuela account balances at the SICAD II rate of approximately 50 Bolívars to one U.S. Dollar as of September 30, 2014. The net assets held and revenue generated by our Venezuelan subsidiaries were not material to our consolidated results as of September 30, 2014.

Venezuela has foreign exchange and price controls which have historically limited our ability to convert Bolívars to U.S. dollars and transfer funds out of Venezuela. Additionally, government restrictions on the transfer of cash out of the country have limited our ability to repatriate cash; however, these restrictions have not impacted our ability to execute our business plans in Venezuela. It is not possible for us to predict the extent to which we may be affected by additional future changes in exchange rates and exchange controls imposed by the Venezuelan government.

 

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-14c and 15d-14c under the Exchange Act) as of September 30, 2014 (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

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There have been no changes in the Company’s internal control over financial reporting that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

Information in response to this Item is incorporated by reference to the information set forth under the heading “Legal Matters” in the Company’s prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on April 4, 2014 (the “Prospectus”).

 

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in the Prospectus.

 

 

 

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Item 6. Exhibits

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized on October 30, 2014.

 

 

 

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