‘

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2016

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.

 

 

 

 

 

 

---

IMS HEALTH HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

1

---

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).

 

 

2

---

IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

  

  

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

 

 

3

---

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).

 

 

4

---

IMS HEALTH HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited)

  

 

⁽¹⁾ Shares of common stock at December 31, 2015 were revised to include 0.9 million restricted shares granted on December 31, 2015.

 

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

 

 

5

---

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. For information offerings, the Company receives data without patient identifiers and 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 61% of its 2015 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.  

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 income, cash flows and stockholders’ 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, 2015 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 Annual Report on Form 10-K for the year ended December 31, 2015. Certain prior year amounts have been reclassified to conform to the 2016 presentation. Amounts presented in the Condensed Consolidated Financial Statements may not add due to rounding.

Merger with Quintiles Transnational Holdings, Inc.

On May 3, 2016, the Company and Quintiles Transnational Holdings Inc. (“Quintiles”) entered into a definitive merger agreement, pursuant to which the companies will be combined. The merged company will be renamed Quintiles IMS Holdings, Inc. Under the terms of the merger agreement, the Company’s shareholders will receive 0.3840 shares of Quintiles common stock for each share of IMS common stock. Upon completion of the merger, the Company’s shareholders will own approximately 51.4 percent of the shares of the combined company on a fully diluted basis and Quintiles shareholders will own approximately 48.6 percent of the combined company on a fully diluted basis. The transaction is subject to customary closing conditions, including regulatory approvals and approval by both IMS and Quintiles shareholders, and is expected to close early in the fourth quarter of 2016.

Recently Issued Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies certain aspects of accounting for share-based payments to employees, including the requirement for companies to recognize the income tax effects of awards in the income statement when the awards vest or are settled. Additionally, companies can elect to estimate forfeitures or recognize when they occur. The guidance is effective for the Company’s interim and annual periods beginning January 1, 2017. Earlier adoption is permitted. The Company is currently evaluating the impact of this standard on 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 and services. The guidance also requires enhanced disclosures. In August 2015, the FASB delayed the effective date of the guidance. In March 2016, the FASB issued further guidance on assessing whether an entity is a principal or an agent in a revenue transaction, which impacts whether an entity reports revenue on a

6

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

gross or net basis. Additionally, in 2016, the FASB issued implementation guidance for the revenue standard, including guidance on identifying performance obligations. These revenue standards are effective for the Company’s interim and annual periods beginning January 1, 2018. Earlier adoption is permitted. The Company is currently evaluating the impact of these standards on its consolidated financial statements, as well as the method of transition it will use in adopting the new standards.

In February 2016, the FASB issued updated guidance on leases. The guidance requires a lessee to recognize a right-of-use asset and a lease liability on the statement of financial position for all leases with terms more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The guidance is effective for the Company’s interim and annual periods beginning January 1, 2019. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition approach, which requires application of the new guidance at the beginning of the earliest comparative period presented. The Company is currently evaluating the impact of this new standard on its consolidated financial statements and related disclosures.

In May 2015, the FASB updated the accounting standards related to fair value measurement for investments that are measured at net asset value. The update eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share as a practical expedient. Adoption of this guidance on January 1, 2016 only impacts disclosures related to certain assets held by its pension plans and did not impact the Company’s consolidated financial results.

In April 2015, the FASB issued guidance to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. Adoption of this guidance on January 1, 2016, which is applied prospectively, did not have a material impact on our consolidated financial statements.

 

 

 

Note 2. Acquisitions

The Company makes acquisitions to enhance its capabilities and offerings in certain areas, including technology services.

The Company completed five unrelated individually immaterial acquisitions during the first six months of 2016, one of which occurred in the second quarter of 2016. These acquisitions expanded the Company’s existing capabilities in technology services offerings, and to a lesser degree, information offerings. The purchase price allocations 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 the Company’s results of operations. The Condensed Consolidated Financial Statements include the results of the acquisitions subsequent to closing. As these acquisitions were immaterial to the Company’s operating results both individually and in the aggregate, pro forma results of operations are not provided. The following table provides certain financial information for these acquisitions, including the preliminary allocation of the aggregate purchase price to certain tangible and intangible assets acquired and goodwill.

 

 

7

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

During the second quarter of 2016, the Company recorded an adjustment to its preliminary purchase price allocation as well as related deferred tax effects, which reduced the amount allocated to client relationships by $17 million for an acquisition that occurred in the first quarter of 2016.

Goodwill is attributable to the value of the synergies between the acquired companies and IMS Health.

Cegedim Acquisition

In April 2015, the Company completed the acquisition of certain customer relationship management (“CRM”) and strategic data businesses of Cegedim, SA (“Cegedim” and the “Cegedim acquisition”). Cegedim is a global technology and services company specializing in healthcare whose offerings help pharmaceutical companies manage their sales and marketing operations.

The following pro forma information presents the financial results as if the acquisition of Cegedim had occurred on January 1, 2014, with pro forma adjustments to give effect to an increase in Selling and administrative expenses in 2014 for acquisition-related costs, additional depreciation and amortization for fair value adjustments of property, plant and equipment and intangible assets, an increase in interest expense from acquisition financing, and related tax effects. The pro forma results do not include any anticipated cost synergies, costs or other effects of the planned integration of Cegedim. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred for the period presented below had the Cegedim acquisition been completed on January 1, 2014, nor are they indicative of the future operating results of the Company.

 

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 $37 million through 2018. The Company’s contingent consideration recorded on the balance sheet was approximately $22 million and $28 million at June 30, 2016 and December 31, 2015, 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. Changes in the fair value estimates are included in Selling and administrative expenses.

 

 

Note 3. Goodwill

The following table sets forth changes in the Company’s goodwill for the six months ended June 30, 2016.

  

 

8

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

 

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 six months ended June 30, 2016:  

 

Other charges

During the six months ended June 30, 2016, the Company recorded impairment charges of $2 million, the majority of which related to impaired leases for properties.

During the six months ended June 30, 2015, the Company recorded impairment charges of $7 million, $6 million of which was recorded in the second quarter of 2015. The $7 million charge is primarily comprised of the write-off of the value of computer software that was no longer in use 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 fluctuating foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate movements. Accordingly, the Company enters into foreign currency forward contracts to 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”). 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 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.

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. These contracts have various expiration dates through September 2016.

9

---

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 Income:

 

Net Investment Risk Management

The Company designates its foreign currency denominated debt as a hedge of its net investment in foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in the Euro exchange rate with respect to the U.S. Dollar. As of June 30, 2016, these borrowings (net of original issue discount) were €1,120 million ($1,244 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 (losses) related to the net investment hedge included in cumulative translation adjustment were $32 million and $(50) million for the three months ended June 30, 2016 and 2015, respectively, and $(20) million and $72 million for the six months ended June 30, 2016 and 2015, respectively.

Interest Rate Risk Management

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

In 2014, the Company purchased U.S. Dollar denominated interest rate caps (“2014 Caps”) at strike rates ranging between 2% and 3%. These caps expire at various times between April 2017 and April 2019 and are designated as cash flow hedges.

The Company also entered into U.S. Dollar and Euro denominated interest rate swap agreements in 2014 (“2014 Swaps”) to hedge interest rate exposure on its borrowings. The 2014 swaps 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 2010 (“2010 Swaps”) to hedge interest rate exposure on its borrowings. The 2010 Swaps expired at various times through January 2016. On these agreements, the Company paid a fixed rate ranging from 3% to 3.3% and received a variable rate of interest equal to the three-month LIBOR. The 2010 Swaps were not designated as cash flow hedges.

10

---

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:

 

  

 

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 for foreign exchange derivatives and interest expense for interest rate derivatives on the Condensed Consolidated Statements of Comprehensive Income. Cash flows are classified consistent with the underlying hedged item.

The effects of derivative instruments in cash flow hedging relationships on the Condensed Consolidated Statements of Comprehensive Income are as follows:

 

 

  

The pre-tax gain recognized in other income (loss), net for foreign exchange contracts not designated as hedging instruments was $(4) million and $2 million for the three months ended June 30, 2016 and 2015, respectively, and $(3) million and $– million for the six months ended June 30, 2016 and 2015, respectively.

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 $20 million of pre-tax unrealized losses related to its foreign exchange contracts and interest rate derivatives included in AOCI at June 30, 2016 to be reclassified into earnings within the next twelve months.

11

---

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 June 30, 2016 and December 31, 2015 due to the short-term nature of these instruments. At June 30, 2016 and December 31, 2015, the fair value of total debt approximated $4,564 million and $4,229 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:

 

 

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.

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.

 

 

12

---

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 June 30, 2016 for the remainder of 2016 and thereafter were as follows:

 

  

Senior Secured Credit Facilities

In January 2016, IMS Health Incorporated (“IMS Health”), an indirect wholly owned subsidiary of the Company, entered into an amendment (the “2016 Amendment”) to the Third Amended and Restated Credit and Guaranty Agreement, dated as of March 17, 2014, among IMS Health, IMS AG and IMS Japan K.K., as co-borrowers, Healthcare Technology Intermediate Holdings, Inc., Bank of America, N.A. and the other lenders party thereto (as amended by the 2016 Amendment, the “Credit Agreement” and, together with the related security and other documents for the senior secured term loan facilities and the senior secured revolving facility, the “Senior Secured Credit Facilities”). The 2016 Amendment increased outstanding commitments under the Company’s existing Term A loans by $300 million. The proceeds from the additional Term A loans were used for general corporate purposes, including funding acquisitions and repaying existing loans under IMS Health’s senior secured revolving credit facility. As a result of the 2016 Amendment, the Company incurred $2 million of fees; of which $1 million was recorded in Other income (loss), net during the first quarter of 2016 and $1 million will be amortized to interest expense.

At June 30, 2016, the Company had an aggregate $500 million revolving credit facility, of which $155 million was unused.

 

 

Note 7. Pension and Postretirement Benefits

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

 

13

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

 

The Company’s net periodic benefit credit for its postretirement benefits was less than $1 million for the three and six months ended June 30, 2016 and 2015, respectively. During the six months ended June 30, 2016, the Company contributed approximately $9 million to its pension and postretirement benefit plans and expects to contribute an additional $3 million for the remainder of 2016.

 

 

Note 8. Stockholders’ Equity

Share Repurchase

On December 16, 2015, the Company’s board of directors approved a $250 million common stock repurchase authorization. Through December 31, 2015, the Company had purchased 670 thousand shares of its common stock having an aggregate value of approximately $17 million at an average price of $25.70 per share. In the second quarter of 2016, the Company purchased 1 million shares of its common stock having an aggregate value of approximately $25 million at an average price of $25.42 per share. These share repurchases were funded through a combination of cash and borrowings under the Company’s revolving credit facility. The repurchase authorization does not have a specified expiration date and can be modified, suspended or discontinued at any time. As of June 30, 2016, approximately $207 million is available to purchase shares under the December 2015 authorization.

On May 3, 2015, the Company’s board of directors authorized a $300 million common stock repurchase program. In connection with that program, on May 12, 2015, the Company purchased 11.1 million shares of its common stock from the underwriters of the Secondary Offering (as defined below) having an aggregate value of approximately $300 million at $27.0875 per share, equal to the midpoint between the public offering price and the price paid by the underwriters to the Selling Stockholders (as defined below) for the shares sold in the Secondary Offering. The share repurchase was funded through a combination of available cash, borrowings from its revolving credit facility and additional term loans under its Senior Secured Credit Facilities.

Secondary Offering

On May 12, 2015, existing shareholders of the Company (collectively, the “Selling Stockholders”) completed the sale of 57.97 million shares of the Company’s common stock at a public offering price of $27.50 per share, including 6.87 million shares that were offered and sold by the Selling Stockholders pursuant to the full exercise of the underwriter’s option to purchase additional shares. These transactions are collectively referred to as the “Secondary Offering.” The Company did not sell any stock in, or receive any proceeds from, the Secondary Offering. The Company incurred $1 million of expenses in the second quarter of 2015 related to the Secondary Offering, which were included in Selling and administrative expenses.  

 

 

Note 9. Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in the components of AOCI, net of tax, for the periods indicated:

 

14

---

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 $7 million and $27 million for the three and six months ended June 30, 2016, respectively. The tax expense in both periods was favorably impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate.

The Company recorded a provision for income taxes of $13 million and a benefit from income taxes of $227 million for the three and six months ended June 30, 2015, respectively. The tax expense in the three months ended June 30, 2015 was favorably impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate. Historically, the Company provided deferred taxes with respect to all of the unremitted earnings of its non-U.S. subsidiaries. The tax benefit for the six months ended June 30, 2015 was favorably impacted as the Company began asserting as of the beginning of 2015, with certain exceptions, that the unremitted earnings of its non-U.S. subsidiaries will be indefinitely reinvested. As a result of this change in assertion, the Company reversed a previously established deferred tax liability of $256 million as a discrete benefit in the first quarter of 2015.  

 

 

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 legal and tax proceedings, claims and litigation, either individually or in the aggregate, to have a material adverse effect on the Company’s results of operations, cash flows or financial position. However, one or more unfavorable outcomes in any claim or litigation against the Company could have a material adverse effect for the period in which it is resolved. The following is a summary of certain legal matters involving the Company.

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

15

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

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. On April 23, 2015, the Company and the government executed the settlement agreement and made the $1.5 million payment. The Company is currently unable to determine the outcome of the remaining 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 and two of its subsidiaries (collectively “Symphony”) filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania against IMS Health alleging anticompetitive business practices in violation of the Sherman Antitrust Act and Pennsylvania State law. IMS Health asserted various counterclaims in that lawsuit. On December 20, 2013, IMS Health filed a lawsuit in the U.S. District Court for the District of Delaware against Symphony for infringement of three patents seeking injunctive relief and damages. In late 2015, the Company and Symphony entered into a settlement agreement whereby each of the parties agreed to terminate their respective lawsuits, and these lawsuits were dismissed with prejudice in January, 2016.

 

 

Note 12. 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 clients in the healthcare industry with comprehensive solutions to measure and improve their performance.

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.

 

16

---

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.  

 

 

The Company periodically reviews and makes changes to its geographic reporting classifications. As a result of these changes, prior years’ geographic financial information was reclassified to conform to the current year presentation. The reclassifications did not change previously reported condensed consolidated results of operations.

 

 

 

Note 13. Earnings per Share

Basic earnings per share is computed using the weighted-average number of common shares outstanding during the period. Diluted earnings 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

17

---

IMS HEALTH HOLDINGS, INC.

Notes to Condensed Consolidated Financial Statements - Continued

(unaudited)

 

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.

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

 

 

 

 

 

 

 

 

 

 

 

18

---

 

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 Annual Report on Form 10-K for the year ended December 31, 2015. 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 our Annual Report on Form 10-K for the year ended December 31, 2015 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 61% of our 2015 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.

Proposed Merger

On May 3, 2016, IMS and Quintiles Transnational Holdings Inc. (“Quintiles”) entered into a definitive merger agreement, pursuant to which the companies will be combined. The merged company will be renamed Quintiles IMS Holdings, Inc. Under the terms of the merger agreement, our shareholders will receive 0.3840 shares of Quintiles common stock for each share of IMS common stock. Upon completion of the merger, our shareholders will own approximately 51.4 percent of the shares of the combined company on a fully diluted basis and Quintiles shareholders will own approximately 48.6 percent of the combined company on a fully diluted basis. The transaction is subject to customary closing conditions, including regulatory approvals and approval by both our and Quintiles shareholders, and is expected to close early in the fourth quarter of 2016.

Acquisitions

We make acquisitions to enhance our capabilities and offerings in certain areas, including technology services.

During the six months ended June 30, 2016, we completed five unrelated individually immaterial acquisitions, one of which occurred in the second quarter of 2016. The total cost of these acquisitions, net of cash acquired, was approximately $281 million. The purchase price allocations for these acquisitions will be finalized after the completion of the valuation of certain intangible assets and any adjustments to the preliminary purchase price allocations are not expected to have a material impact on our results of operations. The results of operations of the acquired businesses have been included in our consolidated results of operations since the date of their acquisition and were not significant to our condensed consolidated results of operations.

On April 1, 2015, we completed the acquisition of certain customer relationship management and strategic data businesses of Cegedim, SA (“Cegedim” and the “Cegedim acquisition”) for a total purchase price, after a working capital adjustment, of approximately $445 million.

See Note 2 to our Condensed Consolidated Financial Statements for additional information with respect to these acquisitions.

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

19

---

 

information facilitates comparison of the underlying results over time. During the three months ended June 30, 2016, the U.S. Dollar was generally stronger against the other currencies in which we transact business as compared to the three months ended June 30, 2015, except for the Euro and Japanese Yen. During the first six months of 2016, the U.S. Dollar was generally stronger against the other currencies in which we transact business as compared to the first six months of 2015, except for the Japanese Yen. The revenue growth at actual currency rates was lower than the growth at constant currency exchange rates during the three and six months ended June 30, 2016. 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 stock-based compensation related charges, acquisition-related charges, restructuring and related charges, secondary offering expenses and purchase accounting adjustments 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.

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 facilitate operating performance comparisons from period to period by excluding certain non-cash items, such as the impact of depreciation and amortization and the impact of stock-based compensation related charges, and certain variable charges, such as acquisition-related expenses, restructuring charges and secondary offering expenses. Because Adjusted EBITDA facilitates internal comparisons of our historical operating performance on a more consistent basis, we also use this metric for business planning purposes and in evaluating business opportunities. In addition, management believes Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other parties in evaluating peer companies as a measure of financial performance and debt-service capabilities.

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. In evaluating Adjusted EBITDA, you should be aware that in the future we will likely incur expenses similar to some of the adjustments in this presentation. The presentation of Adjusted EBITDA should not be construed as indicating that our future results will be unaffected by these expenses or by any unusual or non-recurring items. 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

20

---

 

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.

 

 

Revenue

Total revenue increased 8.1% to $802 million for the three months ended June 30, 2016 compared to $742 million in the same quarter in the prior year, and grew 8.4% on a constant currency basis, as the U.S. Dollar strengthened against most other currencies in which we transact business. Revenue from our information offerings increased 2.5% in the second quarter of 2016 and grew 2.6% on a constant currency basis over the same period. Revenue from our technology services offerings increased 13.8% in the second quarter of 2016 and grew 14.3% on a constant currency basis over the same quarter in the prior year. The constant currency increase in information offerings revenue primarily resulted from growth in the United States, partially offset by lower revenues in the Asia Pacific region. The constant currency increase in technology services revenue primarily resulted from the acquisition of AlphaImpactRx, a U.S.-based provider of primary market research solutions acquired in January 2016, and growth in technology and applications and work flow analytics offerings, led by the United States and EMEA (Europe, the Middle East, Africa, India, Sri Lanka and Bangladesh).

Total revenue increased 14.7% to $1,576 million for the six months ended June 30, 2016 compared to $1,374 million in the same period in the prior year, and grew 16.1% on a constant currency basis, as the U.S. Dollar strengthened against most other currencies in which we transact business. Revenue from our information offerings increased 4.2% in the first six months of 2016 and grew 5.7% on a constant currency basis over the same period. Revenue from our technology services offerings increased 26.6% in the first six months of 2016 and grew 27.8% on a constant currency basis over the same period in the prior year. The constant currency increase in information offerings revenue primarily resulted from the Cegedim acquisition, which closed on April 1, 2015. The constant currency increase in technology services revenue primarily resulted from the Cegedim acquisition; the acquisition of AlphaImpactRx; and growth in technology and applications and work flow analytics offerings, led by the United States and EMEA.

Operating Costs of Information, exclusive of Depreciation and Amortization

Operating costs of information offerings increased $6 million, or 3.0%, in the three months ended June 30, 2016 compared to the same quarter in the prior year. Excluding the favorable effect of foreign currency translation of $1 million, as well as stock-based compensation related charges, restructuring and related charges and acquisition-related charges, operating costs of information

21

---

 

increased 3.3% in the second quarter of 2016 compared to the second quarter of 2015. The constant currency increase in operating costs of information was primarily due to an increase in data costs, partially offset by lower third-party service provider fees of approximately $4 million.

Operating costs of information offerings increased $9 million, or 2.8%, in the six months ended June 30, 2016 compared to the same period in the prior year. Excluding the favorable effect of foreign currency translation of $6 million, as well as stock-based compensation related charges, restructuring and related charges and acquisition-related charges, operating costs of information increased 4.2% in the first six months of 2016 compared to the first six months of 2015. The constant currency increase in operating costs of information was primarily due to an increase in data costs.

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

Direct and incremental costs of technology services offerings grew $45 million, or 22.5%, in the three months ended June 30, 2016 compared to the same quarter in the prior year. Excluding the favorable effect of foreign currency translation of less than $1 million, stock-based compensation related charges, restructuring and related charges and acquisition-related charges, direct and incremental costs of technology services grew 22.7% in the second quarter of 2016 compared to the second quarter of 2015. The constant currency increase in direct and incremental costs of technology services was driven primarily by increased compensation costs of approximately $17 million in part due to the AlphaImpactRx acquisition and to support the growth in our technology services offerings. Additionally, increases in third-party service provider fees of approximately $8 million and data costs directly related to technology services, both in part due to the AlphaImpactRx acquisition, contributed to the growth as compared to the second quarter of 2015.

Direct and incremental costs of technology services offerings increased $129 million, or 38.6%, in the six months ended June 30, 2016 compared to the same period in the prior year. Excluding the favorable effect of foreign currency translation of $6 million, as well as stock-based compensation related charges, restructuring and related charges and acquisition-related charges, direct and incremental costs of technology services grew 40.4% in the first six months of 2016 compared to the first six months of 2015. The constant currency increase in direct and incremental costs of technology services was driven primarily by increased compensation costs of $62 million, largely due to the Cegedim and AlphaImpactRx acquisitions and to support the growth in our technology services offerings. Additionally, increases in third-party service provider fees of approximately $24 million, data costs directly related to technology services, and infrastructure expense of $8 million, all in part due to the Cegedim acquisition, contributed to the growth as compared to the first six months of 2015.

Selling and Administrative Expenses, exclusive of Depreciation and Amortization

Selling and administrative expenses decreased $12 million, or 5.6%, in the three months ended June 30, 2016 compared to the same quarter in the prior year. Excluding the favorable effect of foreign currency translation of $3 million, as well as stock-based compensation related charges, restructuring and related charges, acquisition-related charges and secondary offering expenses, selling and administrative expenses decreased 1.9% in the second quarter of 2016 compared to second quarter of 2015. Selling and administrative expenses in constant currency reflected lower compensation expense.

Selling and administrative expenses increased $28 million, or 8.9%, in the six months ended June 30, 2016 compared to the same period in the prior year. Excluding the favorable effect of foreign currency translation of $9 million, as well as stock-based compensation related charges, restructuring and related charges, acquisition-related charges and secondary offering expenses, selling and administrative expenses grew 13.5% in the first six months of 2016 compared to first six months of 2015. Selling and administrative expenses in constant currency reflected higher compensation expense and higher occupancy expense of approximately $9 million compared to the first six months of 2015, both of which were largely due to the Cegedim acquisition.

Depreciation and Amortization

Depreciation and amortization expense increased $7 million, or 8.5%, in the three months ended June 30, 2016 and decreased $2 million, or 1.1%, in the six months ended June 30, 2016 as compared to the respective prior year periods. The increase for the second quarter was primarily due to additional depreciation and amortization expense related to the acquisitions occurring since June 2015. The decrease for the year to date period was primarily due to certain intangible assets recorded in connection with a merger transaction completed in 2010 that became fully amortized during the first quarter of 2015, partially offset by additional depreciation and amortization expense related to the acquisitions occurring over the last year, including Cegedim.

Severance, Impairment and Other Charges

Severance, impairment and other charges for the three months ended June 30, 2016 and 2015 were primarily comprised of severance. See Severance, Impairment and Other Charges below for further information.

22

---

 

Operating Income (Loss)

Operating income was $79 million in the three months ended June 30, 2016, a decrease of $17 million compared to the same quarter in the prior year. Operating income for the second quarter of 2016 decreased $20 million in constant currency terms compared to the second quarter of 2015. Absent the impact of stock-based compensation related charges, acquisition-related charges, restructuring and related charges, purchase accounting adjustments and secondary offering expenses, operating income increased 12.8% at reported foreign currency rates and increased 9.7% on a constant currency basis for the second quarter of 2016. The increase in operating income on a constant currency basis was a result of higher revenues, partially offset by increases in operating expenses to support the revenue growth and higher depreciation and amortization expense.

Operating income was $192 million in the six months ended June 30, 2016, an increase of $5 million compared to the same period in the prior year. Operating income for the first six months of 2016 increased $1 million in constant currency terms compared to the first six months of 2015. Absent the impact of stock-based compensation related charges, acquisition-related charges, restructuring and related charges, purchase accounting adjustments and secondary offering expenses, operating income increased 10.8% at reported foreign currency rates and increased 9.3% on a constant currency basis for the first six months of 2016. The increase in operating income on a constant currency basis was a result of higher revenues, partially offset by increases in operating expenses to support the revenue growth.

Trends in Operating Margins

Operating margins decreased to 9.9% for the three months ended June 30, 2016 from 12.9% for the three months ended June 30, 2015. Margins in both periods were negatively impacted by the effects of foreign currency translation, stock-based compensation related charges, acquisition-related charges, restructuring and related charges and purchase accounting adjustments, and secondary offering expenses in 2015. Excluding the effects of foreign currency translation and these charges, operating margins were 22.5% and 22.3% in the second quarter of 2016 and 2015, respectively. The period over period decrease in operating margin was primarily due to the lower profitability of the acquired AlphaImpactRx businesses and the mix of products sold.

Operating margins decreased to 12.2% for the six months ended June 30, 2016 from 13.6% for the six months ended June 30, 2015. Margins in both periods were negatively impacted by the effects of foreign currency translation, stock-based compensation related charges, acquisition-related charges, restructuring and related charges and purchase accounting adjustments, and secondary offering expenses in 2015. Excluding the effects of foreign currency translation and these charges, operating margins were 22.9% and 24.3% in the first six months of 2016 and 2015, respectively. The period over period decrease in operating margin was primarily due to the lower profitability of the acquired Cegedim and AlphaImpactRx businesses and the mix of products sold.

Non-Operating Loss, net

Non-operating loss, net was $48 million in the three months ended June 30, 2016, an increase of $12 million compared to the same quarter in the prior year. Interest expense, net of interest income, was $4 million higher than in the second quarter of 2015 primarily due to increased commitments under our existing Term A loans. The hedge of non-U.S. Dollar anticipated royalties resulted in a $3 million loss in the second quarter of 2016 compared to a $6 million gain in the prior year quarter.

Non-operating loss, net was $98 million in the six months ended June 30, 2016, an increase of $29 million compared to the same period in the prior year. Interest expense, net of interest income, was $12 million higher than in the first six months of 2015 primarily due to the issuance of €275 million senior notes on March 30, 2015 in anticipation of the Cegedim acquisition and increased commitments under our existing Term A loans. The hedge of non-U.S. Dollar anticipated royalties resulted in a $1 million loss in the first six months of 2016 compared to a $13 million gain in the prior year period. Additionally, the impact of all other foreign exchange, including the revaluation and settlement of non-functional currency assets and liabilities, hedging costs and foreign exchange contracts not designated as hedging instruments, was a $4 million loss in the first six months of 2016, compared to a $4 million gain in the comparable prior year period. Offsetting these increases in non-operating loss was $5 million of lower charges related to the remeasurement of our Venezuelan Bolívar account balances.

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.

We recorded a provision for income taxes of $7 million and $13 million for the three months ended June 30, 2016 and 2015, respectively, which resulted in an effective tax rate of 22.6% and 22.2%. The effective tax rate for both periods was favorably impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate.

23

---

 

We recorded a provision for income taxes of $27 million and a benefit from income taxes of $227 million for the six months ended June 30, 2016 and 2015, respectively, which resulted in an effective tax rate expense of 28.7% and effective tax rate benefit of 192.2%, respectively. The effective tax rate expense for the six months ended June 30, 2016 was favorably impacted as a result of profits generated in non-U.S. tax jurisdictions with lower tax rates than the U.S. statutory tax rate. The effective tax rate benefit for the six months ended June 30, 2015 was primarily due to changing our assertion related to unremitted earnings of its non-U.S. subsidiaries. As of the beginning of 2015, we began asserting, with certain exceptions, that the unremitted earnings of our non-U.S. subsidiaries are indefinitely reinvested. As a result of this change in assertion, we reversed a previously established deferred tax liability of $256 million as a discrete benefit to the first quarter of 2015. If the $256 million discrete benefit related to the change in assertion was not recorded in the first quarter of 2015, the effective tax rate would have been 25.2% for the six months ended June 30, 2015.

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 clients in the healthcare industry with comprehensive solutions to measure and improve their performance.

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 our 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.

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

 

 

We periodically review and make changes to our geographic reporting classifications. As a result of these changes, prior years’ geographic financial information was reclassified to conform to the current year presentation. The reclassifications did not change previously reported condensed consolidated results of operations.

24

---

 

 

Americas Region

Revenue in the Americas region grew 13.9% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, revenue grew 15.3% in the second quarter of 2016 compared to the second quarter of 2015. The constant currency increase in revenues was primarily due to the AlphaImpactRx acquisition, growth in information offerings, and work flow analytics and technology and applications offerings within technology services. Revenue in the Americas region grew 16.9% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, revenue grew 18.7% in the first six months of 2016 compared to the first six months of 2015. The constant currency increase in revenues was primarily due to the Cegedim and AlphaImpactRx acquisitions, growth in information offerings, and work flow analytics and technology and applications offerings within technology services.

Operating income in the Americas region increased 12.6% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, operating income increased 13.2% in the second quarter of 2016 compared to the second quarter of 2015. The increase in constant currency operating income was a result of revenue growth, partially offset by higher operating expenses of $44 million, in part due to the AlphaImpactRx acquisition and continued investments in the region to drive revenue growth. Operating income in the Americas region decreased 14.8% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, operating income decreased 13.5% in the first six months of 2016 compared to the first six months of 2015. The decrease in constant currency operating income was a result of higher operating expenses of $131 million, largely due to continued investments in the region to drive revenue growth and the Cegedim and AlphaImpactRx acquisitions, partially offset by revenue growth.

EMEA Region

Revenue in the EMEA region grew 3.5% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, revenue grew 4.2% in the second quarter of 2016 compared to the second quarter of 2015. The increase in revenues on a constant currency basis was primarily due to growth in our technology and applications and work flow analytics offerings within technology services. Revenue in the EMEA region grew 16.3% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, revenue grew 18.3% in the first six months of 2016 compared to the first six months of 2015. The increase in revenues was primarily due to the Cegedim acquisition and, on a constant currency basis, by growth in technology and applications offerings within technology services.

Operating income in the EMEA region increased 15.1% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, operating income increased 15.5% in the second quarter of 2016 compared to the second quarter of 2015. The increase in constant currency operating income was a result of strong revenue growth in the region; partially offset by higher operating expenses of $3 million. Operating income in the EMEA region increased 15.4% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, operating income increased 17.3% in the first six months of 2016 compared to the first six months of 2015. The increase in constant currency operating income was a result of strong revenue growth in the region; partially offset by higher operating expenses of $77 million, in part due to the Cegedim acquisition.

Asia Pacific Region

Revenue in the Asia Pacific region grew 3.3% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, revenue decreased 0.4% in the second quarter of 2016 compared to the second quarter of 2015. The decrease in revenues on a constant currency basis was primarily due to lower revenues from information offerings, partially offset by growth in consulting services and technology and applications within technology services. Revenue in the Asia Pacific region grew 4.9% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, revenue grew 3.3% in the first six months of 2016 compared to the first six months of 2015. The increase in revenues was primarily

25

---

 

due to the Cegedim acquisition and growth in consulting services and technology and applications within technology services, partially offset by lower revenues from information offerings.

Operating income in the Asia Pacific region increased 4.5% in the three months ended June 30, 2016 compared to the same quarter in the prior year. On a constant currency basis, operating income declined 4.0% in the second quarter of 2016 compared to the second quarter of 2015. The decrease in constant currency operating income was primarily the result of lower revenues and higher operating expenses of $1 million. Operating income in the Asia Pacific region declined 4.2% in the six months ended June 30, 2016 compared to the same period in the prior year. On a constant currency basis, operating income declined 8.4% in the first six months of 2016 compared to the first six months of 2015. The decrease in constant currency operating income was primarily a result of higher operating expenses of $13 million, largely due to continued investments in the region to drive growth and the Cegedim acquisition, 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 Income. Foreign currency translation decreased our U.S. Dollar revenue growth by approximately 0.3 percentage points in the second quarter of 2016 and 1.4 percentage points in the first six months of 2016 and decreased our operating income decline by 2.8 percentage points in the second quarter of 2016 and increased our operating income growth by 2.1 percentage points for the first six months of 2016.

Non-U.S. monetary assets are maintained in currencies other than the U.S. Dollar, principally the Swiss Franc, 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 June 30, 2016, the Swiss Franc, Euro and Japanese Yen exchange rates were stronger against the U.S. Dollar compared to December 31, 2015. 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 charges taken for our Venezuelan operations in the first six months of 2016 and 2015, increased the U.S. Dollar amount of cash and cash equivalents by $7 million during the first six months of 2016 and decreased it by $9 million in the comparable prior year period.

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 Senior Secured Credit Facilities (as defined below). At June 30, 2016, cash and cash equivalents were $368 million and the principal amount of our total indebtedness was $4,565 million. Additionally, we had $155 million available for borrowing under our secured revolving credit facility. In the last two calendar years combined, we have generated strong net cash provided by operating activities of $600 million. 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.

We believe we will have available resources to meet both our short-term and long-term liquidity requirements, including our debt service. We expect that 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. In addition, we do not intend to use non-U.S. cash and cash equivalents to meet U.S. liquidity needs to the extent those earnings are permanently reinvested. While our board of directors reviews 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.

Cash Flows

Cash and cash equivalents decreased $28 million to $368 million at June 30, 2016 compared to $396 million at December 31, 2015. The decrease reflects cash used in investing activities of $372 million, mostly offset by cash provided by financing activities of $241 million and operating activities of $96 million and an increase in cash of $7 million due to the effect of exchange rate changes.

Net cash provided by operating activities amounted to $96 million for the six months ended June 30, 2016 compared to $215 million for the six months ended June 30, 2015. Cash flows from operating activities for the first six months of 2016 reflects lower cash-related net income of $13 million and unfavorable working capital movements of $90 million, primarily due to the timing of the collection of accounts receivable, approximately $40 million in timing of cash flows related to loyalty card programs we administer on

26

---

 

behalf of our customers, which were acquired in the second and third quarters of 2015, and higher severance payments of approximately $19 million in the first six months of 2016. Additionally, we made a prepayment of approximately $15 million as an investment in specialty data. Income tax payments, net of refunds, and interest payments were approximately $7 million higher in the first half of 2016 compared to the same period in 2015.

Net cash used in investing activities amounted to $372 million for the six months ended June 30, 2016, a decrease in cash used of $79 million compared to the six months ended June 30, 2015. The decrease is primarily due to lower payments for acquisitions in the first half of 2016 as compared to the same period in the prior year.  

Net cash provided by financing activities amounted to $241 million for the six months ended June 30, 2016, an increase of $38 million compared to the six months ended June 30, 2015. Net cash provided during the six months ended June 30, 2016 was primarily driven by proceeds from increased commitments under our existing Term A loans of $279 million, net of repayments, partially offset by repurchases of $29 million of our common stock. Net cash provided by financing activities for the first six months of 2015 included the issuance of 4.125% Senior Notes in March 2015 and additional term loans resulting from an amendment to our Senior Secured Credit Facilities in May 2015 totaling $471 million, net of repayments, partially offset by $300 million in share repurchases.

Share Repurchase

On December 16, 2015, our board of directors approved a $250 million common stock repurchase authorization. Our share repurchase authorization has been developed to buy opportunistically, when we believe that our share price provides us with an attractive use of our cash flow and debt capacity. Through December 31, 2015, we had purchased 670 thousand shares of our common stock having an aggregate value of approximately $17 million at an average price of $25.70 per share. In the second quarter of 2016, we purchased 1 million shares of our common stock having an aggregate value of approximately $25 million at an average price of $25.42 per share. These share repurchases were funded through a combination of cash and borrowings under our revolving credit facility. The repurchase authorization does not have a specified expiration date and can be modified, suspended or discontinued at any time. As of June 30, 2016, approximately $207 million is available to purchase shares under the December 2015 authorization.

On May 3, 2015, our board of directors authorized a $300 million common stock repurchase program. In connection with that program, on May 12, 2015, we purchased 11.1 million shares of our common stock having an aggregate value of approximately $300 million at $27.0875 per share. The share repurchase was funded through a combination of available cash, borrowings under our revolving credit facility and additional term loans under our Senior Secured Credit Facilities.

Debt

Senior Secured Credit Facilities

In January 2016, IMS Health Incorporated (“IMS Health”), our indirect wholly-owned subsidiary, entered into an amendment (the “2016 Amendment”) to the Third Amended and Restated Credit and Guaranty Agreement, dated as of March 17, 2014, among IMS Health, IMS AG and IMS Japan K.K., as co-borrowers, Healthcare Technology Intermediate Holdings, Inc., Bank of America, N.A. and the other lenders party thereto (as amended by the 2016 Amendment, the “Credit Agreement” and, together with the related security and other documents for the senior secured term loan facilities and the senior secured revolving facility, the “Senior Secured Credit Facilities”). The 2016 Amendment increased outstanding commitments under our existing Term A loans by $300 million. The proceeds from the additional Term A loans were used for general corporate purposes, including funding acquisitions and repaying existing loans under our senior secured revolving credit facility. As a result of the 2016 Amendment, we incurred $2 million of fees; of which $1 million was recorded in Other income (loss), net during the first quarter of 2016 and $1 million will be amortized to interest expense.

At June 30, 2016, we had an aggregate $500 million revolving credit facility, of which $155 million was unused.

See Note 6 to our Condensed Consolidated Financial Statements for further information on our debt.

27

---

 

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 six months ended June 30, 2016:

 

Other charges

During the six months ended June 30, 2016, we recorded impairment charges of $2 million, the majority of which related to impaired leases for properties.

During the six months ended June 30, 2015, we recorded impairment charges of $7 million, $6 million of which was recorded in the second quarter of 2015. The $7 million charge is primarily comprised of the write-off of the value of computer software that was no longer in use 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. 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.

Contractual Obligations

Following the increase in outstanding commitments under our existing Term A loans by $300 million pursuant to the 2016 Amendment, our future scheduled debt principal payments and estimated interest payments, based on rates as of June 30, 2016, are $126 million for the remainder of 2016, $559 million for 2017-2018, $1,868 million for 2019-2020 and $2,761 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.

28

---

 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as other written reports and oral statements that we make from time to time, includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are neither historical facts nor guarantees that the future results, plans, intentions or expectations expressed or implied will be achieved. 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,” “ongoing,” “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:

Matters subject to forward-looking statements involve known and unknown risks and uncertainties, including regulatory, competitive and other factors, which may cause actual financial or operating results or the timing of events to be materially different than those expressed or implied by forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to:

29

---

 

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

There have been no material changes to our quantitative and qualitative disclosures about market risk during the six months ended June 30, 2016 as compared to the quantitative and qualitative disclosures about market risk described in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

 

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-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2016 (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.

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.

 

 

 

30

---

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On May 16, 2016, a putative stockholder class action lawsuit (Chiu v. Bousbib et al., C.A. No. 12340-CB) was filed in the Court of Chancery of the State of Delaware against the members of the IMS Health board of directors. An amended complaint in the Chiu action was filed on June 29, 2016. In general, the complaint alleges that the members of the IMS Health board of directors breached their fiduciary duties to IMS Health stockholders by, among other things, approving the proposed transaction for inadequate consideration and pursuant to an unfair and conflicted process. The amended complaint further alleges that the Registration Statement on Form S-4 filed June 3, 2016 in connection with the proposed transaction is materially misleading. The plaintiff seeks, among other things, injunctive relief prohibiting consummation of the transaction, rescissionary damages in the event the proposed transaction is consummated, and an award of attorneys’ fees and expenses. On July 1, 2016, the plaintiff filed a motion for a preliminary injunction seeking to enjoin the defendants from consummating the proposed transaction. The defendants have not yet responded to the plaintiff’s motion. We believe plaintiff’s allegations are without merit, reject all claims raised by plaintiff and intend to vigorously defend this matter.

Except for the update set forth above, there have been no material changes to the information set forth under the heading “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Additionally, see Note 11, Contingencies, to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.

 

 

Item 1A. Risk Factors

In addition to the risk factors set forth in Part I — Item 1A — “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “10-K”), investors should consider the following risk factors arising from our intention to combine with Quintiles Transnational Holdings Inc. (“Quintiles”) through a “merger of equals” business combination (the “merger”). On May 3, 2016, we entered into a definitive merger agreement (the “merger agreement”) with Quintiles. Pursuant to the terms of the merger agreement, we will be merged with and into Quintiles. Upon completion of the merger, the separate corporate existence of IMS Health will cease, and Quintiles will continue as the surviving corporation (the “Surviving Corporation”) in the merger. Following a stockholder vote by both companies, the merger is expected to close early in the fourth quarter of 2016, although we cannot assure you that the transaction will close during that time or at all. The risk factors below should be read in conjunction with the risk factors set forth in the 10-K and the other information contained in this report as our business, financial condition or results of operations could be adversely affected if any of these risks actually occur.

Failure to complete the merger could negatively impact our stock prices and our future business and financial results.

If the merger is not completed for any reason, including as a result of our or Quintiles’ stockholders failing to approve the applicable proposals, our ongoing businesses may be materially adversely affected and, without realizing any of the benefits of having completed the merger, we would be subject to a number of risks, including the following:

If the merger is not completed, the risks described above may materialize and they may have a material adverse effect on our results of operations, cash flows, financial position and stock prices.

31

---

 

Completion of the merger is subject to a number of conditions, which, if not satisfied or waived, may result in termination of the merger agreement.

The merger agreement contains a number of conditions to completion of the merger, including, among others:

Many of the conditions to completion of the merger are not within our control, and we cannot predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived prior to March 31, 2017, it is possible that the merger agreement may be terminated. Although we have agreed in the merger agreement to use reasonable best efforts, subject to certain limitations, to complete the merger in the most expeditious manner practicable, these and other conditions to completion of the merger may fail to be satisfied.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides detail about our share repurchases during the three months ended June 30, 2016.

 

 

 

32

---

 

Item 6. Exhibits

 

 

 

 

 

33

---

 

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 July 28, 2016.

 

 

 

34