IQVIA HOLDINGS INC. - Quarter Report: 2014 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2014

or

For the transition period from            to            .

Commission File Number: 001-35907

QUINTILES TRANSNATIONAL HOLDINGS INC.

(Exact name of registrant as specified in its charter)

4820 Emperor Blvd., Durham, North Carolina 27703

(Address of principal executive offices and Zip Code)

(919) 998-2000

(Registrant’s telephone number, including area code)

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

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

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

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

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

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QUINTILES TRANSNATIONAL HOLDINGS INC.

FORM 10-Q

TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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QUINTILES TRANSNATIONAL HOLDINGS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

Unaudited Interim Financial Information

The accompanying unaudited condensed consolidated financial statements of Quintiles Transnational Holdings Inc. and its subsidiaries (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s financial condition and results of operations have been included. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The balance sheet at December 31, 2013 has been derived from the audited consolidated financial statements of the Company but does not include all the disclosures required by GAAP.

Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation. These changes had no effect on previously reported total revenues, net income, comprehensive income or shareholders’ deficit.

Recently Issued Accounting Standards

In May 2014, the United States Financial Accounting Standards Board and the International Accounting Standards Board issued a converged standard on the recognition of revenue from contracts with customers. The objective of the new standard is to establish a single comprehensive revenue recognition model that is designed to create greater comparability of financial statements across industries and jurisdictions. Under the new standard, companies will recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also will require expanded disclosures on revenue recognition and changes in assets and liabilities that result from contracts with customers. The Company will adopt the new standard on January 1, 2017, as required. Early adoption is not permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial statements.

2. Employee Stock Compensation

The Company granted the following share-based awards:

The Company had the following share-based awards outstanding:

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The Company used the following assumptions when estimating the value of the share-based compensation for stock options and stock appreciation rights issued as follows:

In November 2013, the Company’s Board of Directors (the “Board”) approved an Employee Stock Purchase Plan (“ESPP”) which was approved by the Company’s shareholders in May 2014. The ESPP allows eligible employees to authorize payroll deductions of up to 10% of their base salary to be applied toward the purchase of full shares of the Company’s common stock on the last day of the offering period. Offering periods under the ESPP are six months in duration and begin on each March 1 and September 1. The first offering period for the ESPP began March 1, 2014. Under the ESPP, shares will be purchased on the last day of each offering period at a discount of 15% of the closing price of the common stock on such date as reported on the New York Stock Exchange. As of June 30, 2014, there have been aggregate payroll contributions of approximately $1.6 million related to the ESPP.

The Company recognized share-based compensation expense of $8.4 million and $6.6 million during the three months ended June 30, 2014 and 2013, respectively, and $15.6 million and $11.1 million during the six months ended June 30, 2014 and 2013, respectively.

3. Concentration of Credit Risk

No customer accounted for 10% or more of consolidated service revenues for the three and six months ended June 30, 2014 or 2013.

4. Accounts Receivable and Unbilled Services

Accounts receivable and unbilled services consist of the following (in thousands):

5. Goodwill

The following is a summary of goodwill by segment for the six months ended June 30, 2014 (in thousands):

6. Derivatives

As of June 30, 2014, the Company held the following derivative positions: (i) freestanding warrants to purchase shares of common stock of third parties, (ii) forward exchange contracts to protect against foreign exchange movements for certain forecasted foreign currency cash flows related to service contracts and (iii) interest rate swaps to hedge the exposure to variability in interest payments on variable interest rate debt. The Company does not use derivative financial instruments for speculative or trading purposes.

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As of June 30, 2014, the Company had freestanding warrants to purchase shares of third parties’ common stock. No quoted price is available for the warrants. Accordingly, the Company uses various valuation techniques to value the warrants, including the present value of estimated expected future cash flows, option-pricing models and fundamental analysis. Factors affecting the valuation include the current price of the underlying common stock, the exercise price of the warrants, the expected time to exercise the warrants, the estimated price volatility of the underlying common stock over the life of the warrants and the restrictions on the transferability of or ability to exercise the warrants. The Company did not sell any warrants during the three and six months ended June 30, 2014 or 2013.

As of June 30, 2014, the Company had 18 open foreign exchange forward contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2014 and the first three months of 2015 with notional amounts totaling $83.1 million. As these contracts were executed to hedge the risk of the potential volatility in the cash flows resulting from fluctuations in currency exchange rates during the remainder of 2014 and the first three months of 2015, these transactions are accounted for as cash flow hedges. As such, the effective portion of the gain or loss on the contracts is recorded as unrealized gains (losses) on derivatives included in the accumulated other comprehensive income (loss) (“AOCI”) component of shareholders’ deficit. These hedges are highly effective. Upon expiration of the hedge instruments in 2014 and the first three months of 2015, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in AOCI into earnings.

On June 9, 2011, the Company entered into six interest rate swaps effective September 28, 2012 and expiring between September 30, 2013 and March 31, 2016 in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. The critical terms of the interest rate swaps were substantially the same as those of the Company’s senior secured credit facilities, including quarterly interest settlements. These interest rate swaps are being accounted for as cash flow hedges as these transactions were executed to hedge the Company’s interest payments, and these hedges are highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in the AOCI component of shareholders’ deficit. The fair value of these interest rate swaps represents the present value of the anticipated net payments the Company will make to the counterparty, which, when they occur, are reflected as interest expense on the condensed consolidated statements of income. These payments, together with the variable rate of interest incurred on the underlying debt, result in a fixed rate of interest of 2.55% plus the applicable margin on the affected borrowings ($945.0 million or 45.9% of the Company’s variable rate debt at June 30, 2014). The Company expects that $12.3 million of unrealized losses will be reclassified out of AOCI and will form the interest rate swap component of the 2.55% fixed rate of interest to be incurred over the next 12 months as the underlying net payments are settled.

The fair values of the Company’s derivative instruments designated as hedging instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded are summarized in the following table (in thousands):

The fair values of the Company’s derivative instruments not designated as hedging instruments and the line items on the accompanying condensed consolidated balance sheets to which they were recorded are summarized in the following table (in thousands):

The effect of the Company’s cash flow hedging instruments on other comprehensive income (loss) is summarized in the following table (in thousands):

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7. Fair Value Measurements

The Company records certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is described below. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Recurring Fair Value Measurements

The following table summarizes the fair value of the Company’s financial assets and liabilities that are measured on a recurring basis as of June 30, 2014 (in thousands):

Below is a summary of the valuation techniques used in determining fair value:

Marketable equity securities — The Company values marketable equity securities utilizing quoted market prices.

Foreign exchange forward contracts — The Company values foreign exchange forward contracts using quoted market prices for identical instruments in less active markets or using other observable inputs.

Warrants — The Company values warrants utilizing the Black-Scholes-Merton model.

Interest rate swaps — The Company values interest rate swaps using market inputs with mid-market pricing as a practical expedient for bid-ask spread.

Contingent consideration — The Company values contingent consideration related to business combinations using a weighted probability calculation of potential payment scenarios discounted at rates reflective of the risks associated with the expected future cash flows. Key assumptions used to estimate the fair value of contingent consideration include revenue, net new business and operating forecasts and the probability of achieving the specific targets.

The following table summarizes the changes in Level 3 financial assets and liabilities measured on a recurring basis for the six months ended June 30 (in thousands):

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The revaluations for the warrants and the contingent consideration are recognized in other expense (income), net on the accompanying condensed consolidated statements of income.

Non-recurring Fair Value Measurements

Certain assets are carried on the accompanying condensed consolidated balance sheets at cost and are not remeasured to fair value on a recurring basis. These assets include cost and equity method investments and loans that are written down to fair value for declines which are deemed to be other-than-temporary, and goodwill and identifiable intangible assets which are tested for impairment annually and when a triggering event occurs.

As of June 30, 2014, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $759.2 million were identified as Level 3. These assets are comprised of cost and equity method investments of $66.4 million, goodwill of $410.3 million and other identifiable intangibles, net of $282.5 million.

The Company has unfunded cash commitments totaling approximately $31.9 million related to its cost and equity method investments as of June 30, 2014.

Other

The estimated fair value of the Company’s long-term debt, which is primarily based on rates in which the debt is traded among banks, was approximately $2.1 billion at both June 30, 2014 and December 31, 2013.

8. Shareholders’ Deficit

Equity Repurchase Program

On October 30, 2013, the Board approved an equity repurchase program (the “Repurchase Program”) authorizing the repurchase of up to $125.0 million of either the Company’s common stock or vested in-the-money employee stock options, or a combination thereof. The Company repurchased 300 shares of its common stock for $47.51 per share for an aggregate purchase price of approximately $14,000 during the six months ended June 30, 2014 under the Repurchase Program. As of June 30, 2014, the Company has remaining authorization under the Repurchase Program to repurchase up to $59.5 million of its common shares. The Repurchase Program for vested in-the-money employee stock options expired in November 2013. The Repurchase Program for common stock does not have an end date.

Private Share Repurchase

On May 28, 2014, the Company completed the repurchase of 3,287,209 shares of its common stock for $50.23 per share from TPG Quintiles Holdco, L.P., one of its existing shareholders, in a private transaction for an aggregate purchase price of approximately $165.1 million. The repurchase price per share of common stock was equal to 98% of the closing market price of the Company’s common stock on the New York Stock Exchange on May 27, 2014 (which was $51.26). The repurchase of shares from its existing shareholder was approved in compliance with the Company’s related party transactions approval policy. The Company funded this private repurchase transaction with cash on hand. This private repurchase transaction was separate from and in addition to the Repurchase Program.

9. Restructuring

In February 2014, the Board approved a restructuring plan of up to $13.0 million to better align resources with the Company’s strategic direction. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 400 positions, primarily in the Product Development segment. Since February 2014, the Company has recognized approximately $2.8 million of restructuring costs related to this plan, all of which were for activities in the Product Development segment. All of the restructuring costs are related to severance costs. Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management.

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The following amounts were recorded for the February 2014 restructuring plan and the restructuring plans initiated in prior years (in thousands):

The Company expects the majority of the restructuring accruals at June 30, 2014 will be paid in 2014.

10. Employee Benefit Plans

Defined Benefit Plans

The following table summarizes the components of pension expense related to the Company’s defined benefit plans (in thousands):

Other

As of June 30, 2014 and December 31, 2013, the Company has a severance accrual included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets of $9.0 million and $14.1 million, respectively. The Company recognizes obligations associated with severance related to contractual termination benefits at fair value on the date that it is probable that the affected employees will be entitled to the benefit and the amount can reasonably be estimated. The severance accrual is related to cost reduction programs that will result in severance for approximately 270 positions, which are expected to lower operating costs and improve profitability by reducing excess capacity. These actions are expected to occur and be paid during 2014 and 2015. During the first six months of 2014, the Company has recognized approximately $2.5 million of net reversals related to these cost reduction programs, primarily as a result of affected individuals transferring into other positions within the Company. Of the $2.5 million decrease from net reversals recognized for these cost reduction programs, approximately ($2.6) million, $149,000 and ($80,000) were related to activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.

The following amounts were recorded for the severance associated with cost reduction programs (in thousands):

11. Income Taxes

The Company’s effective income tax rate was 28.4% and 18.9% for the three months ended June 30, 2014 and 2013, respectively, and 29.5% and 31.8% for the six months ended June 30, 2014 and 2013, respectively. The effective income tax rate for the three and six months ended June 30, 2013 was positively impacted by a $16.2 million discrete income tax benefit recognized as a result of the management agreement termination fee and costs associated with debt repayments. The effective income tax rate for the three and six months ended June 30, 2013 was negatively impacted by the settlement of certain intercompany notes that had previously been considered long-term investments, which resulted in $11.2 million of income tax expense.

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In addition, the effective income tax rate for the three and six months ended June 30, 2013, and for subsequent periods, was positively impacted by the Company’s change in the assertion regarding the undistributed earnings of most of its foreign subsidiaries that are considered to be indefinitely reinvested outside of the United States. Prior to June 2013, the Company had not considered the majority of the undistributed earnings of its foreign subsidiaries to be indefinitely reinvested. Accordingly, periods prior to June 2013 were negatively impacted by income taxes imposed on most of the earnings of the foreign subsidiaries, as a deferred income tax liability was recorded each quarter for the anticipated income tax costs of repatriating those earnings in the future. Management reevaluated this assertion following the Company’s initial public offering (“IPO”) in May 2013, as a portion of the IPO proceeds were used to pay down debt held in the United States. With this reduction of debt and related interest expense, the Company expects to be able to support the cash needs of the domestic subsidiaries without repatriating cash from the affected foreign subsidiaries. The Company expects to utilize the cash generated outside of the United States to fund growth outside of the United States. As a result of the assertion change, the Company recorded an $8.1 million income tax benefit in the second quarter of 2013 to reverse the deferred income tax liability previously recorded on undistributed foreign earnings prior to 2013 that are now considered indefinitely reinvested outside of the United States. In addition, the estimated annual effective income tax rate for 2013 decreased due to the indefinitely reinvested assertion, which resulted in a $7.3 million one-time income tax benefit for the three months ended June 30, 2013 to adjust income taxes recorded on the first quarter of 2013 earnings to the new estimated annual effective income tax rate.

12. Comprehensive Income

Below is a summary of the components of AOCI (in thousands):

Below is a summary of the (gains) losses reclassified from AOCI into the condensed consolidated statements of income and the affected financial statement line item (in thousands):

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13. Segments

The following table presents the Company’s operations by reportable segment. The Company is managed through two reportable segments, Product Development and Integrated Healthcare Services. Product Development, which primarily serves biopharmaceutical customers engaged in research and development, provides clinical research and clinical trial services. Integrated Healthcare Services provides commercialization services to biopharmaceutical customers and research, analytics, real-world and late phase research, and other services to both biopharmaceutical customers and the broader healthcare market.

Certain costs are not allocated to the Company’s segments and are reported as general corporate and unallocated expenses. These costs primarily consist of share-based compensation and expenses for corporate overhead functions such as finance, human resources, information technology, facilities and legal, as well as certain expenses incurred during the second quarter of 2013, including the $25.0 million fee incurred in connection with the termination of the management agreement with affiliates of certain shareholders and the $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GF Management Company, LLC, a company owned by the Company’s Executive Chairman. The Company does not allocate restructuring or impairment charges to its segments. Information presented below is in thousands:

14. Earnings Per Share

The following table shows the weighted average number of outstanding share-based awards not included in the computation of diluted earnings per share as the effect of including such share-based awards in the computation would be anti-dilutive (in thousands):

Share-based awards will have a dilutive effect under the treasury method only when the respective period’s average market value of the Company’s common stock exceeds the exercise proceeds.

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15. Subsequent Event

On July 1, 2014, the Company completed the acquisition of Encore Health Resources, LLC (“Encore”) effected through a merger for approximately $93.6 million in cash. The preliminary fair value of Encore’s net assets acquired is not available as of the filing date of this Form 10-Q. Encore has operations in the United States and its business is primarily focused on providing electronic health records (“EHR”) implementation and advisory services to healthcare providers. As part of its Integrated Healthcare Services segment, the Company expects that Encore will enhance its EHR expertise.

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

Cautionary Statement for Forward-Looking Information

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect, among other things, our current expectations and anticipated results of operations, all of which are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, market trends, or industry results to differ materially from those expressed or implied by such forward-looking statements. Therefore, any statements contained herein that are not statements of historical fact may be forward-looking statements and should be evaluated as such. Without limiting the foregoing, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “should,” “targets,” “will” and the negative thereof and similar words and expressions are intended to identify forward-looking statements. We assume no obligation to update any such forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information.

We caution you that any such forward-looking statements are further qualified by important factors that could cause our actual operating results to differ materially from those in the forward-looking statements, including without limitation, that most of our contracts may be terminated on short notice, and we may be unable to maintain large customer contracts or to enter into new contracts; our financial results may be adversely affected if we underprice our contracts, overrun our cost estimates or fail to receive approval for or experience delays in documenting change orders; the historical indications of the relationship of our backlog to revenues may not be indicative of their future relationship; we may be unable to maintain our information systems or effectively update them; customer or therapeutic concentration could harm our business; our business is subject to risks associated with international operations, including economic, political and other risks, such as compliance with a myriad of laws and regulations, complications from conducting clinical trials in multiple countries simultaneously and changes in exchange rates; the market for our services may not grow as we expect; government regulators or our customers may limit the scope of prescription or withdraw products from the market, and government regulators may impose new regulatory requirements or may adopt new regulations affecting the biopharmaceutical industry; we may be unable to successfully develop and market new services or enter new markets; our failure to perform services in accordance with contractual requirements, regulatory standards and ethical considerations may subject us to significant costs or liability, which could also damage our reputation and cause us to lose existing business or not receive new business; our services are related to treatment of human patients, and we could face liability if a patient is harmed; we may be unable to successfully identify, acquire and integrate businesses, services and technologies; and we have substantial indebtedness and may incur additional indebtedness in the future, which could adversely affect our financial condition. For a further discussion of the risks relating to our business, see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Overview

We are the world’s largest provider of biopharmaceutical development services and commercial outsourcing services. We are positioned at the intersection of business services and healthcare and generated $2.0 billion of service revenues in the first six months of 2014 and conduct business in approximately 100 countries with approximately 30,700 employees. We use the breadth and depth of our service offerings, our global footprint and our therapeutic, scientific and analytics expertise to help our biopharmaceutical customers, as well as other healthcare customers, to be more successful in an increasingly complex healthcare environment. Our business is currently organized in two reportable segments, Product Development and Integrated Healthcare Services.

For the three months ended June 30, 2014, our service revenues increased 9.7%, or $91.2 million at actual foreign exchange rates compared to the same period last year. Our growth in service revenues, excluding the impact of foreign currency fluctuations (“constant currency”), was 8.6%, with 6.7% growth in the Product Development segment and 15.1% growth in the Integrated Healthcare Services segment. For the six months ended June 30, 2014, our service revenues increased 9.0%, or $169.1 million at actual foreign exchange rates compared to the same period last year. The year to date growth in service revenues on a constant currency basis was 8.5%, with 7.6% growth in the Product Development segment and 11.5% growth in the Integrated Healthcare Services segment.

Income from operations was $141.0 million, net income was $85.1 million and diluted earnings per share was $0.64 for the three months ended June 30, 2014. Income from operations was $282.3 million, net income was $175.3 million and diluted earnings per share was $1.32 for the six months ended June 30, 2014.

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Net new business was $1,228 million and $2,503 million for the three and six months ended June 30, 2014, respectively. This net new business contributed to an ending backlog of $10,264 million at June 30, 2014. “Net new business” and “backlog” are defined under “Net New Business Reporting and Backlog” below.

Product Development

Product Development provides services and expertise that allow biopharmaceutical companies to outsource the clinical development process from first-in-man trials to post-launch monitoring. Our comprehensive service offerings provide the support and functional expertise necessary at each stage of development, as well as the systems and analytical capabilities to help our customers improve product development efficiency and effectiveness. Product Development is comprised of clinical solutions and services and consulting. Clinical solutions and services provides services necessary to develop biopharmaceutical products. These services include project management and clinical monitoring functions for conducting multi-site trials (generally Phase II-IV) (collectively “core clinical”). These also include clinical trial support services that improve clinical trial decision-making, such as global laboratories, data management, biostatistical, safety and pharmacovigilance, early clinical development trials (generally Phase I), and strategic planning and design services, which help improve decisions and performance. We also provide functional services that cover a range of areas. Consulting provides strategy and management consulting services based on life science expertise and advanced analytics, as well as regulatory and compliance consulting services.

Integrated Healthcare Services

Integrated Healthcare Services provides the healthcare industry with both broad geographic presence and commercial capabilities. Our customized commercialization services are designed to accelerate the commercial success of biopharmaceutical and other health-related products. Integrated Healthcare Services provides a broad array of services including commercial services, such as providing contract pharmaceutical sales forces in key geographic markets, as well as a growing number of healthcare business services for the broader healthcare sector. Service offerings include commercial services (sales representatives, strategy, marketing communications and other areas related to commercialization), real-world and late phase research (drug therapy analysis, real-world research and evidence-based medicine, including research studies to prove a drug’s value) and other healthcare services (comparative and cost-effectiveness research capabilities, clinical management analytics, decision support services, medication adherence and health outcome optimization services, and web-based systems for measuring quality improvement).

Reimbursed Expenses

Reimbursed expenses may fluctuate from period-to-period due, in part, to where we are in the lifecycle of the many contracts that are in progress at a particular point in time. For instance, these pass-through costs tend to be higher during the early phases of clinical trials as a result of patient recruitment efforts. As reimbursed expenses are pass-through costs to our customers with little to no profit to us, we believe that the fluctuations in reimbursed expenses from period to period are not meaningful to our underlying performance and we do not provide analysis of the fluctuation in these items or their impact on our financial results.

Foreign Currency Fluctuations

The impact from foreign currency fluctuations and constant currency information assumes constant foreign currency exchange rates based on the rates in effect for the comparable prior-year period were used in translation. We believe that providing the impact of fluctuations in foreign currency rates on certain financial results can facilitate analysis of period-to-period comparisons of business performance.

Results of Operations

Backlog and Net New Business

We began 2014 with backlog of $9,855 million, which was 13% higher than at the beginning of 2013. Backlog at June 30, 2014 was $10,264 million.

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Net new business grew 21% in the second quarter of 2014 to $1,228 million from $1,014 million in second quarter of 2013, driven by growth in Integrated Healthcare Services. Integrated Healthcare Services’ net new business increased 154% to $361 million in the second quarter of 2014 as compared to $143 million for the same period in 2013, related to growth in commercial services in North America and Japan as well as an increase in net new business from real-world and late phase research services. Product Development’s net new business decreased to $867 million in the second quarter of 2014 as compared to $871 million for the same period in 2013, as net new business from the acquisition of Novella Clinical Inc., or Novella, that was completed in the third quarter of 2013 was more than offset by higher cancellations in the quarter.

Net new business grew 11% in the first six months of 2014 to $2,503 million from $2,259 million in the first six months of 2013, driven by growth in Integrated Healthcare Services. Integrated Healthcare Services’ net new business increased 102% to $630 million in the first six months of 2014 as compared to $313 million for the same period in 2013, related to growth in commercial services in North America and Japan as well as an increase in net new business from real-world and late phase research services. Product Development’s net new business decreased 4% to $1,873 million for the first six months in 2014 as compared to $1,946 million for the same period in 2013, as net new business from the Novella acquisition was more than offset by lower net new business for core clinical services. We experienced higher growth in net new business for functional resourcing business in core clinical services in the first six months of 2014 primarily due to large wins in the first quarter of 2014.

Service Revenues

For the three months ended June 30, 2014, our service revenues increased $91.2 million, or 9.7%, as compared to the same period in 2013. This increase is comprised of constant currency service revenue growth of approximately $81.1 million, or 8.6%, and a positive impact of approximately $10.1 million from the effects of foreign currency fluctuations. The constant currency service revenue growth, which includes the impact from the Novella acquisition, is comprised of a $48.0 million increase in Product Development and a $33.1 million increase in Integrated Healthcare Services.

For the six months ended June 30, 2014, our service revenues increased $169.1 million, or 9.0%, as compared to the same period in 2013. This increase is comprised of constant currency service revenue growth of approximately $159.5 million, or 8.5%, and a positive impact of approximately $9.6 million from the effects of foreign currency fluctuations. The constant currency service revenue growth, which includes the impact from the Novella acquisition, is comprised of a $108.9 million increase in Product Development and a $50.6 million increase in Integrated Healthcare Services.

Costs of Revenue, Service Costs

When compared to the same period in 2013, service costs in the second quarter of 2014 increased $56.8 million. The increase included a constant currency increase in expenses of approximately $53.5 million, or 8.7%, and a negative impact of approximately $3.3 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the Novella acquisition and increases in compensation and related expenses due to annual merit increases and an increase in billable headcount needed to support our higher volume of revenue. These increases in compensation and related expenses were partially offset by efficiencies gained from restructuring activities taken in prior years.

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When compared to the same period in 2013, service costs in the first six months of 2014 increased $89.5 million. The increase included a constant currency increase in expenses of approximately $95.0 million, or 7.7%, partially offset by a positive impact of approximately $5.5 million from the effects of foreign currency fluctuations. The constant currency service costs growth was due to incremental costs resulting from the Novella acquisition and increases in compensation and related expenses due to (1) annual merit increases, (2) an increase in billable headcount needed to support our higher volume of revenue and (3) a reduction of an accrual for statutory profit sharing of approximately $5.4 million in 2013 as a result of guidance handed down by an administrative court in France. These increases in compensation and related expenses were partially offset by efficiencies gained from restructuring activities taken in prior years.

Selling, General and Administrative

The $9.8 million decrease in selling, general and administrative expenses in the second quarter of 2014 included a constant currency decrease of $10.9 million, or 4.8%, partially offset by an increase of $1.1 million from a negative foreign currency impact. The constant currency decrease was primarily due to expenses incurred in the second quarter of 2013 that did not recur in 2014 related to a $25.0 million fee paid in connection with the termination of our management agreement with affiliates of certain of our shareholders and a $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GF Management Company, LLC, or GFM, a company controlled by our Executive Chairman. These decreases were partially offset by incremental costs from the Novella acquisition and increases in compensation and related expenses resulting primarily from annual merit increases and an increase in headcount.

The $10.1 million increase in selling, general and administrative expenses in the first six months of 2014 was caused by a constant currency increase of $11.0 million, or 2.6%, partially offset by a decrease of approximately $900,000 from a positive foreign currency impact. The constant currency increase was primarily due to (1) incremental costs from the Novella acquisition, (2) an increase in share-based compensation, and (3) increases in compensation and related expenses resulting primarily from annual merit increases and an increase in headcount. These increases were partially offset by expenses incurred in the first six months of 2013 that did not recur in 2014 related to a $25.0 million fee paid in connection with the termination of our management agreement with affiliates of certain of our shareholders and a $1.5 million fee paid in connection with the modification of an agreement for the business usage of an airplane owned by GFM.

Restructuring Costs

In February 2014, our Board of Directors, or our Board, approved a restructuring plan of up to $13.0 million to better align our resources with our strategic direction. We recognized $948,000 and $2.0 million of restructuring charges, net of reversals for changes in estimates, during the three and six months ended June 30, 2014, respectively, which were primarily related to the February 2014 restructuring plan. These actions are expected to occur throughout 2014 and are expected to result in severance for approximately 400 positions, primarily in the Product Development segment. We believe that this plan will result in annualized cost savings of approximately $20.0 to $25.0 million.

Interest Income and Interest Expense

Interest income includes interest received from bank balances and investments.

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Interest expense during the three and six months ended June 30, 2014 was lower than the same periods in 2013 primarily due to a decrease in the average debt outstanding as a result of the repayment of the $300.0 million term loan, which Quintiles Transnational Holdings Inc. obtained in February 2012 and paid in full in May 2013, and the pay down of $50.0 million of outstanding indebtedness under our senior secured credit facilities in May 2013. The lower average debt outstanding during the six months ended June 30, 2014 was also impacted by the mandatory prepayment of $33.8 million of outstanding indebtedness under our senior secured credit facilities in the first quarter of 2013. In addition, the average rate of interest on the term loan under our senior secured credit facility during the three and six months ended June 30, 2014 was 75 basis points lower than it was during the same periods in 2013 due to a reduction in the interest rate pursuant to the terms and conditions in the credit agreement as well as from the refinancing transaction we completed in the fourth quarter of 2013.

Loss on Extinguishment of Debt

In May 2013, we recognized a $16.5 million loss on extinguishment of debt related to payment of all amounts outstanding under the $300.0 million term loan and a $50.0 million pay down of outstanding indebtedness under our senior secured credit facilities. The loss on extinguishment of debt included approximately $5.6 million of unamortized debt issuance costs, $4.8 million of unamortized discount and $6.1 million of fees and expenses.

Other Expense (Income), Net

Included in other expense (income), net for the second quarter of 2014 were $2.8 million of foreign currency net losses as compared to $920,000 of foreign currency net losses during the same period in 2013. The first six months of 2014 includes $3.3 million of foreign currency net losses as compared to $898,000 of foreign currency net gains during the same period in 2013. In addition, the first six months of 2014 included a gain from the sale of marketable equity securities of approximately $5.0 million.

Income Tax Expense

The effective income tax rate for the three and six months ended June 30, 2013 was positively impacted by a $16.2 million discrete income tax benefit recognized as a result of the management agreement termination fee and costs associated with debt repayments. The effective income tax rate for the three and six months ended June 30, 2013 was negatively impacted by the settlement of certain intercompany notes that had previously been considered long-term investments, which resulted in $11.2 million of income tax expense. In addition, the effective income tax rate for the three and six months ended June 30, 2013, and for subsequent periods, was positively impacted by our change in the assertion regarding the undistributed earnings of most of our foreign subsidiaries that are considered to be indefinitely reinvested outside of the United States. Prior to June 2013, we had not considered the majority of the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested. Accordingly, periods prior to June 2013 were negatively impacted by income taxes imposed on most of the earnings of the foreign subsidiaries, as a deferred income tax liability was recorded each quarter for the anticipated income tax costs of repatriating those earnings in the future. We reevaluated this assertion following our initial public offering, or IPO, in May 2013, as a portion of the IPO proceeds were used to pay down debt held in the United States. With this reduction of debt and related interest expense, we expect to be able to support the cash needs of our domestic subsidiaries without repatriating cash from the affected foreign subsidiaries. We expect to utilize the cash generated outside of the United States to fund growth outside of the United States. As a result of the assertion change, we recorded an $8.1 million income tax benefit in the second quarter of 2013 to reverse the deferred income tax liability previously recorded on undistributed foreign earnings prior to 2013 that are now considered indefinitely reinvested outside of the United States. In addition, the estimated annual effective income tax rate for 2013 decreased due to the indefinitely reinvested assertion, which resulted in a $7.3 million one-time income tax benefit for the three months ended June 30, 2013 to adjust income taxes recorded on the first quarter of 2013 earnings to the new estimated annual effective income tax rate.

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Equity in Earnings (Losses) of Unconsolidated Affiliates

Equity in earnings (losses) of unconsolidated affiliates for both the three and six month periods of 2014 increased as compared to the same periods in 2013 primarily due to gains from our investment in the NovaQuest Pharma Opportunities Fund III, L.P.

Segments

Service revenues and income from operations by segment are as follows (dollars in millions):