IQVIA HOLDINGS INC. - Quarter Report: 2016 June (Form 10-Q)

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: 001-35907

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 the definitions 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.

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. Summary of Significant Accounting Policies

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, 2016. 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, 2015. The balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements of the Company but does not include all the disclosures required by GAAP.

Investments in Marketable Securities

Investments in marketable securities are classified as either trading or available-for-sale and measured at fair market value. Realized and unrealized gains and losses on trading securities are included in other (income) expense, net on the accompanying condensed consolidated statements of income. Realized gains and losses on available-for-sale securities are included in other (income) expense, net on the accompanying condensed consolidated statements of income. Unrealized gains and losses, net of deferred income taxes, on available-for-sale securities are included in the accumulated other comprehensive income (loss) (“AOCI”) component of shareholders’ deficit until realized. Any gains or losses from the sales of investments or other-than-temporary declines in fair value are computed by specific identification.

Recently Issued Accounting Standards

Accounting pronouncement adopted

In November 2015, the United States Financial Accounting Standards Board (“FASB”) issued new accounting guidance which removed the requirement that deferred income tax assets and liabilities be classified as either current or non-current in a classified statement of financial position and instead requires deferred income tax assets and liabilities to be classified as non-current. The Company adopted this new accounting guidance prospectively on January 1, 2016.

Accounting pronouncements being evaluated

In March 2016, the FASB issued new accounting guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and the classification of excess income tax benefits on the statement of cash flows. The Company expects to adopt this new accounting guidance as required on January 1, 2017. Under the new accounting guidance, excess income tax benefits related to share-based awards will be reflected as a reduction of income tax expense on the statements of income and as cash provided from operating activities. Under existing guidance, these tax benefits are reflected directly in additional paid-in capital and as cash provided from financing activities. The Company recognized $5.1 million of such income tax benefits in the six months ended June 30, 2016. The Company does not expect the adoption of this new accounting guidance to impact the recognition of its share-based compensation expense or its presentation of cash flows related to employee taxes paid for withheld shares.

In February 2016, the FASB issued new accounting guidance which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.

In January 2016, the FASB issued new accounting guidance which modifies how entities measure equity investments and present changes in the fair value of financial liabilities. The new accounting guidance will be effective for annual reporting periods beginning after December 15, 2017. Early adoption of the presentation guidance is permitted; however, early adoption of the recognition and measurement guidance is not permitted. The adoption of this new accounting guidance is not expected to have a material effect on the Company’s financial statements.

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In May 2014, the FASB and the International Accounting Standards Board issued a converged standard on the recognition of revenue from contracts with clients. 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 clients 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 including information about changes in assets and liabilities that result from contracts with clients. The new standard allows for either a retrospective or prospective approach to transition upon adoption. The new standard will be effective for annual reporting periods beginning after December 15, 2017. Early adoption is permitted for annual reporting periods beginning after December 15, 2016. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, the date of adoption, and the transition approach to implement the new standard.

2. Employee Stock Compensation

The Company granted the following number of share-based awards:

The Company had the following number of share-based awards outstanding:

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:

The Company issued 52,772 shares and 38,449 shares of common stock for purchases under its employee stock purchase plan during the six months ended June 30, 2016 and 2015, respectively.

The Company recognized share-based compensation expense of $10.1 million and $10.7 million during the three months ended June 30, 2016 and 2015, respectively, and $18.8 million and $20.3 million during the six months ended June 30, 2016 and 2015, respectively.

3. Concentration of Credit Risk

No client accounted for 10% or more of consolidated service revenues for the three and six months ended June 30, 2016 or 2015.

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4. Accounts Receivable and Unbilled Services

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

5. Investments – Debt, Equity and Other Securities

The following is a summary of the Company’s investments in debt, equity and other securities (in thousands):

Marketable Securities

Trading securities consist primarily of investments in mutual funds and are measured at fair value with realized and unrealized gains and losses recorded in other (income) expense, net on the accompanying condensed consolidated statements of income. Realized and unrealized gains, net of approximately $499,000 and $729,000 were recognized during the three and six months ended June 30, 2016, respectively. Available-for-sale securities consist of equity securities.

Cost Method Investments

On February 25, 2011, the Company and the Samsung Group entered into an agreement to form a joint venture intended to provide pharmaceutical contract manufacturing services in South Korea. In May 2016, the Company sold a portion of its ownership interest in the joint venture to the Samsung Group, at cost, in exchange for $26.0 million. As of June 30, 2016, the Company’s ownership interest in the joint venture was less than 1%.

6. Variable Interest Entities

As of June 30, 2016, the Company’s investments in unconsolidated variable interest entities (“VIEs”) and its estimated maximum exposure to loss were as follows (in thousands):

The Company has committed to invest up to $50 million as a limited partner in NovaQuest Pharma Opportunities Fund III, L.P. (“Fund III”). As of June 30, 2016, the Company has funded approximately $41.5 million and has approximately $8.5 million of remaining funding commitments. As of June 30, 2016 and December 31, 2015, the Company had a 10.9% ownership interest in Fund III. The Company’s maximum exposure to loss on Fund III is limited to its investment and remaining funding commitments.

The Company has committed to invest up to $20 million as a limited partner in NovaQuest Pharma Opportunities Fund IV, L.P. (“Fund IV”). As of June 30, 2016, the Company has funded approximately $7.1 million and has approximately $12.9 million of remaining funding commitments. As of June 30, 2016 and December 31, 2015, the Company had a 2.3% ownership interest in Fund IV. The Company’s maximum exposure to loss on Fund IV is limited to its investment and remaining funding commitments.

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The Company has determined that Fund III and Fund IV (collectively “the Funds”) are VIEs but that the Company is not the primary beneficiary as it does not have a controlling financial interest in either of the Funds. Although the Company does not have a controlling financial interest in either of the Funds, the Company has determined that it has the ability to exercise significant influence. Accordingly, the Company accounts for its investments in the Funds under the equity method of accounting and records its pro rata share of the Funds’ earnings and losses in equity in (losses) earnings of unconsolidated affiliates on the accompanying condensed consolidated statements of income. The investment assets of unconsolidated VIEs are included in investments in and advances to unconsolidated affiliates on the accompanying condensed consolidated balance sheets.

7. Goodwill

The following is a summary of goodwill by segment for the six months ended June 30, 2016 (in thousands):

8. Derivatives

As of June 30, 2016, the Company held the following derivative positions: (i) forward exchange contracts to protect against foreign exchange movements for certain forecasted foreign currency cash flows related to service contracts and (ii) 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.

As of June 30, 2016, the Company had 12 open foreign exchange forward contracts to hedge certain forecasted foreign currency cash flow transactions occurring in 2016 and the first three months of 2017 with notional amounts totaling $121.8 million. 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 2016 and the first three months of 2017. 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 AOCI. For accounting purposes these hedges are deemed to be highly effective. As of June 30, 2016 and December 31, 2015, the Company had recorded gross unrealized losses of $12.2 million and $5.2 million, respectively, related to foreign exchange forward contracts. Upon expiration of the hedge instruments in 2016 and the first three months of 2017, the Company will reclassify the unrealized holding gains and losses on the derivative instruments included in AOCI into earnings. The unrealized losses are included in other current liabilities on the accompanying condensed consolidated balance sheets as of June 30, 2016 and December 31, 2015.

On June 3, 2015, the Company entered into seven forward starting interest rate swaps with a notional value of $440.0 million in an effort to limit its exposure to changes in the variable interest rate on its senior secured credit facilities. Interest on the swaps began accruing on June 30, 2016 and the interest rate swaps expire between March 31, 2017 and March 31, 2020. The critical terms of the interest rate swaps are 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 for accounting purposes these hedges are deemed to be highly effective. As such, changes in the fair value of these derivative instruments are recorded as unrealized gains (losses) on derivatives included in AOCI. 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 2.1% plus the applicable margin on the affected borrowings. These interest rate swaps will result in a total debt mix of approximately 50% fixed rate debt and 50% variable rate debt. The Company expects that $6.2 million of unrealized losses will be reclassified out of AOCI and will form the interest rate swap component of the 2.1% fixed rate of interest 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):

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

9. 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, 2016 (in thousands):

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

Marketable securities — The Company values trading and available-for-sale securities using the quoted market value of the securities held.

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.

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.

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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):

The revaluations for the contingent consideration are recognized in other (income) expense, 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, 2016, assets carried on the balance sheet and not remeasured to fair value on a recurring basis totaling approximately $1,134.2 million and were identified as Level 3. These assets are comprised of cost and equity method investments of $64.8 million, goodwill of $716.6 million and other identifiable intangibles, net of $352.8 million.

The estimated fair value of the Company’s long-term debt approximates its carrying value as of June 30, 2016 and December 31, 2015. The estimated fair value of the long-term debt is primarily based on rates in which the debt is traded among banks.

10. Shareholders’ Deficit

Equity Repurchase Program

During the six months ended June 30, 2016, the Company repurchased 1,486,679 shares of its common stock under a previously approved equity repurchase program (the “Repurchase Program”) at an average market price per share of $65.67 for an aggregate purchase price of $97.6 million. From the plan’s inception in October 2013 through June 30, 2016, the Company has repurchased a total of $678.2 million of its securities under the Repurchase Program, consisting of $59.1 million of stock options and $619.1 million of common stock. As of June 30, 2016, the Company has remaining authorization to repurchase up to $46.8 million of its common stock under the Repurchase Program. In addition, from time to time, the Company has repurchased and may continue to repurchase common stock through private or other transactions outside of the Repurchase Program.

Non-controlling Interests

Below is a summary of non-controlling interests for the six months ended June 30 (in thousands):

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11. Business Combinations

On May 3, 2016, the Company entered into a merger agreement with IMS Health Holdings, Inc. (“IMS Health”). If the merger agreement is approved by the companies’ respective stockholders and the other customary conditions to completing the merger are satisfied or waived, IMS Health will merge with and into the Company in a “merger of equals,” with the Company continuing as the surviving corporation (the “Surviving Corporation”) and the separate corporate existence of IMS Health ceasing. The merger will be accounted for using the acquisition method of accounting with the Company considered the accounting and legal acquirer. Upon completion of the merger, each share of IMS Health common stock outstanding immediately before the merger will be converted into the right to receive 0.3840 of a share of Surviving Corporation common stock. This exchange ratio will not be adjusted for changes in the market price or number of shares outstanding of either the Company’s common stock or IMS Health common stock between the date of signing the merger agreement and completion of the merger. IMS Health equity awards held by current employees and certain members of the IMS Health board of directors will be converted into Surviving Corporation equity awards after giving effect to the exchange ratio. The terms of the awards, including vesting provisions, will be substantially consistent to those of the historical IMS Health equity awards; provided that any awards subject to performance-based vesting criteria will be converted into Surviving Corporation awards that vest based solely upon continued service. If the merger agreement is terminated under certain circumstances, the Company or IMS Health, as applicable, will be required to pay the other a cash termination fee equal to $250 million. The merger is expected to close in the fourth quarter of 2016.

12. Restructuring

2016 Plan

During the first quarter of 2016, the Company’s Board of Directors (the “Board”) approved a restructuring plan for approximately $22 million, and in the second quarter of 2016 increased the approval to $41 million, primarily for severance and other exit costs, to align its resources and reduce overcapacity. These actions are expected to continue throughout 2016 and 2017, and are expected to consist of severance, facility closure and other exit-related costs. During the six months ended June 30, 2016, the Company has recognized approximately $21.6 million, $1.7 million and $1.9 million of restructuring costs related to this plan for activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.

2015 Plans

During the first quarter of 2015, the Board approved a restructuring plan for approximately $30.0 million to align the Company’s resources and reduce overcapacity. These actions are expected to continue throughout 2016, and are expected to consist of severance, facility closure and other exit-related costs. Since the start of this plan in 2015, the Company has recognized approximately $12.1 million, $8.9 million and $951,000 of restructuring costs related to this plan for activities in the Product Development segment, Integrated Healthcare Services segment and corporate activities, respectively.

Also, in connection with consummating the joint venture transaction with Quest Diagnostics Incorporated, during the third quarter of 2015, a restructuring plan was approved to reduce facility overcapacity and eliminate redundant roles. These actions are expected to continue throughout 2016 and 2017, and are expected to consist of severance, facility closure and other exit-related costs of approximately $14.0 million. Since the start of this plan in 2015, the Company has recognized approximately $11.5 million of restructuring costs related to this plan for activities in the Product Development segment.

The following amounts were recorded for the restructuring plans (in thousands):

Restructuring costs are not allocated to the Company’s reportable segments as they are not part of the segment performance measures regularly reviewed by management. The Company expects the majority of the restructuring accruals at June 30, 2016 will be paid in 2016 and 2017.

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13. 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, 2016 and December 31, 2015, the Company had a severance accrual included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets of $2.7 million and $3.3 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. During the first six months of 2016, the Company recognized approximately $472,000 of net reversals related to these cost reduction programs in the Product Development segment, primarily as a result of affected individuals transferring into other positions within the Company. The Company expects the majority of the severance accrual at June 30, 2016 will be paid in 2017.

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

14. Comprehensive Income

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

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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):

15. 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 clients engaged in research and development, provides clinical research and clinical trial services. Integrated Healthcare Services provides commercialization services to biopharmaceutical clients and research, analytics, real-world and late phase research, and other services to both biopharmaceutical clients 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, merger and acquisition related costs, and expenses for corporate overhead functions such as senior leadership, finance, human resources, information technology, facilities and legal. The Company does not allocate restructuring charges to its segments. Information presented below is in thousands:

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16. Earnings Per Share

The following table presents the weighted average number of outstanding share-based awards not included in the computation of diluted earnings per share if they are subject to performance conditions or if the effect of including such share-based awards in the computation would be anti-dilutive (in thousands):

The vesting of performance units is contingent upon the achievement of certain performance targets. The performance units are not included in diluted earnings per share until the performance targets have been met.

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

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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 together with our condensed consolidated financial statements and the related notes 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, 2015.

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 client 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; client 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 clients 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; our proposed merger with IMS Health Holdings, Inc., or IMS Health, which may be delayed or may not close at all, either due to a failure to obtain regulatory approvals or meet other closing conditions to the merger, including approval of the merger by our and IMS Health stockholders; we may have difficulty integrating our business and operations with IMS Health after the merger and achieving the expected benefits of the merger; our investments in our clients’ businesses or drugs and our related commercial rights strategies could have a negative impact on our financial performance; we face risks arising from the restructuring of our operations; our restructuring plans may not result in the annualized cost savings we expect; 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, 2015, as updated by our quarterly reports on Form 10-Q.

Overview

Our business is currently organized in two reportable segments, Product Development and Integrated Healthcare Services.

Product Development

Product Development provides services and expertise that allow biopharmaceutical companies to outsource the clinical development process from first-in-man clinical 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 clients improve product development efficiency and effectiveness. Product Development is comprised of clinical solutions and services and advisory services. Clinical solutions and services provides services necessary to develop biopharmaceutical products. These services include project management and clinical monitoring functions for conducting multi-site clinical trials (generally Phase II-IV) (collectively “core clinical”). These also include clinical trial support services that improve clinical trial decision-making, such as global clinical trial 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 resourcing services that cover a range of areas. Advisory services provides strategy and management advisory services based on life science expertise and advanced analytics, as well as regulatory and compliance advisory services.

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In July 2015, we combined our global clinical trials laboratory operations in our Product Development segment with the clinical trials laboratory operations of Quest Diagnostics Incorporated, or Quest, with the resulting combined business referred to as Q² Solutions. We own 60% of Q² Solutions and Quest owns the remaining 40%. The Q² Solutions transaction was accounted for as a business combination and is included in our consolidated financial information since the acquisition date with a non-controlling interest for the portion which we do not own.

Integrated Healthcare Services

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. Our customized commercialization services are designed to accelerate the commercial success of biopharmaceutical and other health-related products. Service offerings include commercial services (sales representatives, strategy, marketing communications and other areas related to market access and 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), other healthcare services (comparative and cost-effectiveness research capabilities, decision support services, communication services and health engagement, medication adherence and health outcome optimization services, and web-based systems for measuring quality improvement), and electronic health records implementation and advisory services.

Recent Event

On May 3, 2016, we entered into a merger agreement with IMS Health. If the merger agreement is approved by the companies’ respective stockholders and the other customary conditions to completing the merger are satisfied or waived, IMS Health will merge with and into us in a “merger of equals,” with us continuing as the surviving corporation, or the Surviving Corporation, and the separate corporate existence of IMS Health ceasing. The merger will be accounted for using the acquisition method of accounting with us considered the accounting and legal acquirer. Upon completion of the merger, each share of IMS Health common stock outstanding immediately before the merger will be converted into the right to receive 0.3840 of a share of Surviving Corporation common stock. This exchange ratio will not be adjusted for changes in the market price or number of shares outstanding of either our common stock or IMS Health common stock between the date of signing the merger agreement and completion of the merger. IMS Health equity awards held by current employees and certain members of the IMS Health board of directors will be converted into Surviving Corporation equity awards after giving effect to the exchange ratio. The terms of the awards, including vesting provisions, will be substantially consistent to those of the historical IMS Health equity awards; provided that any awards subject to performance-based vesting criteria will be converted into Surviving Corporation awards that vest based solely upon continued service. If the merger agreement is terminated under certain circumstances, we or IMS Health, as applicable, will be required to pay the other a cash termination fee equal to $250 million. The merger is expected to close in the fourth quarter of 2016.

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 clients with little to no profit and we believe that the fluctuations from period-to-period are not meaningful to our underlying performance, we do not provide analysis of the fluctuations in these items or their impact on our financial results.

The Company has collection risk on contractually reimbursable expenses, and, from time to time, is unable to obtain reimbursement from the client for costs incurred. When such an expense is not reimbursed, it is classified as cost of revenue, service costs on the condensed consolidated statements of income.

Foreign Currency Translation

In the first six months of 2016, approximately 32% of our service revenues were denominated in currencies other than the United States dollar. Because a large portion of our service revenues and expenses are denominated in currencies other than the United States dollar and our financial statements are reported in United States dollars, changes in foreign currency exchange rates can significantly affect our results of operations. The revenue and expenses of our foreign operations are generally denominated in local currencies and translated into United States dollars for financial reporting purposes. Accordingly, exchange rate fluctuations will affect the translation of foreign results into United States dollars for purposes of reporting our consolidated results.

As a result, 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 that excludes the effects of foreign currency rate fluctuations. The constant currency information assumes the same foreign currency exchange rates that were in effect for the comparable prior-year period were used in translation of the current period results.

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Consolidated Results of Operations

Backlog and Net New Business

We began 2016 with backlog of $12,038 million, which was 7% higher than at the beginning of 2015. Backlog at June 30, 2016 was $12,538 million. Included within backlog at June 30, 2016 is approximately $8,611 million of backlog that we do not expect to generate revenue in the next 12 months.

Net new business increased 24.4% in the second quarter of 2016 to $1,645 million from $1,322 million in the second quarter of 2015, driven by an increase in Product Development partially offset by a decrease in Integrated Healthcare Services. Product Development’s net new business increased 43.2% in the second quarter of 2016 to $1,385 million from $968 million in the second quarter of 2015 related primarily to higher new business signings for core clinical services and clinical trial support services, and the incremental impact from the businesses that Quest contributed to Q² Solutions. New business signings during the second quarter included the closing of some large opportunities which were delayed from the first quarter of 2016. Integrated Healthcare Services’ net new business decreased 26.7% in the second quarter of 2016 to $260 million from $354 million in the second quarter of 2015, related primarily to lower new business signings for commercial services (which reflects generally soft market conditions for these services in Europe and Japan) and lower new business signings for real-world and late phase research services.

Net new business remained relatively constant in the first six months of 2016 to $2,671 million compared to $2,668 million in the first six months of 2015, driven by an increase in Product Development offset by a decrease in Integrated Healthcare Services. Product Development’s net new business increased 6.3% in the first six months of 2016 to $2,184 million from $2,054 million in the first six months of 2015 related primarily to higher new business signings for core clinical services and clinical trial support services, and the incremental impact from the businesses that Quest contributed to Q² Solutions. Integrated Healthcare Services’ net new business decreased 20.7% in the first six months of 2016 to $487 million from $614 million in the first six months of 2015, related primarily to lower new business signings for commercial services (which reflects generally soft market conditions for these services in Europe and Japan), partially offset by an increase in net new business from real-world and late phase research services.

Summary Results of Operations

The following tables present a summary of our results of operations: