UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
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x |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2009 |
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OR |
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number: 001-14049
IMS Health Incorporated
(Exact Name of Registrant as Specified in its Charter)
Delaware |
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06-1506026 |
(State of Incorporation) |
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(I.R.S. Employer Identification No.) |
901 Main Avenue, Norwalk, CT 06851
(Address of principal executive offices)(Zip Code)
(203) 845-5200
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 the filing requirements for the past 90 days.
x Yes o 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes o 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 definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x |
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Accelerated Filer o |
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Non-Accelerated Filer o |
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Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. At June 30, 2009, there were 182,386,850 shares of IMS Health Incorporated Common Stock, $0.01 par value, outstanding.
IMS HEALTH INCORPORATED
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PAGE(S) |
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3 |
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4 |
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5 |
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6 |
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7 |
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8-30 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
31-51 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
52 |
52 |
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53 |
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53 54 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
54 |
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55 |
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56 |
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57 |
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58 |
2
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(Dollars and shares in thousands, except per share data)
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As of June 30, |
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As of December 31, |
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Assets: |
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Current Assets: |
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Cash and cash equivalents |
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$ |
239,780 |
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$ |
215,682 |
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Accounts receivable, net of allowances of $9,473 and $5,960 in 2009 and 2008, respectively |
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329,850 |
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382,776 |
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Other current assets |
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177,770 |
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174,099 |
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Total Current Assets |
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747,400 |
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772,557 |
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Securities and other investments |
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8,119 |
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7,121 |
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Property, plant and equipment, net of accumulated depreciation of $223,454 and $208,340 in 2009 and 2008, respectively |
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180,578 |
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183,055 |
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Computer software |
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245,449 |
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253,583 |
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Goodwill (Note 6) |
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674,888 |
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663,532 |
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Other assets |
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174,383 |
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207,289 |
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Total Assets |
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$ |
2,030,817 |
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$ |
2,087,137 |
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Liabilities, Redeemable Noncontrolling Interest and Shareholders Deficit: |
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Current Liabilities: |
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Accounts payable |
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$ |
71,390 |
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$ |
119,798 |
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Accrued and other current liabilities |
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248,292 |
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275,764 |
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Accrued income taxes |
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47,735 |
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Short-term deferred tax liability |
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2,074 |
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9,444 |
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Deferred revenues |
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107,023 |
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88,484 |
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Total Current Liabilities |
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428,779 |
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541,225 |
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Postretirement and postemployment benefits |
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112,694 |
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109,516 |
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Long-term debt (Note 9) |
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1,359,295 |
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1,404,199 |
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Other liabilities |
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152,515 |
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185,677 |
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Total Liabilities |
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$ |
2,053,283 |
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$ |
2,240,617 |
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Commitments and Contingencies (Note 7) |
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Redeemable Noncontrolling Interest (Note 13) |
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$ |
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$ |
100,000 |
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Shareholders Deficit: |
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Common Stock, par value $.01, authorized 800,000 shares; issued 335,045 shares in 2009 and 2008, respectively |
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$ |
3,350 |
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$ |
3,350 |
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Capital in excess of par |
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530,762 |
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546,478 |
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Retained earnings |
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3,245,400 |
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3,060,345 |
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Treasury stock, at cost, 152,659 and 153,564 shares in 2009 and 2008, respectively |
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(3,555,465 |
) |
(3,576,446 |
) |
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Cumulative translation adjustment |
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(132,609 |
) |
(171,990 |
) |
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Unamortized postretirement and postemployment balances (SFAS No. 158) |
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(115,366 |
) |
(117,111 |
) |
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Total IMS Health Shareholders Deficit |
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$ |
(23,928 |
) |
$ |
(255,374 |
) |
Noncontrolling Interests (Note 13) |
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$ |
1,462 |
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$ |
1,894 |
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Total Shareholders Deficit |
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$ |
(22,466 |
) |
$ |
(253,480 |
) |
Total Liabilities, Redeemable Noncontrolling Interest and Shareholders Deficit |
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$ |
2,030,817 |
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$ |
2,087,137 |
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3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share data)
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Three Months Ended |
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2009 |
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2008 |
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Information and analytics revenue |
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$ |
408,611 |
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$ |
453,440 |
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Consulting and services revenue |
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114,228 |
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147,269 |
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Operating Revenue |
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522,839 |
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600,709 |
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Operating costs of information and analytics |
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175,401 |
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193,607 |
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Direct and incremental costs of consulting and services |
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57,012 |
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71,951 |
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External-use software amortization |
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10,117 |
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13,043 |
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Selling and administrative expenses |
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162,919 |
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168,365 |
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Depreciation and other amortization |
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22,676 |
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22,366 |
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Severance, impairment and other charges (Note 15) |
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25,428 |
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Operating Income |
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69,286 |
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131,377 |
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Interest income |
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476 |
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2,983 |
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Interest expense |
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(9,055 |
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(11,970 |
) |
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Other income (expense), net |
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4,523 |
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(6,159 |
) |
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Non-Operating Loss, Net |
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(4,056 |
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(15,146 |
) |
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Income before provision for income taxes |
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65,230 |
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116,231 |
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Provision for income taxes (Note 11) |
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(1,518 |
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(37,505 |
) |
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Net Income |
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$ |
63,712 |
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$ |
78,726 |
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Less: Net income attributable to noncontrolling interests (Note 13) |
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829 |
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1,031 |
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Net Income Attributable to IMS Health |
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$ |
62,883 |
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$ |
77,695 |
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Basic Earnings Per Share of Common Stock |
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$ |
0.34 |
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$ |
0.43 |
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Diluted Earnings Per Share of Common Stock |
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$ |
0.34 |
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$ |
0.42 |
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Weighted average number of shares outstanding Basic |
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182,380 |
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181,741 |
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Dilutive effect of shares issuable as of period-end under stock-based compensation plans and other |
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124 |
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2,133 |
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Adjustment of shares outstanding applicable to exercised and cancelled stock options during the period |
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22 |
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Weighted Average Number of Shares Outstanding Diluted |
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182,504 |
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183,896 |
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See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars and shares in thousands, except per share data)
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Six Months Ended |
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2009 |
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2008 |
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Information and analytics revenue |
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$ |
828,688 |
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$ |
909,627 |
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Consulting and services revenue |
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221,095 |
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265,262 |
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Operating Revenue |
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1,049,783 |
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1,174,889 |
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Operating costs of information and analytics |
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346,240 |
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386,374 |
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Direct and incremental costs of consulting and services |
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118,157 |
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140,456 |
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External-use software amortization |
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20,641 |
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25,757 |
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Selling and administrative expenses |
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323,325 |
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331,133 |
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Depreciation and other amortization |
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45,841 |
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43,410 |
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Severance, impairment and other charges (Note 15) |
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25,428 |
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Operating Income |
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170,151 |
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247,759 |
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Interest income |
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1,483 |
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5,575 |
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Interest expense |
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(18,531 |
) |
(23,233 |
) |
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Other income (expense), net |
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9,418 |
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(24,781 |
) |
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Non-Operating Loss, Net |
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(7,630 |
) |
(42,439 |
) |
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Income before provision for income taxes |
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162,521 |
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205,320 |
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Benefit (provision) for income taxes (Note 11) |
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35,647 |
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(65,784 |
) |
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Net Income |
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$ |
198,168 |
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$ |
139,536 |
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Less: Net income attributable to noncontrolling interests (Note 13) |
|
1,953 |
|
2,666 |
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Net Income Attributable to IMS Health |
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$ |
196,215 |
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$ |
136,870 |
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Basic Earnings Per Share of Common Stock |
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$ |
1.08 |
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$ |
0.75 |
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Diluted Earnings Per Share of Common Stock |
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$ |
1.08 |
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$ |
0.74 |
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Weighted average number of shares outstanding Basic |
|
182,113 |
|
183,388 |
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Dilutive effect of shares issuable as of period-end under stock-based compensation plans and other |
|
92 |
|
1,547 |
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Adjustment of shares outstanding applicable to exercised and cancelled stock options during the period |
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|
38 |
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Weighted Average Number of Shares Outstanding Diluted |
|
182,205 |
|
184,973 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
5
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
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Six Months Ended June 30, |
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2009 |
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2008 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
198,168 |
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$ |
139,536 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
|
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Depreciation and amortization |
|
66,482 |
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69,167 |
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Bad debt expense |
|
2,688 |
|
983 |
|
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Deferred income taxes |
|
1,500 |
|
1,439 |
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Gains from investments, net |
|
(38 |
) |
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Non-cash stock-based compensation charges |
|
15,605 |
|
16,227 |
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Non-cash portion of severance, impairment and other charges |
|
17,210 |
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|
|
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Net tax benefit on stock-based compensation |
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(4,440 |
) |
(316 |
) |
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Excess tax benefits from stock-based compensation |
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|
(88 |
) |
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Change in assets and liabilities, excluding effects from acquisitions and dispositions: |
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|
|
|
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Net decrease (increase) in accounts receivable |
|
47,849 |
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(28,930 |
) |
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Net decrease (increase) in work-in-process inventory |
|
3,389 |
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(5,468 |
) |
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Net decrease (increase) in prepaid expenses and other current assets |
|
9,016 |
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(18,817 |
) |
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Net decrease in accounts payable |
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(50,710 |
) |
(18,196 |
) |
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Net decrease in accrued and other current liabilities |
|
(22,372 |
) |
(6,995 |
) |
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Net decrease in accrued severance, impairment and other charges |
|
(6,582 |
) |
(27,914 |
) |
||
Net increase (decrease) in deferred revenues |
|
17,658 |
|
(18,476 |
) |
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Net (decrease) increase in accrued income taxes |
|
(108,818 |
) |
6,597 |
|
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Net decrease in pension assets (net of liabilities) |
|
6,450 |
|
1,655 |
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Net decrease in other long-term assets (net of long-term liabilities) |
|
1,254 |
|
1,642 |
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Net Cash Provided by Operating Activities |
|
194,309 |
|
112,046 |
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Cash Flows Used in Investing Activities: |
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|
|
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Capital expenditures |
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(11,210 |
) |
(22,462 |
) |
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Additions to computer software |
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(37,967 |
) |
(36,537 |
) |
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Proceeds from sale of assets, net |
|
751 |
|
1,392 |
|
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Payments for acquisitions of businesses, net of cash acquired |
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(2,896 |
) |
(45,308 |
) |
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Funding of venture capital investments |
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(1,000 |
) |
(1,500 |
) |
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Other investing activities, net |
|
1,114 |
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(1,874 |
) |
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Net Cash Used in Investing Activities |
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(51,208 |
) |
(106,289 |
) |
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Cash Flows Used in Financing Activities: |
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|
|
|
|
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Net increase in revolving credit facility and other |
|
2,544 |
|
139,500 |
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Proceeds from private placement notes |
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|
240,000 |
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Repayment of private placement notes |
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(150,000 |
) |
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Payments for purchase of treasury stock |
|
|
|
(229,340 |
) |
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Proceeds from exercise of stock options |
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|
|
5,000 |
|
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Excess tax benefits from stock-based compensation |
|
|
|
88 |
|
||
Dividends paid |
|
(11,160 |
) |
(11,067 |
) |
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Proceeds from employee stock purchase plan and other |
|
|
|
(25 |
) |
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Decrease in cash overdrafts |
|
(4,836 |
) |
(995 |
) |
||
Payments to noncontrolling interests and other financing activities |
|
(103,875 |
) |
(3,382 |
) |
||
Net Cash Used in Financing Activities |
|
(117,327 |
) |
(10,221 |
) |
||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
(1,676 |
) |
6,940 |
|
||
Increase in Cash and Cash Equivalents |
|
24,098 |
|
2,476 |
|
||
Cash and Cash Equivalents, Beginning of Period |
|
215,682 |
|
218,249 |
|
||
Cash and Cash Equivalents, End of Period |
|
$ |
239,780 |
|
$ |
220,725 |
|
See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
6
IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT (Unaudited)
(Dollars and shares in thousands, except per share data)
|
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|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
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|
|
|
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Post Retirement |
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Other |
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Total |
|
|
|
|
|
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Shares |
|
|
|
Capital |
|
|
|
|
|
Cumulative |
|
Post Employ |
|
Compre- |
|
IMS Health |
|
|
|
|
|
||||||||||||
|
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Common |
|
Treasury |
|
Common |
|
in Excess |
|
Retained |
|
Treasury |
|
Translation |
|
Adjust |
|
hensive |
|
Shareholders |
|
Noncontrolling |
|
Total |
|
||||||||||
|
|
Stock |
|
Stock |
|
Stock |
|
of Par |
|
Earnings |
|
Stock |
|
Adjustment |
|
SFAS 158 |
|
Income |
|
(Deficit) Equity |
|
Interest |
|
(Deficit) Equity |
|
||||||||||
Balance, December 31, 2007 |
|
335,045 |
|
143,818 |
|
$ |
3,350 |
|
$ |
535,500 |
|
$ |
2,771,278 |
|
$ |
(3,355,790 |
) |
$ |
61,931 |
|
$ |
(56,584 |
) |
|
|
$ |
(40,315 |
) |
$ |
1,444 |
|
$ |
(38,871 |
) |
|
Net Income Attributable to IMS Health |
|
|
|
|
|
|
|
|
|
311,250 |
|
|
|
|
|
|
|
$ |
311,250 |
|
311,250 |
|
940 |
|
312,190 |
|
|||||||||
Cash Dividends ($0.12 per share) |
|
|
|
|
|
|
|
|
|
(22,183 |
) |
|
|
|
|
|
|
|
|
(22,183 |
) |
|
|
(22,183 |
) |
||||||||||
Stock-Based Compensation Expense |
|
|
|
|
|
|
|
28,036 |
|
|
|
|
|
|
|
|
|
|
|
28,036 |
|
|
|
28,036 |
|
||||||||||
Net Tax Benefit on Stock-Based Compensation |
|
|
|
|
|
|
|
(499 |
) |
|
|
|
|
|
|
|
|
|
|
(499 |
) |
|
|
(499 |
) |
||||||||||
Treasury Shares Acquired Under Purchases |
|
|
|
10,495 |
|
|
|
|
|
|
|
(238,046 |
) |
|
|
|
|
|
|
(238,046 |
) |
|
|
(238,046 |
) |
||||||||||
Treasury Shares Reissued Under: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Exercise of Stock Options |
|
|
|
(277 |
) |
|
|
(920 |
) |
|
|
6,441 |
|
|
|
|
|
|
|
5,521 |
|
|
|
5,521 |
|
||||||||||
Vesting of Restricted Stock |
|
|
|
(473 |
) |
|
|
(15,642 |
) |
|
|
10,977 |
|
|
|
|
|
|
|
(4,665 |
) |
|
|
(4,665 |
) |
||||||||||
Employee Stock Purchase Plan |
|
|
|
1 |
|
|
|
3 |
|
|
|
(28 |
) |
|
|
|
|
|
|
(25 |
) |
|
|
(25 |
) |
||||||||||
Cumulative Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,921 |
) |
|
|
(233,921 |
) |
(233,921 |
) |
(490 |
) |
(234,411 |
) |
||||||||||
SFAS 158 Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,527 |
) |
(60,527 |
) |
(60,527 |
) |
|
|
(60,527 |
) |
||||||||||
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,802 |
|
|
|
450 |
|
|
|
|||||||||
Balance, December 31, 2008 |
|
335,045 |
|
153,564 |
|
$ |
3,350 |
|
$ |
546,478 |
|
$ |
3,060,345 |
|
$ |
(3,576,446 |
) |
$ |
(171,990 |
) |
$ |
(117,111 |
) |
|
|
$ |
(255,374 |
) |
$ |
1,894 |
|
$ |
(253,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Net Income Attributable to IMS Health |
|
|
|
|
|
|
|
|
|
196,215 |
|
|
|
|
|
|
|
$ |
196,215 |
|
196,215 |
|
96 |
|
196,311 |
|
|||||||||
Cash Dividends ($0.12 per share) |
|
|
|
|
|
|
|
|
|
(11,160 |
) |
|
|
|
|
|
|
|
|
(11,160 |
) |
|
|
(11,160 |
) |
||||||||||
Stock-Based Compensation Expense |
|
|
|
|
|
|
|
15,605 |
|
|
|
|
|
|
|
|
|
|
|
15,605 |
|
|
|
15,605 |
|
||||||||||
Net Tax Benefit on Stock-Based Compensation |
|
|
|
|
|
|
|
(4,440 |
) |
|
|
|
|
|
|
|
|
|
|
(4,440 |
) |
|
|
(4,440 |
) |
||||||||||
Treasury Shares Reissued Under: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Vesting of Restricted Stock |
|
|
|
(905 |
) |
|
|
(26,881 |
) |
|
|
20,981 |
|
|
|
|
|
|
|
(5,900 |
) |
|
|
(5,900 |
) |
||||||||||
Cumulative Translation Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
39,381 |
|
|
|
39,381 |
|
39,381 |
|
(528 |
) |
38,853 |
|
||||||||||
SFAS 158 Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745 |
|
1,745 |
|
1,745 |
|
|
|
1,745 |
|
||||||||||
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
237,341 |
|
|
|
(432 |
) |
|
|
|||||||||
Balance, June 30, 2009 |
|
335,045 |
|
152,659 |
|
$ |
3,350 |
|
$ |
530,762 |
|
$ |
3,245,400 |
|
$ |
(3,555,465 |
) |
$ |
(132,609 |
) |
$ |
(115,366 |
) |
|
|
$ |
(23,928 |
) |
$ |
1,462 |
|
$ |
(22,466 |
) |
See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).
7
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Note 1. Interim Condensed Consolidated Financial Statements (Unaudited)
The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended. The Condensed Consolidated Financial Statements (Unaudited) do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, all of which are of a normal recurring nature, considered necessary for a fair presentation of the statements of financial position, income, shareholders deficit and cash flows for the periods presented have been included. The Company has evaluated for disclosure subsequent events that have occurred up to July 31, 2009, the date of issuance of these financial statements. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. The December 31, 2008 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The Condensed Consolidated Financial Statements (Unaudited) and related notes should be read in conjunction with the Consolidated Financial Statements and related notes of IMS Health Incorporated (the Company or IMS) included in its 2008 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the 2009 presentation. Amounts presented in the Condensed Consolidated Financial Statements (Unaudited) may not add due to rounding.
Note 2. Basis of Presentation
IMS Health Incorporated is the leading global provider of market intelligence to the pharmaceutical and healthcare industries. The Company offers leading-edge market intelligence products and services that are integral to its clients day-to-day operations, including product and portfolio management capabilities; commercial effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve productivity and the delivery of quality healthcare worldwide. The Companys information products are developed to meet client needs by using data secured from a worldwide network of suppliers in more than 100 countries. The Companys business lines are:
· Commercial Effectiveness to increase clients productivity across end-to-end sales, marketing, promotional and performance management processes;
· Product and Portfolio Management to provide clients with insights into market measurement so they can optimize their product portfolio and strategies; and
· New Business Areas that support pharmaceutical client business initiatives in managed markets, consumer health, and pricing and market access, and that also serve payer and government audiences.
Within these business lines, the Company provides consulting and services that use in-house capabilities and methodologies to assist clients in analyzing and evaluating market trends, strategies
8
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
and tactics, and to help in the development and implementation of customized software applications and data warehouse tools.
The Company operates in more than 100 countries.
The Company is managed on a global business model with global leaders for the majority of its critical business processes and accordingly has one reportable segment (see Note 16).
Note 3. Summary of Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157, effective January 1, 2008, did not have a material impact on the Companys financial position, results of operations or cash flows. In February 2008, the FASB issued Staff Positions No. FAS 157-1 and No. FAS 157-2 which delayed the effective date of SFAS No. 157 for one year for certain non-financial assets and liabilities and removed certain leasing transactions from its scope. The adoption of Staff Positions No. FAS 157-1 and No. 157-2, effective January 1, 2009, did not have a material impact on the Companys financial position, results of operations or cash flows.
In December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), which amends SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009, with earlier application permitted. Upon initial application, the provisions of FSP FAS 132(R)-1 are not required for earlier periods that are presented for comparative purposes. The Company is currently evaluating the new disclosure requirements under FSP FAS 132(R)-1.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which provides guidance on determining fair values when there is no active market or where the price inputs being used represent distressed sales. It also reaffirms what SFAS No. 157 states is the objective of fair value measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material impact on the Companys financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.
9
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
This standard also requires those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on the Companys financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for interim or annual financial periods ending after June, 15, 2009. The adoption of SFAS No. 165 did not have a material impact on the Companys financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to FASB Statement No. 140. This statement eliminates the concept of qualifying special-purpose entities (QSPEs), changes the requirements for derecognizing financial assets and requires additional disclosures about transfers of financial assets, including securitization transactions, and an entitys continuing involvement in and exposure to the risks related to transferred financial assets. This Statement must be applied as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is currently evaluating this statement to determine any potential impact that it may have on the financial results of the Company.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The statement eliminates the exemption for QSPEs, requires a new approach for determining who should consolidate variable-interest entities (VIEs), and changes when it is necessary to reassess who should consolidate VIEs. This Statement shall be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is currently evaluating this statement to determine any potential impact that it may have on the financial results of the Company.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this statement is not expected to have a material impact on the financial results of the Company.
10
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Note 4. Summary of Significant Accounting Policies
Operating Costs of Information and Analytics
Operating costs of information and analytics (I&A) include costs of data, data processing and collection and costs attributable to personnel involved in production, data management and delivery of the Companys I&A offerings.
One of the Companys major expenditures is the cost for the data it receives from suppliers. After receipt of the raw data and prior to the data being available for use in any part of its business, the Company is required to transform the raw data into useful information through a series of comprehensive processes. These processes involve significant employee costs and data processing costs.
Costs associated with the Companys data purchases are deferred within work-in-process inventory and recognized as expense as the corresponding data product revenue is recognized by the Company, generally over a thirty to sixty day period.
Direct and Incremental Costs of Consulting and Services
Direct and incremental costs of consulting and services (C&S) include the costs of the Companys consulting staff directly involved with delivering revenue generating engagements, related accommodations and the costs of primary market research data purchased specifically for certain individual C&S engagements. Although the Companys data is used in multiple customer solutions across different offerings within both I&A and C&S, the Company does not have a meaningful way to allocate the direct cost of the data between I&A and C&S revenues. As such, the direct and incremental costs of C&S do not reflect the total costs incurred to deliver its C&S revenues.
Costs associated with the Companys time and material and fixed-price C&S contracts are recognized as incurred.
Note 5. Acquisitions
The Company makes acquisitions in order to expand its products, services and geographic reach. On January 1, 2009, the Company adopted SFAS No. 141R, Business Combinations (SFAS 141R), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. The impact of the adoption of SFAS 141R on the Companys financial position, results of operations and cash flows will be dependent on the terms and conditions of acquisitions consummated on or after the adoption date.
During the six months ended June 30, 2009, the Company did not complete any acquisitions.
During the six months ended June 30, 2008, the Company completed three acquisitions of Robinson and James Research Pty Limited (Australia), Fourth Hurdle Consulting Limited (U.K.) and
11
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Health Benchmarks, Inc. (U.S.) at an aggregate cost of approximately $24,100 which were accounted for under the purchase method of accounting. As such, the aggregate purchase price was allocated on a preliminary basis to the assets acquired based on estimated fair values as of the closing date. The purchase price allocations were finalized during the first quarter of 2009 and during 2008. The Condensed Consolidated Financial Statements (Unaudited) include the results of these acquired companies subsequent to the closing of these acquisitions. Had these acquisitions occurred as of January 1, 2008 or 2007, the impact on the Companys results of operations would not have been significant. Goodwill of approximately $16,400 was recorded in connection with these acquisitions, none of which was deductible for tax purposes.
Note 6. Goodwill and Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are not amortized and are tested at least annually (or based on any triggering event) for impairment. Intangible assets that have finite useful lives are amortized. During the six months ended June 30, 2009, the Companys goodwill increased by $11,356 mainly due to foreign currency translation adjustments. During the six months ended June 30, 2008, the Companys goodwill increased by $47,628 due to foreign currency translation adjustments and the preliminary allocation of purchase price for the acquisitions completed during the six months ended June 30, 2008 (see Note 5).
All of the Companys other acquired intangibles are subject to amortization. Intangible asset amortization expense was $4,334 and $8,884 during the three and six months ended June 30, 2009, respectively, and $4,768 and $9,489 during the three and six months ended June 30, 2008, respectively. At June 30, 2009, intangible assets were primarily composed of customer relationships, databases and trade names (principally included in other assets) and computer software. The gross carrying amounts and related accumulated amortization of these intangibles were $188,397 and $107,516, respectively, at June 30, 2009 and $189,383 and $98,736, respectively, at December 31, 2008. These intangibles are amortized over periods ranging from two to twenty years. As of June 30, 2009, the weighted average amortization periods of the acquired intangibles by asset class are listed in the following table:
Intangible Asset Type |
|
Weighted
Average |
|
Customer Relationships |
|
10.0 |
|
Computer Software and Algorithms |
|
7.0 |
|
Databases |
|
4.7 |
|
Trade Names |
|
4.3 |
|
Other |
|
4.0 |
|
Weighted average |
|
8.8 |
|
Based on current estimated useful lives, amortization expense associated with intangible assets at June 30, 2009 is estimated to be approximately $4,205 for each of the remaining two quarters in 2009. Thereafter, annual amortization expense associated with intangible assets is estimated to be as follows:
12
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Year Ended |
|
Amortization |
|
|
2010 |
|
13,299 |
|
|
2011 |
|
11,963 |
|
|
2012 |
|
10,314 |
|
|
2013 |
|
10,036 |
|
|
2014 |
|
8,299 |
|
|
Thereafter |
|
$ |
18,561 |
|
Note 7. Contingencies
The Company and its subsidiaries are involved in legal and tax proceedings, claims and litigation arising in the ordinary course of business. Management periodically assesses the Companys liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where management currently believes it is probable that the Company will incur a loss and that the probable loss or range of loss can be reasonably estimated, the Company has recorded reserves in the Condensed Consolidated Financial Statements (Unaudited) based on its best estimates of such loss. In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. However, even in many instances where the Company has recorded a reserve, the Company is unable to predict with certainty the final outcome of the matter or whether resolution of the matter will materially affect the Companys results of operations, financial position or cash flows. As additional information becomes available, the Company adjusts its assessment and estimates of such liabilities accordingly.
The Company routinely enters into agreements with its suppliers to acquire data and with its customers to sell data, all in the normal course of business. In these agreements, the Company sometimes agrees to indemnify and hold harmless the other party for any damages such other party may suffer as a result of potential intellectual property infringement and other claims related to the use of the data. These indemnities typically have terms of approximately two years. The Company has not accrued a liability with respect to these matters, as the exposure is considered remote.
Based on its review of the latest information available, in the opinion of management, the ultimate liability of the Company in connection with pending tax and legal proceedings, claims and litigation will not have a material effect on the Companys results of operations, cash flows or financial position, with the possible exception of the matters described below.
D&B Legacy and Related Tax Matters
Sharing Disputes. In 1996, the company then known as The Dun & Bradstreet Corporation (D&B) and now known as R.H. Donnelley Corporation (Donnelley) separated into three public companies by spinning off ACNielsen Corporation (ACNielsen) and the company then known as Cognizant Corporation (Cognizant) (the 1996 Spin-Off). Cognizant is now known as Nielsen Media Research, Inc., a subsidiary of The Nielsen Company, formerly known as VNU N.V. (NMR). The agreements effecting the 1996 Spin-Off allocated tax-related liability with respect to
13
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
certain prior business transactions between D&B and Cognizant. The D&B portion of such liability is now shared among Donnelley and certain of its former affiliates (the Donnelley Parties), and the Cognizant portion of such liability is shared between NMR and the Company pursuant to the agreements effecting Cognizants spin-off of the Company in 1998 (the 1998 Spin-Off).
The underlying tax controversies with the Internal Revenue Service (IRS) have substantially all been resolved and the Company paid to the IRS the amounts that it believed were due and owing. In the first quarter of 2006, Donnelley indicated that it disputed the amounts contributed by the Company toward the resolution of these matters based on the Donnelley Parties interpretation of the allocation of liability under the 1996 Spin-Off agreements. In August 2006, the Donnelley Parties commenced arbitration regarding one of these disputes (referred to herein as the Dutch Partnership Dispute). The Dutch Partnership Dispute was resolved during the third quarter of 2008 when the parties consented to the entry of a consent award by the arbitration panel. Pursuant to the terms of the consent award, in the third quarter of 2008, the Company made a payment of $4,600 ($3,100 net of tax benefit) and an additional interest and cost payment of $2,600 ($1,700 net of tax benefit) to the Donnelley Parties. The remaining disputes were resolved during the second quarter of 2009 by agreement among the parties. Pursuant to the 2009 settlement agreement, the Company made a payment of $10,750 ($8,000 net of tax benefit) to the Donnelley Parties in full satisfaction of its liability with respect to the remaining disputes (see Note 11).
The Partnership (Tax Year 1997). During the fourth quarter of 2008, the Company entered into a final agreement with the IRS in which the IRS disallowed certain items of partnership expense for tax year 1997 with respect to a partnership now substantially owned by the Company (the Partnership). During 1997, the Partnership was substantially owned by Cognizant, but liability for this matter was allocated to the Company pursuant to the agreements effecting the 1998 Spin-Off. Pursuant to the settlement, during the second quarter of 2009, the Company paid $20,400 (tax and interest, net of tax benefit) to the IRS in full satisfaction of its liability with respect to the Partnership for tax year 1997.
In addition to these matters, the Company and its predecessors have entered, and the Company continues to enter, into global tax planning initiatives in the normal course of their businesses. These activities are subject to review by applicable tax authorities. As a result of the review process, uncertainties exist and it is possible that some of these matters could be resolved adversely to the Company.
IMS Health Government Solutions Voluntary Disclosure Program Participation
The Companys wholly-owned subsidiary, IMS Government Solutions Inc., is primarily engaged in providing services and products under contracts with the U.S. government. U.S. government contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. government have the ability to investigate whether contractors operations are being conducted in accordance with such requirements. U.S. government investigations, whether relating to these contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties being imposed on us, or could lead to suspension or debarment from future U.S. government contracting. U.S. government investigations often take
14
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
years to complete and may result in no adverse action against the Company.
IMS Government Solutions discovered potential noncompliance with various contract clauses and requirements under its General Services Administration Contract which was awarded in 2002 to its predecessor company, Synchronous Knowledge Inc. (Synchronous Knowledge Inc. was acquired by IMS in May 2005). Upon discovery of the potential noncompliance, the Company began remediation efforts, promptly disclosed the potential noncompliance to the U.S. government, and was accepted into the Department of Defense Voluntary Disclosure Program. The Company filed its Voluntary Disclosure Program Report (Disclosure Report) on August 29, 2008. Based on the Companys findings as disclosed in the Disclosure Report, the Company recorded a reserve of approximately $3,700 for this matter in the third quarter of 2008. The Company is currently unable to determine the outcome of this matter pending the resolution of the Voluntary Disclosure Program process and its ultimate liability arising from this matter could exceed its current reserve.
Other Contingencies
Contingent Consideration. Under the terms of certain purchase agreements related to acquisitions consummated in 2008 and prior, the Company may be required to pay additional amounts as contingent consideration based on the achievement of certain performance related targets during 2009. These additional payments will be recorded as goodwill in accordance with Emerging Issues Task Force (EITF) No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination. The Company paid approximately $2,400 under these contingencies during 2009. Based on current estimates, the Company expects that additional contingent consideration under these agreements may total approximately $3,200. It is expected that these contingencies will be resolved within a specified time period after the end of calendar year 2009.
15
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Note 8. Stock-Based Compensation
The following table summarizes activity of stock options for the periods indicated:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Price Per |
|
|
|
|
Shares |
|
Share |
|
|
Options Outstanding, December 31, 2006 |
|
21,396 |
|
$ |
23.43 |
|
Granted |
|
|
|
|
|
|
Exercised |
|
(6,299 |
) |
$ |
22.72 |
|
Forfeited |
|
(200 |
) |
$ |
24.14 |
|
Cancelled |
|
(371 |
) |
$ |
27.61 |
|
Options Outstanding, December 31, 2007 |
|
14,526 |
|
$ |
23.62 |
|
Granted |
|
1,159 |
|
$ |
22.58 |
|
Exercised |
|
(277 |
) |
$ |
19.91 |
|
Forfeited |
|
(88 |
) |
$ |
23.86 |
|
Cancelled |
|
(2,141 |
) |
$ |
25.51 |
|
Options Outstanding, December 31, 2008 |
|
13,179 |
|
$ |
23.29 |
|
Granted |
|
1,795 |
|
$ |
13.43 |
|
Exercised |
|
|
|
|
|
|
Forfeited |
|
(22 |
) |
$ |
22.58 |
|
Cancelled |
|
(2,542 |
) |
$ |
29.19 |
|
Options Outstanding, June 30, 2009 |
|
12,410 |
|
$ |
20.66 |
|
Options Vested or Expected to Vest, June 30, 2009 |
|
12,181 |
|
$ |
20.74 |
|
Exercisable, June 30, 2009 |
|
9,786 |
|
$ |
21.82 |
|
16
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
The following table summarizes activity of restricted stock units (RSUs) with service conditions:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Unvested, December 31, 2006 |
|
1,558 |
|
$ |
25.04 |
|
Granted |
|
1,219 |
|
$ |
29.64 |
|
Vested |
|
(296 |
) |
$ |
26.06 |
|
Forfeited |
|
(148 |
) |
$ |
28.09 |
|
Unvested, December 31, 2007 |
|
2,333 |
|
$ |
27.16 |
|
Granted |
|
1,356 |
|
$ |
22.24 |
|
Vested |
|
(569 |
) |
$ |
27.45 |
|
Forfeited |
|
(348 |
) |
$ |
26.74 |
|
Unvested, December 31, 2008 |
|
2,772 |
|
$ |
24.75 |
|
Granted |
|
2,036 |
|
$ |
13.44 |
|
Vested |
|
(858 |
) |
$ |
25.69 |
|
Forfeited |
|
(112 |
) |
$ |
24.87 |
|
Unvested, June 30, 2009 |
|
3,838 |
|
$ |
18.54 |
|
Vested or Expected to Vest, June 30, 2009 |
|
3,471 |
|
$ |
18.65 |
|
The following table summarizes activity of RSUs with performance conditions:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Unvested, December 31, 2006 |
|
613 |
|
$ |
24.20 |
|
Granted |
|
402 |
|
$ |
14.72 |
|
Vested |
|
(84 |
) |
$ |
18.65 |
|
Forfeited |
|
(6 |
) |
$ |
27.00 |
|
Unvested, December 31, 2007 |
|
925 |
|
$ |
20.56 |
|
Granted |
|
357 |
|
$ |
12.97 |
|
Vested |
|
(109 |
) |
$ |
23.86 |
|
Forfeited |
|
(12 |
) |
$ |
27.26 |
|
Unvested, December 31, 2008 |
|
1,161 |
|
$ |
17.84 |
|
Granted |
|
655 |
|
$ |
13.27 |
|
Vested |
|
(453 |
) |
$ |
20.70 |
|
Forfeited |
|
(2 |
) |
$ |
24.35 |
|
Unvested, June 30, 2009 |
|
1,361 |
|
$ |
15.05 |
|
Vested or Expected to Vest, June 30, 2009 |
|
1,270 |
|
$ |
15.13 |
|
17
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
The following table summarizes activity of non-employee director deferred stock granted in lieu of board meeting fees:
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
Shares |
|
Fair Value |
|
|
Outstanding, December 31, 2006 |
|
33 |
|
$ |
22.49 |
|
Granted |
|
5 |
|
$ |
29.50 |
|
Outstanding, December 31, 2007 |
|
38 |
|
$ |
23.37 |
|
Granted |
|
6 |
|
$ |
19.71 |
|
Outstanding, December 31, 2008 |
|
44 |
|
$ |
22.81 |
|
Granted |
|
4 |
|
$ |
13.96 |
|
Issued |
|
(14 |
) |
$ |
21.68 |
|
Outstanding, June 30, 2009 |
|
34 |
|
$ |
22.18 |
|
The following table summarizes the components and classification of stock-based compensation expense for the periods indicated:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
June 30, |
|
June 30, |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Stock Options |
|
$ |
814 |
|
$ |
1,199 |
|
$ |
1,178 |
|
$ |
3,217 |
|
RSUs |
|
7,946 |
|
7,637 |
|
14,427 |
|
13,012 |
|
||||
Employee Stock Purchase Plan |
|
|
|
|
|
|
|
(2 |
) |
||||
Total Stock-Based Compensation Expense |
|
$ |
8,760 |
|
$ |
8,836 |
|
$ |
15,605 |
|
$ |
16,227 |
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Costs of I&A |
|
$ |
748 |
|
$ |
844 |
|
$ |
1,236 |
|
$ |
1,621 |
|
Direct and Incremental Costs of C&S |
|
1,235 |
|
1,003 |
|
2,154 |
|
1,711 |
|
||||
Selling and Administrative Expenses |
|
6,777 |
|
6,989 |
|
12,215 |
|
12,895 |
|
||||
Total Stock-Based Compensation Expense |
|
$ |
8,760 |
|
$ |
8,836 |
|
$ |
15,605 |
|
$ |
16,227 |
|
|
|
|
|
|
|
|
|
|
|
||||
Tax Benefit on Stock-Based Compensation Expense |
|
$ |
2,719 |
|
$ |
2,727 |
|
$ |
4,954 |
|
$ |
5,127 |
|
|
|
|
|
|
|
|
|
|
|
||||
Capitalized Stock-Based Compensation Expense |
|
$ |
45 |
|
$ |
65 |
|
$ |
83 |
|
$ |
106 |
|
On April 21, 2009, the Company awarded its annual grant in the form of restricted stock units whose vesting and delivery are contingent upon completion of a specified period of future service. The awards have a zero exercise price to the employee and vest ratably over three to four years. The Companys amortization of the award is based upon the fair market value of a share of Common Stock on April 21, 2009. In addition, on April 21, 2009, the Company awarded stock appreciation rights (SARs) to certain executives. The SARs have an exercise price of $13.43 to the employee,
18
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
vest ratably over 3 years, and the Companys amortization of the award is based upon the Black-Scholes value.
For a complete description of the Companys Stock Incentive Plans and its accounting policies regarding stock-based compensation, refer to Notes 2 and 11 of the Companys 2008 Annual Report on Form 10-K as filed with the SEC.
Note 9. Financial Instruments
On January 1, 2009, the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS 161), which requires enhanced disclosures about an entitys derivative and hedging activities as provided below. As this statement requires only additional disclosures, the adoption of SFAS 161 did not have an impact on the Companys financial position, results of operations or cash flows.
Foreign Exchange Risk Management
The Company transacts business in more than 100 countries and is subject to risks associated with changing foreign exchange rates. The Companys objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on net income, non-U.S. Dollar anticipated royalties, and on the value of non-functional currency assets and liabilities.
It is the Companys policy to enter into foreign currency transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the Japanese Yen, the British Pound, the Swiss Franc and the Canadian Dollar.
The impact of foreign exchange risk management activities on pre-tax income for the three and six months ended June 30, 2009 were net gains of $4,537 and $9,421, respectively, and net losses of $6,131 and $24,728 for the three and six months ended June 30, 2008, respectively.
At June 30, 2009, the Company had assets of approximately $536,349 and liabilities of approximately $539,387 in foreign exchange forward contracts outstanding with various expiration dates through May 2010 relating to non-US Dollar net income, non-U.S. Dollar anticipated royalties and non-functional currency assets and liabilities (see below). Foreign exchange forward contracts are recorded at estimated fair value. The estimated fair values of the forward contracts are based on quoted market prices.
Unrealized and realized gains and losses on the contracts hedging net income and non-functional currency assets and liabilities do not qualify for hedge accounting, and therefore are not deferred and are included in the Consolidated Statements of Income in Other income (expense), net.
19
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Unrealized gains and losses on the contracts hedging non-U.S. Dollar anticipated royalties qualify for hedge accounting, and are therefore deferred and included in OCI Other Comprehensive Income.
|
|
Fair Value of Derivative Instruments (1) |
|
||||||||||
|
|
Asset Derivatives |
|
Liability Derivatives |
|
||||||||
|
|
As of June 30, |
|
As of December |
|
As of June 30, |
|
As of December 31, |
|
||||
Derivatives designated as hedging instruments under SFAS 133 |
|
|
|
|
|
|
|
|
|
||||
Foreign Exchange Contracts |
|
$ |
174,811 |
|
$ |
172,113 |
|
$ |
176,931 |
|
$ |
179,110 |
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives not designated as hedging instruments under SFAS 133 |
|
|
|
|
|
|
|
|
|
||||
Foreign Exchange Contracts |
|
361,538 |
|
236,977 |
|
362,456 |
|
238,023 |
|
||||
Total Derivatives |
|
$ |
536,349 |
|
$ |
409,090 |
|
$ |
539,387 |
|
$ |
417,133 |
|
(1) The net amounts of these derivatives are included in Current Assets and Current Liabilities in the Condensed Consolidated Statements of Financial Position (Unaudited).
Effect of Derivatives on Financial Performance for the Three Months Ended June 30, |
|
||||||||||||||
Derivatives in SFAS 133 |
|
Amount of |
|
Location of Gain/(Loss) |
|
Amount of |
|
||||||||
|
|
2009 |
|
2008 |
|
into Income |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign Exchange Contracts |
|
$ |
(2,800 |
) |
$ |
5,800 |
|
Other Income (Expense), Net |
|
$ |
2,200 |
|
$ |
(6,000 |
) |
Effect of Derivatives on Financial Performance for the Six Months Ended June 30, |
|
||||||||||||||
Derivatives in SFAS 133 |
|
Amount of |
|
Location of Gain/(Loss) |
|
Amount of |
|
||||||||
|
|
2009 |
|
2008 |
|
into Income |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign Exchange Contracts |
|
$ |
6,300 |
|
$ |
(7,600 |
) |
Other Income (Expense), Net |
|
$ |
1,400 |
|
$ |
(8,200 |
) |
Fair Value Disclosures
At June 30, 2009, the Companys financial instruments included cash, cash equivalents, and receivables, accounts payable and long-term debt. At June 30, 2009, the fair values of cash, cash equivalents, receivables and accounts payable approximated carrying values due to the short-term
20
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
nature of these instruments. At June 30, 2009, the fair value of long-term debt approximated carrying value.
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, (see Note 3). SFAS No. 157 establishes a three-level hierarchy for disclosure of fair value measurements as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs are observable in active markets.
Level 3 Unobservable inputs reflecting managements own assumptions about the inputs used in pricing the asset or liability.
The following table summarizes assets and liabilities measured at fair value on a recurring basis at June 30, 2009:
|
|
Basis of Fair Value Measurements |
|
||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||
Assets |
|
|
|
|
|
|
|
|
|
||
Derivatives (1) |
|
|
|
$ |
536,349 |
|
|
|
$ |
536,349 |
|
|
|
|
|
|
|
|
|
|
|
||
Liabilities |
|
|
|
|
|
|
|
|
|
||
Derivatives (1) |
|
|
|
$ |
539,387 |
|
|
|
$ |
539,387 |
|
(1) Derivatives consist of foreign exchange contracts based on observable market inputs of spot and forward rates.
Credit Concentrations
The Company continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments and does not anticipate non-performance by the counterparties. The Company would not realize a material loss as of June 30, 2009 in the event of non-performance by any one counterparty. In general, the Company enters into transactions only with financial institution counterparties that have a credit rating of A or better. In addition, the Company limits the amount of credit exposure with any one institution.
The Company maintains accounts receivable balances ($329,850 and $382,776, net of allowances, at June 30, 2009 and December 31, 2008, respectively), principally from customers in the pharmaceutical industry. The Companys trade receivables do not represent significant concentrations of credit risk at June 30, 2009 due to the credit worthiness of its customers and their dispersion across many geographic areas.
21
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Lines of Credit
The following table summarizes the Companys long-term debt at June 30, 2009 and December 31, 2008:
|
|
2009 |
|
2008 |
|
||
5.58% Private Placement Notes, principal payment of $105,000 due January 2015 |
|
$ |
105,000 |
|
$ |
105,000 |
|
5.99% Private Placement Notes, principal payment of $135,000 due January 2018 |
|
135,000 |
|
135,000 |
|
||
5.55% Private Placement Notes, principal payment of $150,000 due April 2016 |
|
150,000 |
|
150,000 |
|
||
1.70% Private Placement Notes, principal payment of 34,395,000 Japanese Yen due January 2013 |
|
356,654 |
|
381,304 |
|
||
Revolving Credit Facility: |
|
|
|
|
|
||
Japanese Yen denominated borrowings at average floating rates of approximately 0.88% |
|
329,841 |
|
435,895 |
|
||
U.S. Dollar denominated borrowings at average floating rates of approximately 0.85% |
|
232,800 |
|
147,000 |
|
||
Bank Term Loan, principal payment of $50,000 due June 2010 at average floating rate of approximately 0.82% |
|
50,000 |
|
50,000 |
|
||
Total Long-Term Debt |
|
$ |
1,359,295 |
|
$ |
1,404,199 |
|
In February 2008, the Company closed a private placement transaction pursuant to which it issued $105,000 of seven-year debt at a fixed rate of 5.58%, and $135,000 of ten-year debt at a fixed rate of 5.99% to several highly rated insurance companies. The Company used the proceeds for share repurchases (see Note 12) and to refinance existing debt.
In July 2006, the Company entered into a $1,000,000 revolving credit facility with a syndicate of 12 banks (Revolving Credit Facility) replacing its existing $700,000 facility. The terms of the Revolving Credit Facility extended the maturity of the facility in its entirety to a term of five years, maturing July 2011, reduced the borrowing margins, and increased subsidiary borrowing limits. Total borrowings under the Revolving Credit Facility were $562,641 and $582,895 at June 30, 2009 and December 31, 2008, respectively, all of which were classified as long-term. The Company defines long-term lines as those where the lines are non-cancellable for more than 365 days from the balance sheet date by the financial institutions except for specified, objectively measurable violations of the provisions of the agreement. In general, rates for borrowing under the Revolving Credit Facility are LIBOR plus 40 basis points and can vary based on the Companys Debt to EBITDA ratio. The weighted average interest rates for the Companys lines were 0.87% and 1.36% at June 30, 2009 and December 31, 2008, respectively. In addition, the Company is required to pay a commitment fee on any unused portion of the facilities of 0.01%. At June 30, 2009, the Company had approximately $437,359 available under existing bank credit facilities.
In June 2006, the Company closed a $50,000 three-year term loan with a bank. The term loan allows the Company to borrow at a floating rate with a lower borrowing margin than the Companys revolving credit facility. The term loan also provides the Company with two one-year options to extend the term at the Companys discretion. In August 2008, the Company exercised the first one-year option to extend the term through June 2010, and in June 2009 the Company exercised the second one-year option to extend the term through June 2011. The Company used the proceeds to refinance existing debt borrowed under the revolving credit facility.
22
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
In April 2006, the Company closed a private placement transaction pursuant to which it issued $150,000 of ten-year notes to two highly rated insurance companies at a fixed rate of 5.55%. The Company used the proceeds to refinance existing debt of $150,000 drawn under a short term credit agreement with a bank in January 2006.
In January 2006, the Company closed a private placement transaction pursuant to which its Japanese subsidiary issued 34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance) to several highly rated insurance companies at a fixed rate of 1.70%. The Company used the proceeds to refinance existing debt in Japan.
The Companys financing arrangements provide for certain covenants and events of default customary for similar instruments, including in the case of its main bank arrangements, the private placement transactions, and the term loan, covenants to maintain specific ratios of consolidated total indebtedness to EBITDA and of EBITDA to certain fixed charges. At June 30, 2009, the Company was in compliance with these financial debt covenants.
Note 10. Pension and Postretirement Benefits
The following table provides the Companys expense associated with pension benefits that are accounted for under SFAS No. 87, Employers Accounting for Pensions, and postretirement benefits that are accounted for under SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. For a complete description of the Companys pension and postretirement benefits, refer to Note 10 of the Companys 2008 Annual Report on Form 10-K as filed with the SEC.
Components of Net Periodic Benefit Cost for the |
|
Pension Benefits |
|
Other Benefits |
|
||||||||
Three Months Ended June 30, |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Service cost |
|
$ |
3,370 |
|
$ |
4,310 |
|
$ |
|
|
$ |
|
|
Interest cost |
|
4,795 |
|
5,180 |
|
180 |
|
192 |
|
||||
Expected return on plan assets |
|
(6,061 |
) |
(7,926 |
) |
|
|
|
|
||||
Amortization of prior service cost (credit) |
|
(28 |
) |
6 |
|
(41 |
) |
(3 |
) |
||||
Amortization of transition obligation (asset) |
|
|
|
(1 |
) |
|
|
|
|
||||
Amortization of net loss |
|
2,377 |
|
632 |
|
143 |
|
145 |
|
||||
Settlement charge (credit) |
|
(8 |
) |
|
|
|
|
|
|
||||
Net periodic benefit cost |
|
$ |
4,445 |
|
$ |
2,201 |
|
$ |
282 |
|
$ |
334 |
|
23
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Components of Net Periodic Benefit Cost for the |
|
Pension Benefits |
|
Other Benefits |
|
||||||||
Six Months Ended June 30, |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Service cost |
|
$ |
6,721 |
|
$ |
8,615 |
|
$ |
|
|
$ |
|
|
Interest cost |
|
9,444 |
|
10,280 |
|
360 |
|
384 |
|
||||
Expected return on plan assets |
|
(11,930 |
) |
(15,858 |
) |
|
|
|
|
||||
Amortization of prior service cost (credit) |
|
(58 |
) |
12 |
|
(82 |
) |
(6 |
) |
||||
Amortization of transition obligation (asset) |
|
|
|
|
|
|
|
|
|
||||
Amortization of net loss |
|
4,728 |
|
1,264 |
|
286 |
|
291 |
|
||||
Settlement charge (credit) |
|
(8 |
) |
|
|
|
|
|
|
||||
Net periodic benefit cost |
|
$ |
8,897 |
|
$ |
4,313 |
|
$ |
564 |
|
$ |
669 |
|
Note 11. Income Taxes
The Company operates in more than 100 countries around the world and its earnings are taxed at the applicable income tax rate in each of these countries.
For the three months ended June 30, 2009, the Companys effective tax rate was reduced by the settlement of a certain state tax matter (tax benefit of $16,300) and the resolution of certain legacy tax matters (tax benefit of $9,500) (see Note 7, Sharing Disputes.). For the three months ended March 31, 2009, the Companys effective tax rate was reduced as a result of the reorganization of certain subsidiaries which resulted in a foreign exchange loss recognized for tax purposes (tax benefit of $63,200), the repayment of a certain intercompany loan which resulted in a foreign exchange loss recognized for tax purposes (tax benefit of $6,100) and the expiration of certain statutes of limitation (tax benefits of $4,000). For the three months ended June 30, 2008, the Companys effective tax rate was reduced as a result of audit settlements with taxing authorities (tax benefit of $10,300). Also during this period, the Company recorded tax expense for tax positions related to non-US transactions offset by a benefit related to the expiration of certain statutes of limitation (net tax expense of $5,300). Further, for the three months ended March 31, 2008 the Companys effective tax rate was reduced as a result of the filing of an advance pricing agreement (APA) between two taxing jurisdictions (tax benefit of $4,900). The APA ensures conformity between the jurisdictions taxing authorities regarding the treatment of certain intercompany transactions, thereby allowing the Company to record a corresponding tax benefit.
For the three and six months ended June 30, 2009, the Company recorded $1,900 and $5,700, respectively, of tax expense related to unrecognized tax benefits that if recognized, would favorably affect the effective tax rate. Interest and penalties of $800 and $2,500, respectively, are included in these amounts. For the three and six months ended June 30, 2008, the Company recorded $5,200 and $10,000, respectively, of tax expense related to unrecognized tax benefits including $2,600 and $5,300, respectively, of interest and penalties.
The Company files numerous consolidated and separate income tax returns in U.S. (federal and state) and non-U.S. jurisdictions. The Company is no longer subject to U.S. federal income tax
24
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
examination by tax authorities for years before 2004. The Company is no longer subject to state and local income tax examination by tax authorities for years before 1997. Further, with few exceptions, the Company is no longer subject to examination by tax authorities in its material non-U.S. jurisdictions prior to 2004. It is reasonably possible that within the next twelve months the Company could realize $28,900 of unrecognized tax benefits as a result of the expiration of certain statutes of limitation.
Note 12. IMS Health Capital Stock
The Companys share repurchase program has been developed to buy opportunistically, when the Company believes that its share price provides it with an attractive use of its cash flow and debt capacity.
On December 18, 2007, the Board of Directors authorized a stock repurchase program to buy up to 20,000 shares. As of June 30, 2009, 9,505 shares remained available for repurchase under the December 2007 program.
During the six months ended June 30, 2009, the Company did not repurchase any shares of outstanding Common Stock under this program.
During the six months ended June 30, 2008, the Company repurchased 10,000 shares of outstanding Common Stock under this program at a total cost of $229,340.
These share repurchases positively impacted the Companys diluted earnings per share by $0.02 for the three and six months ended June 30, 2008.
Shares acquired through the Companys repurchase programs described above are open-market purchases or privately negotiated transactions in compliance with SEC Rule 10b-18.
Under the Companys Restated Certificate of Incorporation as amended, the Company has authority to issue 820,000 shares with a par value of $.01 per share of which 800,000 represent shares of Common Stock, 10,000 represent shares of preferred stock and 10,000 represent shares of Series Common Stock. The preferred stock and Series Common Stock can be issued with varying terms, as determined by the Board of Directors.
Note 13. Noncontrolling Interests
On January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51 (SFAS 160), which established accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parents ownership interests, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. This statement also established disclosure requirements that identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The adoption of SFAS 160 resulted in the
25
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
reclassification of amounts previously referred to as minority interests and currently referred to as noncontrolling interests, from mezzanine equity (between Total Liabilities and Shareholders Deficit) to a separate component of Shareholders Deficit in the Companys Condensed Consolidated Statements of Financial Position (Unaudited). Additionally, net income attributable to noncontrolling interests, which previously was included in Other expense, net on a pretax basis, is shown separately from net income attributable to the Company in the Companys Condensed Consolidated Statements of Income (Unaudited). The adoption of SFAS 160 did not have a material impact on the Companys financial position, results of operations or cash flows.
The following table reconciles noncontrolling interests included as a separate component of Shareholders Deficit. Prior year amounts have been reclassified to conform to the current year presentation as required by SFAS 160.
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Noncontrolling interests, April 1 and January 1 |
|
$ |
1,721 |
|
$ |
2,340 |
|
$ |
1,894 |
|
$ |
1,444 |
|
Income (loss) attributable to noncontrolling interests |
|
58 |
|
(68 |
) |
96 |
|
468 |
|
||||
Translation adjustments attributable to noncontrolling interests |
|
(317 |
) |
(288 |
) |
(528 |
) |
72 |
|
||||
Noncontrolling interests, June 30 |
|
$ |
1,462 |
|
$ |
1,984 |
|
$ |
1,462 |
|
$ |
1,984 |
|
In July 2006, the Company, together with two of its wholly-owned subsidiaries, entered into an Amended and Restated Agreement of Limited Liability Company of IMS Health Licensing Associates, L.L.C. (the Amended LLC Agreement). The Amended LLC Agreement governed the relationship between the Company, its subsidiaries and two third-party investors with respect to their interests in IMS Health Licensing Associates, L.L.C. (the LLC). The LLC is a separate and distinct legal entity that is in the business of licensing database assets and computer software. The Company is the sole managing member of the LLC. From 1997 until June 30, 2009, the Company and/or its subsidiaries, or their predecessors, had contributed assets to, and held a controlling interest (approximately 93% at June 30, 2009) in the LLC, and the third-party investors had contributed $100,000 to, and held a noncontrolling interest (approximately 7% at June 30, 2009) in the LLC. Pursuant to the terms of the Amended LLC Agreement, on May 6, 2009, the third-party investors elected to have their noncontrolling interests in the LLC liquidated or purchased by the Company or its designee. On June 30, 2009, a wholly-owned subsidiary of the Company purchased the third-party investors noncontrolling interests in the LLC at a cost of $100,970, which the Company financed through a combination of cash on-hand and borrowings under its revolving credit facility. Following the purchase of the noncontrolling interests, the Company, together with its wholly-owned subsidiaries, hold 100% of the membership interest in the LLC. Under the revisions to EITF Topic No. D-98, Classification and Measurement of Redeemable Securities, these third-party investor contributions qualified as redeemable noncontrolling interests as their redemption was not solely within the control of the Company. As such, these redeemable noncontrolling interests were presented in mezzanine equity in the Companys Condensed Consolidated Statements of Financial Position (Unaudited). Net income related to these redeemable noncontrolling interests amounted to
26
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
$802 and $1,888, respectively, for the three and six months ended June 30, 2009 and $1,100 and $2,199, respectively, for the three and six months ended June 30, 2008 and is included in net income attributable to noncontrolling interests in the Companys Condensed Consolidated Statements of Income (Unaudited).
Note 14. Comprehensive Income
The following table sets forth the components of comprehensive income, net of income tax expense:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Net Income |
|
$ |
63,712 |
|
$ |
78,726 |
|
$ |
198,168 |
|
$ |
139,536 |
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
||||
Foreign currency translation gains |
|
13,253 |
|
69,820 |
|
38,853 |
|
13,976 |
|
||||
Amortization of SFAS 158 service cost |
|
(304 |
) |
731 |
|
1,745 |
|
1,261 |
|
||||
Total other comprehensive income, net of tax |
|
12,949 |
|
70,551 |
|
40,598 |
|
15,237 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Comprehensive Income |
|
$ |
76,661 |
|
$ |
149,277 |
|
$ |
238,766 |
|
$ |
154,773 |
|
Less comprehensive income attributable to: |
|
|
|
|
|
|
|
|
|
||||
Noncontrolling interests in permanent equity |
|
(290 |
) |
(357 |
) |
(463 |
) |
539 |
|
||||
Redeemable noncontrolling interests in mezzanine equity |
|
802 |
|
1,100 |
|
1,888 |
|
2,199 |
|
||||
Comprehensive income attributable to IMS Health |
|
$ |
76,149 |
|
$ |
148,534 |
|
$ |
237,341 |
|
$ |
152,035 |
|
Note 15. Severance, Impairment and Other Charges
During the second quarter of 2009, the Company recorded $25,428 in charges as a component of operating income. Of this amount, $17,210 related to non-cash impairment charges for the write-down of certain capitalized software assets to their net realizable values in the Companys Americas and EMEA regions. The write-downs were the result of the regular review of the Companys capitalized software assets. The remaining $8,218 was for supplier contract-related charges based on a SFAS No. 5, Accounting for Contingencies, assessment for which the Company will not realize any future economic benefit.
During the fourth quarter of 2008, the Company recorded $9,408 of non-cash impairment charges as a component of operating income related to the write-off of certain capitalized software assets in its EMEA and Asia Pacific regions. This was the result of the discontinuation of certain IMS products at the end of 2008.
In response to healthcare marketplace dynamics, during the fourth quarter of 2007, the Company committed to a restructuring plan designed to eliminate approximately 1,070 positions worldwide in production and development, sales, marketing, consulting and services and administration. The plan also included the write-down of two impaired computer software assets and related contract payments to be incurred with no future economic benefit based on the Companys decision to abandon certain products in its EMEA region. As a result, the Company recorded $88,690 of Severance, impairment and other charges as a component of operating income
27
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
in the fourth quarter of 2007. The severance benefits were calculated pursuant to the terms of established employee protection plans, in accordance with local statutory minimum requirements or individual employee contracts, as applicable.
These charges were designed to strengthen client-facing operations worldwide, increase the Companys operating efficiencies and streamline its cost structure. Some of the initiatives included in this plan are designed to better align the Companys resources to help clients manage for change in a challenging climate.
The severance and contract payments portion of the fourth quarter 2007 charge was approximately $75,043 and will all be settled in cash. Termination actions under the plan were substantially completed by the end of June 30, 2009.
|
|
Severance |
|
Contract |
|
Asset |
|
Currency |
|
|
|
|||||
|
|
related |
|
related |
|
write- |
|
translation |
|
|
|
|||||
|
|
reserves |
|
reserves |
|
downs |
|
adjustments |
|
Total |
|
|||||
Charge at December 31, 2007 |
|
$ |
71,583 |
|
$ |
3,460 |
|
$ |
13,647 |
|
$ |
|
|
$ |
88,690 |
|
2007 utilization |
|
|
|
|
|
(13,647 |
) |
|
|
(13,647 |
) |
|||||
2008 utilization |
|
(48,645 |
) |
(2,150 |
) |
|
|
|
|
(50,795 |
) |
|||||
2009 utilization |
|
(14,136 |
) |
(534 |
) |
|
|
|
|
(14,670 |
) |
|||||
Currency translation adjustments |
|
|
|
|
|
|
|
(2,057 |
) |
(2,057 |
) |
|||||
Balance at June 30, 2009 |
|
$ |
8,802 |
|
$ |
776 |
|
$ |
|
|
$ |
(2,057 |
) |
$ |
7,521 |
|
The Company currently expects that cash outlays will be applied against the $7,521 balance remaining in the 2007 fourth quarter charge at June 30, 2009 as follows:
Year Ended December 31, |
|
Outlays |
|
|
2009 |
|
$ |
6,402 |
|
2010 |
|
941 |
|
|
2011 |
|
178 |
|
|
Total |
|
$ |
7,521 |
|
Note 16. Operations by Business Segment
Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment. The Company operates a globally consistent business model, offering pharmaceutical business information and related services to its customers in more than 100 countries. See Note 2.
The Company maintains regional geographic management to facilitate local execution of its global strategies. However, the Company maintains global leaders for the majority of its critical
28
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
business processes; and the most significant performance evaluations and resource allocations made by the Companys chief operating decision makers are made on a global basis. As such, the Company has concluded that it maintains one operating and reportable segment.
Geographic Financial Information:
The following represents selected geographic information for the regions in which the Company operates for the three and six months ended June 30, 2009 and 2008.
|
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Corporate & Other |
|
Total |
|
|||||
Three months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
232,228 |
|
$ |
210,306 |
|
$ |
80,305 |
|
|
|
$ |
522,839 |
|
|
Operating Income (Loss) (5) |
|
$ |
62,938 |
|
$ |
24,152 |
|
$ |
27,376 |
|
$ |
(45,180 |
) |
$ |
69,286 |
|
Six months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
468,821 |
|
$ |
416,562 |
|
$ |
164,400 |
|
|
|
$ |
1,049,783 |
|
|
Operating Income (Loss) (5) |
|
$ |
130,780 |
|
$ |
44,647 |
|
$ |
58,664 |
|
$ |
(63,940 |
) |
$ |
170,151 |
|
Three months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
257,020 |
|
$ |
260,424 |
|
$ |
83,265 |
|
|
|
$ |
600,709 |
|
|
Operating Income (Loss) (5) |
|
$ |
82,336 |
|
$ |
31,624 |
|
$ |
31,953 |
|
$ |
(14,536 |
) |
$ |
131,377 |
|
Six months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
509,451 |
|
$ |
501,294 |
|
$ |
164,144 |
|
|
|
$ |
1,174,889 |
|
|
Operating Income (Loss) (5) |
|
$ |
161,591 |
|
$ |
48,846 |
|
$ |
62,516 |
|
$ |
(25,194 |
) |
$ |
247,759 |
|
Notes to Geographic Financial Information:
(1) Americas includes the United States, Canada and Latin America.
(2) EMEA includes countries in Europe, the Middle East and Africa.
(3) Asia Pacific includes Japan, Australia and other countries in the Asia Pacific region.
(4) Operating Revenue relates to external customers and is primarily based on the location of the customer. The Operating Revenue for the geographic regions includes the impact of foreign exchange in converting results into U.S. dollars.
(5) Operating Income for the three geographic regions does not reflect the allocation of certain expenses that are maintained in Corporate and Other and as such, is not a true measure of the respective regions profitability. The Operating Income amounts for the geographic segments include the impact of foreign exchange in converting results into U.S. dollars.
A summary of the Companys operating revenue by product line for the three and six months ended June 30, 2009 and 2008 is presented below:
|
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
Commercial Effectiveness |
|
$ |
263,382 |
|
$ |
300,735 |
|
$ |
523,023 |
|
$ |
586,783 |
|
Product & Portfolio Management |
|
162,316 |
|
187,130 |
|
334,004 |
|
370,221 |
|
||||
New Business Areas |
|
97,141 |
|
112,844 |
|
192,756 |
|
217,885 |
|
||||
Operating Revenue |
|
$ |
522,839 |
|
$ |
600,709 |
|
$ |
1,049,783 |
|
$ |
1,174,889 |
|
29
IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars and shares in thousands, except per share data)
Note 17. Subsequent Events
In response to accelerating healthcare marketplace dynamics compounded by a sustained economic downturn, on July 20, 2009 the Board of Directors of IMS committed to a streamlining program designed to eliminate approximately 850 positions in all areas of the Companys business (the Plan). The Plan also includes charges related to lease impairments and related accelerated depreciation for various office locations.
This Plan will result in the Company recording a severance, impairment and other charge during the third quarter of 2009 relating to termination benefits for employees located in all regions in which the Company operates; however, the majority of actions are planned for the Companys EMEA region.
The Company currently estimates that the total pre-tax charge, including accelerated depreciation, under the Plan will be in the range of $110,000 to $120,000, consisting of $100,000 to $110,000 for employee termination benefits and approximately $10,000 for asset impairments, accelerated depreciation and other charges.
The Company currently estimates that the cash portion of the charge will be in the range of $100,000 to $110,000 and will be funded over approximately a two-year period from cash generated from operations. The estimated termination benefits under the Plan will be calculated pursuant to the terms of established employee protection plans, individual employee contracts or in accordance with local statutory minimum requirements, as applicable.
The Company expects that all actions under the Plan will be completed by the end of the third quarter of 2010.
30
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Dollars and shares in thousands, except per share data)
This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements (Unaudited) and related notes.
Executive Summary
Our Business
IMS Health Incorporated (IMS, we, us or our) is the leading global provider of market intelligence to the pharmaceutical and healthcare industries. We offer leading-edge market intelligence products and services that are integral to our clients day-to-day operations, including product and portfolio management capabilities; commercial effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve productivity and the delivery of quality healthcare worldwide. Our information products are developed to meet client needs by using data secured from a worldwide network of suppliers in more than 100 countries. Our business lines are:
· Commercial Effectiveness to increase clients productivity across end-to-end sales, marketing, promotional and performance management processes;
· Product and Portfolio Management to provide clients with insights into market measurement so they can optimize their product portfolio and strategies; and
· New Business Areas that support pharmaceutical client business initiatives in managed markets, consumer health, and pricing and market access, and that also serve payer and government audiences.
Within these business lines, we provide consulting and services that use in-house capabilities and methodologies to assist clients in analyzing and evaluating market trends, strategies and tactics, and to help in the development and implementation of customized software applications and data warehouse tools.
We operate in more than 100 countries.
We manage on a global business model with global leaders for the majority of our critical business processes and accordingly have one reportable segment.
We believe that important measures of our financial condition and results of operations include operating revenue, constant dollar revenue growth, operating income, constant dollar operating income growth, operating margin and cash flows.
Performance Overview
Operating revenue declined 13.0% to $522,839 in the second quarter of 2009 as compared to $600,709 in the second quarter of 2008. Our operating revenue declined 10.6% to $1,049,783 in the six months ended June 30, 2009 as compared to $1,174,889 in the six months ended June 30, 2008. The three and six month operating revenue decreases were a result of revenue declines in all three of our business lines. Our operating income declined $62,091 to $69,286 in the second quarter of 2009 as compared to $131,377 in the second quarter of 2008. Our operating income declined $77,608 to $170,151 in the six months ended June 30, 2009 as compared to $247,759 in the six months ended June 30, 2008. Both the three and six
31
month operating income declines were due to the decrease in our operating revenue and $25,428 of asset impairments and supplier contract-related charges, partially offset by decreases in our operating costs and selling and administrative expenses, as discussed below. Our net income attributable to IMS was $62,883 for the second quarter of 2009, a decrease of $14,812 as compared to $77,695 for the second quarter of 2008, and $196,215 for the six months ended June 30, 2009, an increase of $59,345 as compared to $136,870 for the six months ended June 30, 2008, due to the Non-Operating Loss, net items discussed below and certain tax items as discussed in Note 11 of the Condensed Consolidated Financial Statements (Unaudited). Our diluted earnings per share of Common Stock decreased to $0.34 for the second quarter of 2009 as compared to $0.42 for the second quarter of 2008 and increased to $1.08 for the six months ended June 30, 2009 as compared to $0.74 for the six months ended June 30, 2008.
Results of Operations
Reclassifications. Certain prior-year amounts have been reclassified to conform to the 2009 presentation.
References to constant dollar results and results excluding the effect of foreign currency translations. We report results in U.S. dollars, but we do business on a global basis. Exchange rate fluctuations affect the rate at which we translate foreign revenues and expenses into U.S. dollars and may have significant effects on our results. In order to illustrate these effects, the discussion of our business in this report sometimes describes the magnitude of changes in constant dollar terms or results excluding the effect of foreign currency translations. We believe this information facilitates a comparative view of our business. In the first six months of 2009, the U.S. dollar was generally stronger against the other currencies in which we transact business as compared to the first six months of 2008. The revenue decline at actual currency rates was greater than the decline at constant dollar exchange rates. See How Exchange Rates Affect Our Results below and the discussion of Market Risk in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of our annual report on Form 10-K for the year ended December 31, 2008 for a more complete discussion regarding the impact of foreign currency translation on our business.
References to operating income and operating margin excluding asset impairments and supplier contract-related charges. We discuss below what our operating income and operating margin for the three and six months ended June 30, 2009 would have been had we not recorded asset impairments and supplier contract-related charges. Because we did not record similar charges in the prior periods, we believe providing these non-GAAP measures is useful to investors as it facilitates comparisons across the periods presented and more clearly indicates trends. Management uses these non-GAAP measures in its global decision-making, including developing budgets and managing expenditures.
32
Summary of Operating Results
|
|
Three Months Ended June 30, |
|
% Variance |
|
||||
|
|
|
|
|
|
2009 |
|
||
|
|
2009 |
|
2008 |
|
vs 2008 |
|
||
Information and analytics revenue (I&A) |
|
$ |
408,611 |
|
$ |
453,440 |
|
(9.9 |
)% |
Consulting and services revenue (C&S) |
|
114,228 |
|
147,269 |
|
(22.4 |
)% |
||
Operating Revenue |
|
522,839 |
|
600,709 |
|
(13.0 |
)% |
||
|
|
|
|
|
|
|
|
||
Operating costs of I&A |
|
175,401 |
|
193,607 |
|
9.4 |
% |
||
Direct and incremental costs of C&S |
|
57,012 |
|
71,951 |
|
20.8 |
% |
||
External-use software amortization |
|
10,117 |
|
13,043 |
|
22.4 |
% |
||
Selling and administrative expenses |
|
162,919 |
|
168,365 |
|
3.2 |
% |
||
Depreciation and other amortization |
|
22,676 |
|
22,366 |
|
(1.4 |
)% |
||
Severance, impairment and other charges |
|
25,428 |
|
|
|
|
|
||
Operating Income |
|
$ |
69,286 |
|
$ |
131,377 |
|
(47.3 |
)% |
|
|
Six Months Ended June 30, |
|
% Variance |
|
||||
|
|
|
|
|
|
2009 |
|
||
|
|
2009 |
|
2008 |
|
vs 2008 |
|
||
Information and analytics revenue (I&A) |
|
$ |
828,688 |
|
$ |
909,627 |
|
(8.9 |
)% |
Consulting and services revenue (C&S) |
|
221,095 |
|
265,262 |
|
(16.7 |
)% |
||
Operating Revenue |
|
1,049,783 |
|
1,174,889 |
|
(10.6 |
)% |
||
|
|
|
|
|
|
|
|
||
Operating costs of I&A |
|
346,240 |
|
386,374 |
|
10.4 |
% |
||
Direct and incremental costs of C&S |
|
118,157 |
|
140,456 |
|
15.9 |
% |
||
External-use software amortization |
|
20,641 |
|
25,757 |
|
19.9 |
% |
||
Selling and administrative expenses |
|
323,325 |
|
331,133 |
|
2.4 |
% |
||
Depreciation and other amortization |
|
45,841 |
|
43,410 |
|
(5.6 |
)% |
||
Severance, impairment and other charges |
|
25,428 |
|
|
|
|
|
||
Operating Income |
|
$ |
170,151 |
|
$ |
247,759 |
|
(31.3 |
)% |
Operating Income
Our operating income for the second quarter of 2009 declined $62,091 to $69,286 from $131,377 in the second quarter of 2008. This was due to the decrease in our operating revenue and $25,428 of asset impairments and supplier contract-related charges, partially offset by decreases in our operating costs and selling and administrative expenses driven by decreased cost of data and tight controls on hiring. Our operating income decreased $62,394 or 52.5% in constant dollar terms. Our operating income for the first six months of 2009 declined $77,608 to $170,151 from $247,759 in the first six months of 2008. This was due to the decrease in our operating revenue and $25,428 of asset impairments and supplier contract-related charges, partially offset by decreases in our operating costs and selling and administrative expenses driven by decreased cost of data and tight controls on hiring. Our operating income decreased $84,378 or 37.3% in constant dollar terms. Excluding the $25,428 of asset impairments and supplier contract-related charges, our operating income for the three and six months ended June 30, 2009 would have been $94,714 and $195,579, respectively, representing a decline of 27.9% and 21.1%, respectively, on a reported basis and
33
32.1% and 26.6%, respectively, in constant dollar terms.
Operating Revenue
Our operating revenue for the second quarter of 2009 declined 13.0% to $522,839 from $600,709 in the second quarter of 2008. On a constant dollar basis, operating revenue declined 7.1%. Operating revenue for the first six months of 2009 declined 10.6% to $1,049,783 from $1,174,889 in the first six months of 2008. On a constant dollar basis, operating revenue declined 4.9%. On a constant dollar basis, acquisitions completed within the prior twelve months contributed approximately 1 percentage point of revenue growth for both the second quarter and first six months of 2009, partially offsetting our operating revenue decline for these same periods. The decrease in our operating revenue resulted from revenue declines in all three of our business lines, together with the effect of approximately $39,000 and $71,000 of currency translation for the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
Summary of Operating Revenue
|
|
|
|
|
|
% Variance |
|
||||
|
|
Three Months Ended June 30, |
|
2009 vs 2008 |
|
||||||
|
|
2009 |
|
2008 |
|
Reported |
|
Constant |
|
||
Commercial Effectiveness |
|
$ |
263,382 |
|
$ |
300,735 |
|
(12.4 |
)% |
(7.1 |
)% |
Product & Portfolio Management |
|
162,316 |
|
187,130 |
|
(13.3 |
)% |
(7.1 |
)% |
||
New Business Areas |
|
97,141 |
|
112,844 |
|
(13.9 |
)% |
(7.0 |
)% |
||
Operating Revenue |
|
$ |
522,839 |
|
$ |
600,709 |
|
(13.0 |
)% |
(7.1 |
)% |
|
|
|
|
|
|
% Variance |
|
||||
|
|
Six Months Ended June 30, |
|
2009 vs 2008 |
|
||||||
|
|
2009 |
|
2008 |
|
Reported |
|
Constant |
|
||
Commercial Effectiveness |
|
$ |
523,023 |
|
$ |
586,783 |
|
(10.9 |
)% |
(5.8 |
)% |
Product & Portfolio Management |
|
334,004 |
|
370,221 |
|
(9.8 |
)% |
(3.9 |
)% |
||
New Business Areas |
|
192,756 |
|
217,885 |
|
(11.5 |
)% |
(4.5 |
)% |
||
Operating Revenue |
|
$ |
1,049,783 |
|
$ |
1,174,889 |
|
(10.6 |
)% |
(4.9 |
)% |
· Commercial Effectiveness: EMEA contributed approximately one-third and the Americas contributed more than one-half to the constant dollar revenue decline for the second quarter of 2009. Each of EMEA and the Americas contributed approximately one-half to the constant dollar revenue decline for the first six months of 2009, slightly offset by revenue growth in Asia Pacific.
· Product & Portfolio Management: EMEA contributed more than two-thirds to the constant dollar revenue decline for the second quarter of 2009. EMEA contributed approximately one-half and the Americas contributed more than one-third to the constant dollar revenue decline for the first six months of 2009.
· New Business Areas: The Americas contributed approximately two-thirds and EMEA contributed approximately one-third to the constant dollar revenue decline for the second quarter of 2009. The
34
Americas contributed more than three-quarters to the constant dollar revenue decline for the first six months of 2009.
Consulting and services (C&S) revenue, as included in the business lines above, was $114,228 in the second quarter of 2009, down 22.4% from $147,269 in the second quarter of 2008 (down 16.8% on a constant dollar basis). C&S revenue was $221,095 in the first six months of 2009, down 16.7% from $265,262 in the first six months of 2008 (down 10.9% on a constant dollar basis).
Operating Costs of Information and Analytics
Operating costs of information and analytics (I&A) include costs of data, data processing and collection and costs attributable to personnel involved in production, data management and delivery of the Companys I&A offerings.
Our operating costs of I&A declined 9.4% to $175,401 in the second quarter of 2009 from $193,607 in the second quarter of 2008 and declined 10.4% to $346,240 in the first six months of 2009 from $386,374 in the first six months of 2008.
· Foreign Currency Translation: The effect of foreign currency translation decreased our operating costs of I&A by approximately $16,000 and $30,000 for the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
Excluding the effect of foreign currency translation, our operating costs of I&A declined 1.5% and 2.8% in the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
· Data: Data costs decreased by approximately $3,000 and $9,000 in the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
· Production, Client Services and Other: Production, client services and other costs increased by approximately $1,000 in the second quarter of 2009 as compared to the second quarter of 2008 and decreased by approximately $1,000 in the first six months of 2009 as compared to the first six months of 2008.
Direct and Incremental Costs of Consulting and Services
Direct and incremental costs of C&S include the costs of consulting staff directly involved with delivering revenue-generating engagements, related accommodations and the costs of primary market research data purchased specifically for certain individual C&S engagements. Direct and incremental costs of C&S do not include an allocation of direct costs of data that are included within I&A.
Our direct and incremental costs of C&S declined 20.8% to $57,012 in the second quarter of 2009 from $71,951 in the second quarter of 2008 and declined 15.9% to $118,157 in the first six months of 2009 from $140,456 in the first six months of 2008.
· Foreign Currency Translation: The effect of foreign currency translation decreased our direct and incremental costs of C&S by approximately $7,000 and $12,000 for the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
35
Excluding the effect of foreign currency translation, our direct and incremental costs of C&S declined 12.6% and 7.8% in the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
· C&S costs decreased by approximately $8,000 and $10,000 in the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008, due to decreased labor cost and primary market research data expense, all directly related to the C&S revenue decline.
External-Use Software Amortization
Our external-use software amortization charges represent the amortization associated with software we capitalized under the provisions of Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. Our external-use software amortization charges declined 22.4% to $10,117 in the second quarter of 2009 from $13,043 in the second quarter of 2008 and declined 19.9% to $20,641 in the first six months of 2009 from $25,757 in the first six months of 2008. This was due to decreased software amortization associated with assets that were fully amortized or written-down to their net realizable values.
Selling and Administrative Expenses
Our selling and administrative expenses consist primarily of the expenses attributable to sales, marketing, and administration, including human resources, legal, management and finance. Our selling and administrative expenses declined 3.2% to $162,919 in the second quarter of 2009 from $168,365 in the second quarter of 2008 and declined 2.4% to $323,325 in the first six months of 2009 from $331,133 in the first six months of 2008.
· Foreign Currency Translation: The effect of foreign currency translation decreased our selling and administrative expenses by approximately $17,000 and $34,000 for the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
Excluding the effect of foreign currency translation, our selling and administrative expenses grew 7.1% and 8.4% in second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
· Sales and Marketing: Sales and marketing expenses remained constant in the second quarter of 2009 as compared to the second quarter of 2008 and decreased by approximately $3,000 in the first six months of 2009 as compared to the first six months of 2008.
· Consulting and Services: C&S expenses increased by approximately $11,000 and $15,000 in the second quarter and first six months of 2009, respectively, as compared to the second quarter and first six months of 2008.
· Administrative and Other: Other expenses remained constant in the second quarter of 2009 as compared to the second quarter of 2008 and increased by approximately $13,000 in the first six months of 2009 as compared to the first six months of 2008.
36
Depreciation and Other Amortization
Our depreciation and other amortization charges increased 1.4% to $22,676 in the second quarter of 2009 from $22,366 in the second quarter of 2008, and 5.6% to $45,841 in the first six months of 2009 from $43,410 in the first six months of 2008, due to increased depreciation related to new facilities and technology to upgrade our financial systems and increased amortization related to internal-use software additions.
Severance, impairment and other charges
During the second quarter of 2009, we recorded $25,428 in charges as a component of operating income. Of this amount, $17,210 related to non-cash impairment charges for the write-down of certain capitalized software assets to their net realizable values in our Americas and EMEA regions. The write-downs were the result of the regular review of our capitalized software assets. The remaining $8,218 was for supplier contract-related charges based on a SFAS No. 5, Accounting for Contingencies, assessment for which we will not realize any future economic benefit (see Note 15 to our Condensed Consolidated Financial Statements (Unaudited).
Trends in our Operations
Our operating margin for the second quarter of 2009 was 13.3% as compared to 21.9% in the second quarter of 2008. Our operating margin for the first six months of 2009 was 16.2% as compared to 21.1% in the first six months of 2008. Margins were negatively impacted by revenue declines and the $25,428 asset impairments and supplier contract-related charges noted above, partially offset by decreased costs of panel and decreased sales and marketing costs. Excluding the $25,428 of asset impairments and supplier contract-related charges, our operating margin for the three and six months ended June 30, 2009 would have been 18.1% and 18.6%, respectively.
We have several offerings in the U.S. that utilize prescriber-identifiable information. Over the past several years, there have been a number of state legislative initiatives seeking to impose restrictions on the commercial use of such information. To date, three states, New Hampshire, Vermont and Maine, have passed laws placing certain restrictions on the license, use or transfer of prescriber-identifiable information for commercial purposes. Collectively, these three states represent approximately one percent of prescription activity in the U.S. and therefore the impact of these laws on our business, financial condition and results of operations is not expected to be material. For additional information regarding the status of the laws passed in the three states noted above and related legislative developments in other jurisdictions, see Part II. Item 1A. Risk Factors.
Non-Operating Loss, net
Our non-operating loss, net, decreased to a loss of $4,056 in the second quarter of 2009 from a loss of $15,146 in the second quarter of 2008 and decreased to a loss of $7,630 in the first six months of 2009 from a loss of $42,439 in the first six months of 2008. This was due to the following factors:
· Interest Expense, net: Net interest expense was $8,579 and $17,048 for the second quarter and first six months of 2009, respectively, as compared to $8,987 and $17,658 for the second quarter and first six months of 2008. This improvement was due to lower debt levels and lower borrowing costs in the second quarter and first six months of 2009 as compared to the second quarter and first six
37
months of 2008.
· Other Income (Expense), net: Other income, net, grew by $10,682 in the second quarter of 2009 as compared to the second quarter of 2008. This was a result of net foreign exchange gains of $4,537 in the second quarter of 2009 as compared to net foreign exchange losses of $6,130 in the second quarter of 2008. Other income, net, grew by $34,199 in the first six months of 2009 as compared to the first six months of 2008. This was a result of net foreign exchange gains of $9,421 in the first six months of 2009 as compared to net foreign exchange losses of $24,728 in the first six months of 2008.
Taxes
We operate in more than 100 countries around the world and our earnings are taxed at the applicable income tax rate in each of these countries.
For the three months ended June 30, 2009, our effective tax rate was reduced by the settlement of a certain state tax matter (tax benefit of $16,300) and the resolution of certain legacy tax matters (tax benefit of $9,500) (see Note 7 to our Condensed Consolidated Financial Statements (Unaudited), Sharing Disputes.). For the three months ended March 31, 2009, our effective tax rate was reduced as a result of the reorganization of certain subsidiaries which resulted in a foreign exchange loss recognized for tax purposes (tax benefit of $63,200), the repayment of a certain intercompany loan which resulted in a foreign exchange loss recognized for tax purposes (tax benefit of $6,100) and the expiration of certain statutes of limitation (tax benefits of $4,000). For the three months ended June 30, 2008, our effective tax rate was reduced as a result of audit settlements with taxing authorities (tax benefit of $10,300). Also during this period, we recorded tax expense for tax positions related to non-US transactions offset by a benefit related to the expiration of certain statutes of limitation (net tax expense of $5,300). Further, for the three months ended March 31, 2008 our effective tax rate was reduced as a result of the filing of an advance pricing agreement (APA) between two taxing jurisdictions (tax benefit of $4,900). The APA ensures conformity between the jurisdictions taxing authorities regarding the treatment of certain intercompany transactions, thereby allowing us to record a corresponding tax benefit.
For the three and six months ended June 30, 2009, we recorded approximately $1,900 and $5,700, respectively, of tax expense related to unrecognized tax benefits that if recognized, would favorably affect the effective tax rate. Interest and penalties of $800 and $2,500, respectively, are included in these amounts. For the three and six months ended June 30, 2008, we recorded $5,200 and $10,000, respectively, of tax expense related to unrecognized tax benefits including $2,600 and $5,300, respectively, of interest and penalties.
We file numerous consolidated and separate income tax returns in U.S. (federal and state) and non-U.S. jurisdictions. We are no longer subject to U.S. federal income tax examination by tax authorities for years before 2004. We are no longer subject to state and local income tax examination by tax authorities for years before 1997. Further, with few exceptions, we are no longer subject to examination by tax authorities in material non-U.S. jurisdictions prior to 2004. It is reasonably possible that within the next twelve months we could realize $28,900 of unrecognized tax benefits as a result of the expiration of certain statutes of limitation.
38
While we intend to continue to seek global tax planning initiatives, there can be no assurance that we will be able to successfully identify and implement such initiatives to reduce or maintain our overall tax rate and therefore rates may go up in the future.
Net Income Attributable to Noncontrolling Interests
On January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51 (SFAS 160), which established accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interests, changes in a parents ownership interests, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. As a result of the adoption of SFAS 160, net income attributable to noncontrolling interests, which previously was included in Other expense, net on a pretax basis, is shown separately from net income attributable to the Company in our Condensed Consolidated Statements of Income (Unaudited). Net Income Attributable to Noncontrolling Interests decreased to $829 and $1,953 in the second quarter and first six months of 2009, respectively, from $1,031 and $2,666 in the second quarter and first six months of 2008, respectively. See Note 13 to our Condensed Consolidated Financial Statements (Unaudited).
The following represents selected geographic information for the regions in which we operate for the three and six months ended June 30, 2009 and 2008:
|
|
Americas |
|
EMEA |
|
Asia Pacific |
|
Corporate & |
|
Total |
|
|||||
Three months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
232,228 |
|
$ |
210,306 |
|
$ |
80,305 |
|
|
|
$ |
522,839 |
|
|
Operating Income (Loss) (5) |
|
$ |
62,938 |
|
$ |
24,152 |
|
$ |
27,376 |
|
$ |
(45,180 |
) |
$ |
69,286 |
|
Six months ended June 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
468,821 |
|
$ |
416,562 |
|
$ |
164,400 |
|
|
|
$ |
1,049,783 |
|
|
Operating Income (Loss) (5) |
|
$ |
130,780 |
|
$ |
44,647 |
|
$ |
58,664 |
|
$ |
(63,940 |
) |
$ |
170,151 |
|
Three months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
257,020 |
|
$ |
260,424 |
|
$ |
83,265 |
|
|
|
$ |
600,709 |
|
|
Operating Income (Loss) (5) |
|
$ |
82,336 |
|
$ |
31,624 |
|
$ |
31,953 |
|
$ |
(14,536 |
) |
$ |
131,377 |
|
Six months ended June 30, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|||||
Operating Revenue (4) |
|
$ |
509,451 |
|
$ |
501,294 |
|
$ |
164,144 |
|
|
|
$ |
1,174,889 |
|
|
Operating Income (Loss) (5) |
|
$ |
161,591 |
|
$ |
48,846 |
|
$ |
62,516 |
|
$ |
(25,194 |
) |
$ |
247,759 |
|
Notes to Geographic Financial Information:
(1) Americas includes the United States, Canada and Latin America.
(2) EMEA includes countries in Europe, the Middle East and Africa.
(3) Asia Pacific includes Japan, Australia and other countries in the Asia Pacific region.
(4) Operating Revenue relates to external customers and is primarily based on the location of the customer. The Operating Revenue for the geographic regions includes the impact of foreign exchange in converting results into U.S. dollars.
(5) Operating Income for the three geographic regions does not reflect the allocation of certain expenses that are maintained in Corporate and Other and as such, is not a true measure of the respective regions profitability. The Operating Income amounts for the geographic segments include the impact of foreign exchange in converting results into U.S. dollars.
39
Americas Region
Operating revenue declined 9.6% and 8.0% in the Americas region in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. Excluding the effect of foreign currency translations, operating revenue declined 7.5% and 5.6% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. This was driven approximately two-thirds by Commercial Effectiveness and more than one-quarter by New Business Areas for the second quarter of 2009. The revenue decline in the first six months of 2009 was driven approximately one-half by Commercial Effectiveness and more than one-quarter by New Business Areas.
Operating income in the Americas region declined 23.6% and 19.1% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. The operating income decline reflected revenue declines in the region which were partially offset by decreases in operating expenses of $5,000 and $10,000 in the second quarter and first six months of 2009, respectively. Excluding the effect of foreign currency translations, operating income decreased 22.0% and 17.3% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively.
EMEA Region
Operating revenue decreased in the EMEA region by 19.2% and 16.9% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. Excluding the effect of foreign currency translations, operating revenue declined 7.8% and 5.6% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. The revenue decline in the second quarter of 2009 was driven more than one-third by Commercial Effectiveness and approximately one-half by the Product & Portfolio Management business line. The revenue decline in the first six months of 2009 was driven approximately two-thirds by Commercial Effectiveness and more than one-quarter by the Product & Portfolio Management business line.
Operating income in the EMEA region declined 23.6% and 8.6% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. The operating income decline reflected revenue declines in the region partially offset by decreases in operating expenses of $43,000 and $81,000 in the second quarter and first six months of 2009, respectively. Excluding the effect of foreign currency translations, operating income decreased 43.1% and 35.2% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively.
Asia Pacific Region
Operating revenue in the Asia Pacific region decreased 3.6% in the second quarter of 2009 as compared to the second quarter of 2008 and increased 0.2% in the first six months of 2009 as compared to the first six months of 2008. Excluding the effect of foreign currency translations, operating revenue declined 3.0% and 0.7% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. The revenue decline in the second quarter of 2009 was driven approximately three-quarters by the Product & Portfolio Management business line. The revenue decline in the first six months of 2009 was driven primarily by Product & Portfolio Management, partially offset by revenue
40
growth in the Commercial Effectiveness business line.
Operating income in the Asia Pacific region decreased by 14.3% and 6.2% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively. Operating income decreased in the second quarter of 2009 as a result of revenue decline in the region and increases in operating expenses of $2,000. In the first six months of 2009, the operating income decline reflected revenue growth in the region more than offset by increases in operating expenses of $4,000. Excluding the effect of foreign currency translations, operating income decreased by 14.7% and 8.5% in the second quarter and first six months of 2009 as compared to the second quarter and first six months of 2008, respectively.
We operate globally, deriving a significant portion of our operating income from non-U.S. operations. As a result, fluctuations in the value of foreign currencies in which we transact business relative to the U.S. dollar may increase the volatility of U.S. dollar operating results. We enter into foreign currency forward contracts to partially offset the effect of currency fluctuations. Foreign currency translation increased the U.S. dollar revenue decline by approximately 5.9 and 5.7 percentage points in the second quarter and first six months of 2009, respectively, while the impact on the operating income decline was an approximate decrease of 5.3 and 6.0 percentage points in the second quarter and first six months of 2009, respectively. In 2008, foreign currency translation increased U.S. dollar revenue growth by approximately 7.6 and 7.2 percentage points in the second quarter and first six months of 2008, respectively, while the impact on operating income growth was an approximate increase of 9.9 and 8.9 percentage points in the second quarter and first six months of 2008, respectively.
Non-U.S. monetary assets are maintained in currencies other than the U.S. dollar, principally the Euro, the Japanese Yen and the Swiss Franc. Where monetary assets are held in the functional currency of the local entity, changes in the value of these currencies relative to the U.S. dollar are reflected in Cumulative translation adjustment in the Condensed Consolidated Statements of Financial Position (Unaudited). The effect of exchange rate changes during the first six months of 2009 decreased the U.S. dollar amount of Cash and cash equivalents by $1,676. The effect of exchange rate changes during the first six months of 2008 increased the US dollar amount of cash and cash equivalents by $6,940.
Liquidity and Capital Resources
Our cash and cash equivalents increased $24,098 to $239,780 at June 30, 2009 compared to $215,682 at December 31, 2008. The increase reflects cash provided by operating activities of $194,309, partially offset by cash used in investing and financing activities of $51,208 and $117,327, respectively, and a decrease of $1,676 due to the effect of exchange rate changes.
We currently expect that we will use our Cash and cash equivalents primarily to fund:
· development of software to be used in our new products and capital expenditures to expand and upgrade our information technology capabilities and to build or acquire facilities to house our business (we currently expect to spend approximately $110,000 to $135,000 during 2009 for software development and capital expenditures);
· acquisitions (see Note 5 to our Condensed Consolidated Financial Statements (Unaudited));
41
· dividends to our shareholders (we expect 2009 dividends will be $0.12 per share or approximately $22,000);
· payments of approximately $125,000 related to our restructuring plans and our second quarter 2009 supplier contract-related charge, of which approximately $75,000 is expected to be paid over the next twelve months (see Notes 15 and 17 to our Condensed Consolidated Financial Statements (Unaudited));
· pension and other postretirement benefit plan contributions (we currently expect contributions to U.S. and non-U.S. pension and other postretirement benefit plans to total approximately $10,000 in 2009) (see Note 10 to our Condensed Consolidated Financial Statements (Unaudited) for information regarding our pension and postretirement benefit plan expense); and
· share repurchases (see Note 12 to our Condensed Consolidated Financial Statements (Unaudited)).
Net cash provided by operating activities amounted to $194,309 for the six months ended June 30, 2009, which represented an increase of $82,263 compared to cash used in operating activities during the comparable period in 2008. The increase relates to higher net income, lower accounts receivable balances, the lower funding of prepaid expenses and other current assets and lower accrued severance, impairment and other balances, partially offset by the higher funding of accounts payable and accrued expenses and other current liabilities during the six months ended June 30, 2009. The decrease in accounts receivable was driven by a decrease in DSO (days sales outstanding), which was ten days lower in the second quarter of 2009 as compared to the prior year comparable quarter. The decrease in DSO was the result of improved collections and receivables management and lower revenue.
Net cash used in investing activities amounted to $51,208 for the six months ended June 30, 2009, a decrease in cash used of $55,081 over the comparable period in 2008. The decrease relates to lower payments for acquisitions and lower capital expenditures, partially offset by higher additions to computer software during the six months ended June 30, 2009 as compared to the prior year comparable period.
Net cash used in financing activities amounted to $117,327 for the six months ended June 30, 2009, an increase of $107,106 compared to cash used in financing activities during the comparable period in 2008. This increase was due to lower net borrowings of debt, the purchase of third-party ownership interests in IMS Health Licensing Associates, L.L.C. (see Note 13 to our Condensed Consolidated Financial Statements (Unaudited)), lower proceeds from the exercise of stock options and a decrease in cash overdrafts, partially offset by lower purchases of treasury stock during the six months ended June 30, 2009 as compared to the prior year comparable period.
Our financing activities include cash dividends we paid of $0.03 per share quarterly, which amounted to $11,160 and $11,067 during the six months ended June 30, 2009 and 2008, respectively. The payments and level of cash dividends made by us are subject to the discretion of our Board of Directors. Any future dividends, other than the $0.03 per share dividend for the third quarter of 2009, which was declared by our Board of Directors in July 2009, will be based on, and affected by, a number of factors, including our operating results and financial requirements.
42
Capital and Credit Markets
As the capital and credit markets have contracted, we have performed additional assessments to determine the impact, if any, on our financial statements of recent market developments, including the restructuring or merging of certain financial institutions. Our additional assessments included a review of access to liquidity in the capital and credit markets and financial institution counterparty creditworthiness. Based on our assessment, we currently believe we have sufficient liquidity and access to credit despite the current condition of the capital and credit markets.
Liquidity in the Capital and Credit Markets
We fund our liquidity needs for capital investment, working capital, and other financial commitments through cash flow from continuing operations and our diversified credit facility ($437,359 in aggregate commitment available as of June 30, 2009). While not significant to us to date, contraction in capital and credit markets may result in increased borrowing costs in the future.
Credit Concentrations
We continually monitor our positions with, and the credit quality of, the financial institutions which are counterparties to our financial instruments and do not anticipate non-performance by the counterparties. We would not have realized a material loss during the quarter ended June 30, 2009 in the event of non-performance by any one counterparty. In general, we enter into transactions only with financial institution counterparties that have a credit rating of A or better. In addition, we limit the amount of credit exposure with any one institution. Particularly in light of the current credit environment, management will continue to monitor the status of these counterparties and will take action, as appropriate, to further manage its counterparty credit risk.
We maintain accounts receivable balances ($329,850 and $382,776, net of allowances, at June 30, 2009 and December 31, 2008, respectively), principally from customers in the pharmaceutical industry. Our trade receivables do not represent significant concentrations of credit risk at June 30, 2009 due to the credit worthiness of our customers and their dispersion across many geographic areas.
Tax and Other Contingencies
We are exposed to certain known tax and other contingencies that are material to our investors. The facts and circumstances surrounding these contingencies and a discussion of their effect on us are included in Notes 7 and 11 to our Condensed Consolidated Financial Statements (Unaudited) for the period ended June 30, 2009.
These contingencies may have a material effect on our liquidity, capital resources or results of operations. In addition, even where our reserves are adequate, the incurrence of any of these liabilities may have a material effect on our liquidity and the amount of cash available to us for other purposes.
Management believes that we have made appropriate arrangements in respect of the future effect on us of these known tax and other contingencies. Management also believes that the amount of cash available to us from our operations, together with cash from financing, will be sufficient for us to pay any known tax and other contingencies as they become due without materially affecting our ability to conduct our operations and invest in the growth of our business.
43
Stock Repurchase Programs
Our share repurchase program has been developed to buy opportunistically, when we believe that our share price provides us with an attractive use of our cash flow and debt capacity.
On December 18, 2007, the Board of Directors authorized a stock repurchase program to buy up to 20,000 shares. As of June 30, 2009, 9,505 shares remained available for repurchase under the December 2007 program.
During the six months ended June 30, 2009, we did not repurchase any shares of outstanding Common Stock under this program.
During the six months ended June 30, 2008, we repurchased 10,000 shares of outstanding Common Stock under this program at a total cost of $229,340.
These share repurchases positively impacted our diluted earnings per share by $0.02 for the three and six months ended June 30, 2008.
Shares acquired through our repurchase programs described above are open-market purchases or privately negotiated transactions in compliance with SEC Rule 10b-18.
Under our Restated Certificate of Incorporation as amended, we have the authority to issue 820,000 shares with a par value of $.01 per share of which 800,000 represent shares of Common Stock, 10,000 represent shares of preferred stock and 10,000 represent shares of Series Common Stock. The preferred stock and Series Common Stock can be issued with varying terms, as determined by the Board of Directors.
Borrowings
In recent years, we have increased debt levels to balance appropriately the objective of generating an attractive cost of capital with providing us a reasonable amount of financial flexibility. At June 30, 2009, our debt totaled $1,359,295, and management does not believe that this level of debt poses a material risk to us due to the following factors:
· in each of the last three years, we have generated strong net cash provided by operating activities in excess of $350,000;
· at June 30, 2009, we had $239,780 in worldwide cash and cash equivalents;
· at June 30, 2009, we had $437,359 of unused debt capacity under our existing bank credit facilities; and
· we believe that we have the ability to obtain additional debt capacity outside of our existing debt arrangements.
44
The following table summarizes our long-term debt at June 30, 2009 and December 31, 2008:
|
|
2009 |
|
2008 |
|
||
5.58% Private Placement Notes, principal payment of $105,000 due January 2015 |
|
$ |
105,000 |
|
$ |
105,000 |
|
5.99% Private Placement Notes, principal payment of $135,000 due January 2018 |
|
135,000 |
|
135,000 |
|
||
5.55% Private Placement Notes, principal payment of $150,000 due April 2016 |
|
150,000 |
|
150,000 |
|
||
1.70% Private Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013 |
|
356,654 |
|
381,304 |
|
||
Revolving Credit Facility: |
|
|
|
|
|
||
Japanese Yen denominated borrowings at average floating rates of approximately 0.88% |
|
329,841 |
|
435,895 |
|
||
U.S. Dollar denominated borrowings at average floating rates of approximately 0.85% |
|
232,800 |
|
147,000 |
|
||
Bank Term Loan, principal payment of $50,000 due June 2010 at average floating rate of approximately 0.82% |
|
50,000 |
|
50,000 |
|
||
Total Long-Term Debt |
|
$ |
1,359,295 |
|
$ |
1,404,199 |
|
In February 2008, we closed a private placement transaction pursuant to which we issued $105,000 of seven-year debt at a fixed rate of 5.58%, and $135,000 of ten-year debt at a fixed rate of 5.99% to several highly rated insurance companies. We used the proceeds for share repurchases (see Note 12 to our Condensed Consolidated Financial Statements (Unaudited)) and to refinance existing debt.
In July 2006, we entered into a $1,000,000 revolving credit facility with a syndicate of 12 banks (Revolving Credit Facility) replacing our existing $700,000 facility. The terms of the Revolving Credit Facility extended the maturity of the facility in its entirety to a term of five years, maturing July 2011, reduced the borrowing margins, and increased subsidiary borrowing limits. Total borrowings under the Revolving Credit Facility were $562,641 and $582,895 at June 30, 2009 and December 31, 2008, respectively, all of which were classified as long-term. We define long-term lines as those where the lines are non-cancellable for more than 365 days from the balance sheet date by the financial institutions except for specified, objectively measurable violations of the provisions of the agreement. In general, rates for borrowing under the Revolving Credit Facility are LIBOR plus 40 basis points and can vary based on the our Debt to EBITDA ratio. The weighted average interest rates for the Companys lines were 0.87% and 1.36% at June 30, 2009 and December 31, 2008, respectively. In addition, we are required to pay a commitment fee on any unused portion of the facilities of 0.01%. At June 30, 2009, we had approximately $437,359 available under existing bank credit facilities.
In June 2006, we closed a $50,000 three-year term loan with a bank. The term loan allows us to borrow at a floating rate with a lower borrowing margin than our revolving credit facility. The term loan also provides us with two one-year options to extend the term at our discretion. In August 2008, we exercised the first one-year option to extend the term through June 2010, and in June 2009 we exercised the second one-year option to extend the term through June 2011. We used the proceeds to refinance existing debt borrowed under the revolving credit facility.
In April 2006, we closed a private placement transaction pursuant to which we issued $150,000 of ten-year notes to two highly rated insurance companies at a fixed rate of 5.55%. We used the proceeds to refinance existing debt of $150,000 drawn under a short term credit agreement with a bank in January 2006.
In January 2006, we closed a private placement transaction pursuant to which our Japanese subsidiary issued 34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance) to several highly
45
rated insurance companies at a fixed rate of 1.70%. We used the proceeds to refinance existing debt in Japan.
Our financing arrangements provide for certain covenants and events of default customary for similar instruments, including in the case of our main bank arrangements, the private placement transactions, and the term loan, covenants to maintain specific ratios of consolidated total indebtedness to EBITDA and of EBITDA to certain fixed charges. At June 30, 2009, we were in compliance with these financial debt covenants.
Severance, Impairment and Other Charges
During the second quarter of 2009, we recorded $25,428 in charges as a component of operating income. Of this amount, $17,210 related to non-cash impairment charges for the write-down of certain capitalized software assets to their net realizable values in our Americas and EMEA regions. The write-downs were the result of the regular review of our capitalized software assets. The remaining $8,218 was for supplier contract-related charges based on a SFAS No. 5, Accounting for Contingencies, assessment for which we will not realize any future economic benefit.
During the fourth quarter of 2008, we recorded $9,408 of non-cash impairment charges as a component of operating income related to the write-off of certain capitalized software assets in our EMEA and Asia Pacific regions. This was the result of the discontinuation of certain IMS products at the end of 2008.
In response to healthcare marketplace dynamics, during the fourth quarter of 2007, we committed to a restructuring plan designed to eliminate approximately 1,070 positions worldwide in production and development, sales, marketing, consulting and services and administration. The plan also included the write-down of two impaired computer software assets and related contract payments to be incurred with no future economic benefit based on our decision to abandon certain products in our EMEA region. As a result, we recorded $88,690 of Severance, impairment and other charges as a component of operating income in the fourth quarter of 2007. The severance benefits were calculated pursuant to the terms of established employee protection plans, in accordance with local statutory minimum requirements or individual employee contracts, as applicable.
These charges were designed to strengthen client-facing operations worldwide, increase our operating efficiencies and streamline our cost structure. Some of the initiatives included in this plan are designed to better align our resources to help clients manage for change in a challenging climate.
The severance and contract payments portion of the charge was approximately $75,043 and will all be settled in cash. Termination actions under the plan were substantially completed by June 30, 2009.
46
|
|
Severance |
|
Contract |
|
Asset |
|
Currency |
|
|
|
|||||
|
|
related |
|
related |
|
write- |
|
translation |
|
|
|
|||||
|
|
Reserves |
|
reserves |
|
downs |
|
adjustments |
|
Total |
|
|||||
Charge at December 31, 2007 |
|
$ |
71,583 |
|
$ |
3,460 |
|
$ |
13,647 |
|
$ |
|
|
$ |
88,690 |
|
2007 utilization |
|
|
|
|
|
(13,647 |
) |
|
|
(13,647 |
) |
|||||
2008 utilization |
|
(48,645 |
) |
(2,150 |
) |
|
|
|
|
(50,795 |
) |
|||||
2009 utilization |
|
(14,136 |
) |
(534 |
) |
|
|
|
|
(14,670 |
) |
|||||
Currency translation adjustments |
|
|
|
|
|
|
|
(2,057 |
) |
(2,057 |
) |
|||||
Balance at June 30, 2009 |
|
$ |
8,802 |
|
$ |
776 |
|
$ |
|
|
$ |
(2,057 |
) |
$ |
7,521 |
|
We currently expect that cash outlays will be applied against the $7,521 balance remaining in the 2007 fourth quarter charge at June 30, 2009 as follows:
Year Ended December 31, |
|
Outlays |
|
|
2009 |
|
$ |
6,402 |
|
2010 |
|
941 |
|
|
2011 |
|
178 |
|
|
Total |
|
$ |
7,521 |
|
In response to accelerating healthcare marketplace dynamics compounded by a sustained economic downturn, on July 20, 2009 our Board of Directors committed to a streamlining program designed to eliminate approximately 850 positions in all areas of our business (the Plan). The Plan also includes charges related to lease impairments and related accelerated depreciation for various office locations.
This Plan will result in us recording a severance, impairment and other charge during the third quarter of 2009 relating to termination benefits for employees located in all regions in which we operate; however, the majority of actions are planned for our EMEA region.
We currently estimate that the total pre-tax charge, including accelerated depreciation, under the Plan will be in the range of $110,000 to $120,000, consisting of $100,000 to $110,000 for employee termination benefits and approximately $10,000 for asset impairments, accelerated depreciation and other charges.
We currently estimate that the cash portion of the charge will be in the range of $100,000 to $110,000 and will be funded over approximately a two-year period from cash generated from operations. The estimated termination benefits under the Plan will be calculated pursuant to the terms of established employee protection plans, individual employee contracts or in accordance with local statutory minimum requirements, as applicable.
We expect that all actions under the Plan will be completed by the end of the third quarter of 2010.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value
47
measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157, effective January 1, 2008, did not have a material impact on our financial position, results of operations or cash flows. In February 2008, the FASB issued Staff Positions No. FAS 157-1 and No. FAS 157-2 which delayed the effective date of SFAS No. 157 for one year for certain non-financial assets and liabilities and removed certain leasing transactions from its scope. The adoption of Staff Positions No. FAS 157-1 and No. 157-2, effective January 1, 2009, did not have a material impact on our financial position, results of operations or cash flows.
In December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS 132(R)-1), which amends SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009, with earlier application permitted. Upon initial application, the provisions of FSP FAS 132(R)-1 are not required for earlier periods that are presented for comparative purposes. We are currently evaluating the new disclosure requirements under FSP FAS 132(R)-1.
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which provides guidance on determining fair values when there is no active market or where the price inputs being used represent distressed sales. It also reaffirms what SFAS No. 157 states is the objective of fair value measurementto reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009. The adoption of FSP FAS 157-4 did not have a material impact on our financial position, results of operations or cash flows.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for interim or annual financial periods ending after June, 15, 2009. The adoption of SFAS No. 165 did not have a material impact on our financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to FASB Statement No. 140. This statement eliminates the concept of qualifying special-purpose entities (QSPEs), changes the requirements for derecognizing financial assets and requires additional disclosures about transfers of financial assets, including securitization transactions, and an entitys continuing involvement in and exposure to the risks related to transferred financial assets. This Statement must be applied as of the beginning of each reporting entitys first annual reporting period that
48
begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We are currently evaluating this statement to determine any potential impact that it may have on our financial results.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The statement eliminates the exemption for QSPEs, requires a new approach for determining who should consolidate variable-interest entities (VIEs), and changes when it is necessary to reassess who should consolidate VIEs. This Statement shall be effective as of the beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. We are currently evaluating this statement to determine any potential impact that it may have on our financial results.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. This statement replaces FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification as the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this statement is not expected to have a material impact on our financial results.
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q, as well as information included in oral statements or other written statements made or to be made by us, contain statements that, in our opinion, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words such as believe, expect, anticipate, intend, plan, foresee, likely, project, estimate, will, may, should, future, predicts, potential, continue and similar expressions identify these forward-looking statements, which appear in a number of places in this Quarterly Report on Form 10-Q and include, but are not limited to, all statements relating to plans for future growth and other business development activities as well as capital expenditures, financing sources, dividends and the effects of regulation and competition, foreign currency conversion and all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers. Investors are cautioned that such forward-looking statements are not assurances for future performance or events and involve risks and uncertainties that could cause actual results and developments to differ materially from those covered in such forward-looking statements. These risks and uncertainties include, but are not limited to:
· risks associated with operating on a global basis, including fluctuations in the value of foreign currencies relative to the U.S. dollar, and the ability to successfully hedge such riskswe derived approximately 64% of our operating revenue in 2008 from non-U.S. operations;
· deterioration in economic conditions, particularly in the pharmaceutical, healthcare or other industries in which our customers operate;
· regulatory, legislative and enforcement initiatives to which we are or may become subject relating particularly to tax and to medical privacy and the collection and dissemination of data
49
and, specifically, non-patient identifiable information, e.g., prescriber identifiable information, or to the process of anonymizing data;
· the imposition of additional restrictions on our use of or access to data, or the refusal by data suppliers to provide data to us;
· uncertainties associated with completion of our restructuring plans discussed in Note 17 to our Condensed Consolidated Financial Statements (Unaudited) and under Severance, Impairment and Other Charges in Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations, and the impact of the restructuring activities on our business and financial results, including the timing of the activities and the associated costs and the ability to achieve projected cost savings;
· conditions in the securities markets that may affect the value or liquidity of portfolio investments; and managements estimates of lives of assets, recoverability of assets, fair market value, estimates of liabilities and accrued income tax benefits and liabilities;
· to the extent unforeseen cash needs arise, the ability to obtain financing on favorable terms, or at all during adverse credit market conditions;
· to the extent we seek growth through acquisitions, alliances or joint ventures, the ability to identify, consummate and integrate acquisitions, alliances and joint ventures on satisfactory terms;
· our ability to develop new or advanced technologies, including sophisticated information systems, software and other technology used to deliver our products and services and to do so on a timely and cost-effective basis, and the exposure to the risk of obsolescence or incompatibility of these technologies with those of our customers or suppliers; our ability to maintain effective security measures for our computer and communications systems; and failures or delays in the operation of our computer or communications systems;
· consolidation in the pharmaceutical industry and the other industries in which our customers operate;
· our ability to successfully maintain historic effective tax rates;
· our ability to maintain and defend our intellectual property rights in jurisdictions around the world;
· competition, particularly in the markets for pharmaceutical information and consulting and services;
· regulatory, legislative and enforcement initiatives to which our customers in the pharmaceutical industry are or may become subject restricting the prices that may be charged for prescription or other pharmaceutical products or the manner in which such products may be marketed or sold; and
50
· terrorist activity, epidemics, credit market disruptions or other conditions that could disrupt commerce, the threat of any such conditions, and responses to and results of such conditions and threats, including but not limited to effects, domestically and/or internationally, on us, our personnel and facilities, our customers and suppliers, financial markets and general economic conditions.
Consequently, all of the forward-looking statements we make in this document are qualified by the information contained herein, including, but not limited to, the information contained under this heading, Risk Factors and our Condensed Consolidated Financial Statements (Unaudited) and notes thereto for the three and six months ended June 30, 2009 and by the material set forth under the headings Business and Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008. We are under no obligation to publicly release any revision to any forward-looking statement contained or incorporated herein to reflect any future events or occurrences.
51
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no significant change in our exposure to market risk during the three and six months ended June 30, 2009. For a discussion of our exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our 2008 Annual Report on Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The Companys Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-14c and 15d-14c under the Exchange Act) as of June 30, 2009 (the Evaluation Date). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in the Companys internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
52
Information in response to this Item is incorporated by reference to the information set forth in Note 7. Contingencies in the Notes to the Condensed Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, except as follows:
Law restricting the use of information may restrict our product and service offerings.
We provide several product and service offerings to clients in the U.S. that involve the license, use and transfer of prescriber-identifiable information for commercial purposes. New Hampshire, Vermont and Maine have passed laws placing certain restrictions on the license, use or transfer of such information for commercial purposes. We challenged all three laws in Federal court, asking the courts to declare these laws unconstitutional.
· With respect to the New Hampshire law, the Federal District Court in Concord, New Hampshire ruled on April 30, 2007 that the law violated the First Amendment and was therefore unconstitutional and enjoined its enforcement. However, that decision was recently overturned by the U.S. Court of Appeals for the First Circuit, which declared the law constitutional. The appeals court vacated the lower courts injunction and the New Hampshire statute became effective on February 9, 2009. On March 27, 2009, we filed a petition for certiorari to the U.S. Supreme Court asking that the Supreme Court review the appeals courts decision in this matter. On June 29, 2009, the Supreme Court announced that it would not hear the case. We have modified our offerings and believe we are operating in compliance with the New Hampshire law.
· With respect to the Maine law, the Federal District Court in Bangor, Maine issued a preliminary injunction on December 21, 2007, prohibiting enforcement of the Maine law. The Maine Attorney General has appealed the preliminary injunction ruling to the U.S. Court of Appeals for the First Circuit.
· With respect to the Vermont law, the Federal District Court in Brattleboro, Vermont held a full trial ending on August 1, 2008. On April 23, 2009 the court issued its decision upholding the Vermont law. We are appealing the district courts decision to the U.S. Court of Appeals for the Second Circuit. The data restrictions in the Vermont law became effective on July 1, 2009. We have modified our offerings and believe we are operating in compliance with the Vermont law.
These three states collectively represent approximately one percent of prescription activity in the United States, so the potential financial impact of these laws on our business, financial condition and results of operations is not expected to be material. However, there have been a significant number of state legislative initiatives over the past several years that seek to impose similar restrictions on the commercial use of prescriber-identifiable information. During 2009, these initiatives were introduced in 23 states. They were unsuccessful in 20 states and remain pending in Massachusetts, New Jersey and
53
New York. We are unable to predict whether and in what form these initiatives will continue or whether additional states or the Federal government will seek to enact similar or more restrictive legislation or regulation of such information. In addition, while we will continue to seek to adapt our products and service offerings (including consulting and services offerings) to comply with the requirements of these laws, there can be no assurance that our efforts to adapt our offerings will be successful and provide the same financial contribution to us. There can also be no assurance that these kinds of legislative initiatives will not adversely affect our ability to generate or assemble data or to develop or market current or future offerings, which could, over time, result in a material adverse impact on our revenues, net income and earnings per share.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period |
|
Total |
|
Average |
|
Total Number of |
|
Maximum Number of |
|
|
|
|
|
|
|
|
|
|
|
April 1-30, 2009 |
|
|
|
|
|
|
|
9,505,300 |
|
May 1-31, 2009 |
|
|
|
|
|
|
|
9,505,300 |
|
June 1-30, 2009 |
|
|
|
|
|
|
|
9,505,300 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
9,505,300 |
|
(1) In December 2007, our Board of Directors authorized a stock repurchase program to buy up to 20,000,000 shares. As of June 30, 2009, 9,505,300 shares remained available for repurchase under the December 2007 program. Unless terminated earlier by resolution of our Board of Directors, this program will expire when we have repurchased all shares authorized for repurchase thereunder. See Note 12 of our Notes to Condensed Consolidated Financial Statements (Unaudited) for further details.
54
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of IMS Health Incorporated was held on May 1, 2009.
The following nominees for director named in the Proxy Statement dated March 27, 2009 were elected at the Meeting for a one-year term expiring in 2010 by the votes indicated:
|
|
For |
|
Against |
|
Abstain |
|
H. Eugene Lockhart |
|
141,743,971 |
|
20,339,366 |
|
540,792 |
|
Bradley T. Sheares |
|
160,361,085 |
|
1,743,771 |
|
519,276 |
|
The following directors continue to serve terms expiring in 2010: James D. Edwards, William C. Van Faasen and Bret W. Wise. The following directors continue to serve terms expiring in 2011: David R. Carlucci, Constantine L. Clemente, Kathryn E. Giusti and M. Bernard Puckett.
The ratification of the appointment of PricewaterhouseCoopers LLP as Independent Registered Public Accounting Firm was approved by the following vote:
|
|
For |
|
Against |
|
Abstain |
|
Number of Shares |
|
156,786,103 |
|
5,303,445 |
|
534,585 |
|
The approval of the amendment to the Restated Certificate of Incorporation to eliminate the supermajority vote provisions:
|
|
For |
|
Against |
|
Abstain |
|
Broker |
|
Number of Shares |
|
149,380,679 |
|
475,214 |
|
930,713 |
|
11,837,530 |
|
55
(a) Exhibits
Exhibit |
|
Description of Exhibits |
3.1 |
|
Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on May 5, 2009). |
|
|
|
3.2 |
|
Fifth Amended and Restated By-laws of IMS Health Incorporated dated May 4, 2009 (incorporated by reference to Exhibit 3.2 to the Registrants Form 8-K filed on May 5, 2009). |
|
|
|
31.1 |
|
CEO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
31.2 |
|
CFO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
32.1 |
|
Joint CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002. |
56
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
IMS Health Incorporated |
|
|
|
|
|
|
|
|
By: |
/s/ Leslye G. Katz |
Date: July 31, 2009 |
Leslye G. Katz |
|
|
Senior Vice President and |
|
|
Chief Financial Officer |
|
|
(principal financial officer) |
|
|
|
|
|
|
|
|
/s/ Harshan Bhangdia |
|
Date: July 31, 2009 |
Harshan Bhangdia |
|
|
Vice President, Controller |
|
|
(principal accounting officer) |
|
57
Exhibit |
|
|
3.1 |
|
Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrants Form 8-K filed on May 5, 2009). |
|
|
|
3.2 |
|
Fifth Amended and Restated By-laws of IMS Health Incorporated dated May 4, 2009 (incorporated by reference to Exhibit 3.2 to the Registrants Form 8-K filed on May 5, 2009). |
|
|
|
31.1 |
|
CEO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
31.2 |
|
CFO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a). |
|
|
|
32.1 |
|
Joint CEO/CFO Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002. |
58