Attached files
file | filename |
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EX-10.1 - SEPARATION AGREEMENT-TH - INVENTIV HEALTH INC | separationagreement.htm |
EX-31.2 - CFO CERTIFICATION SECTION 302 - INVENTIV HEALTH INC | cfocertificationsection302.htm |
EX-32.1 - CEO CERTIFICATION SECTION 1350 - INVENTIV HEALTH INC | ceocertificationsection1350.htm |
EX-32.2 - CFO CERTIFICATION SECTION 1350 - INVENTIV HEALTH INC | cfocertificationsection1350.htm |
EX-31.1 - CEO CERTIFICATION SECTION 302 - INVENTIV HEALTH INC | ceocertificationsection302.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
[X] Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For the
quarterly period ended September 30, 2009
or
[_] Transition
Report Pursuant to Section 13 or 15(d) of the Securities
Exchange
Act of 1934
For the
Transition Period From ___________ to ___________
Commission
file number 0-30318
INVENTIV
HEALTH, INC.
(Exact
name of registrant as specified in its charter)
Delaware 52-2181734
(State or
other
jurisdiction (IRS
Employer
of
incorporation or
organization) Identification
No.)
500
Atrium Drive
Somerset,
New Jersey 08873
(Address
of principal executive office and zip code)
(800)
416-0555
(Registrant's
telephone number, including area code)
Indicate
by check mark whether registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer [
] Accelerated
filer
[X] Non-accelerated
filer [_]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [_] No [X]
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
As of
October 31, 2009, there were 33,597,773 outstanding shares of the registrant's
common stock.
INVENTIV
HEALTH, INC.
INDEX
TO QUARTERLY REPORT ON
FORM
10-Q
PART
I. FINANCIAL INFORMATION
|
ITEM
1. Financial Statements
|
and
December 31, 2008
|
ended
September 30, 2009 and 2008 (unaudited)
|
ended
September 30, 2009 and 2008 (unaudited)
|
Results
of Operations
|
PART
II. OTHER INFORMATION
|
SIGNATURES
|
EXHIBITS
|
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The forward-looking statements are only
predictions and provide our current expectations or forecasts of future events
and financial performance and may be identified by the use of forward-looking
terminology, including the terms “believes,” “estimates,” “anticipates,”
“expects,” “plans,” “intends,” “may,” “will” or “should” or, in each case, their
negative, or other variations or comparable terminology, though the absence of
these words does not necessarily mean that a statement is not
forward-looking.
We intend
that all forward-looking statements be subject to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
are subject to many risks and uncertainties that could cause our actual results
to differ materially from any future results expressed or implied by the
forward-looking statements. Forward-looking statements include all matters that
are not historical facts and include, without limitation statements
concerning:
-
our business strategy, outlook, objectives, plans, intentions and goals;
-
our estimates regarding our liquidity, capital expenditures and sources of both, and our ability to fund our operations and planned capital expenditures for the foreseeable future;
-
our belief that our growth and success will depend on our ability to continue to enhance the quality of our existing services, introduce new services on a timely and cost-effective basis, integrate new services with existing services, increase penetration with existing customers, recruit, motivate and retain qualified personnel and economically train existing sales representatives and recruit new sales representatives;
-
our expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions;
-
our estimates regarding our future earnout obligations from completed acquisitions;
-
our belief that there are ample opportunities for cross-selling to our existing clients;
-
our anticipation that it will be necessary to continue to select, invest in and develop new and enhanced technology and end-user databases on a timely basis in the future in order to maintain our competitiveness;
-
our expectations regarding the impact of our acquisitions, joint ventures and partnerships;
-
our expectations regarding the impact of the adoption of certain accounting standards;
-
our expectations regarding the potential impact of pending litigation; and
-
our expectations regarding the liquidation of the Columbia Strategic Cash Portfolio.
These
forward-looking statements reflect our current views about future events and are
subject to risks, uncertainties and assumptions. We wish to caution readers that
certain important factors may have affected and could in the future affect our
actual results and could cause actual results to differ significantly from those
expressed in any forward-looking statement. The most important factors that
could prevent us from achieving our goals, and cause the assumptions underlying
forward-looking statements and the actual results to differ materially from
those expressed in or implied by those forward-looking statements include, but
are not limited to, the following:
-
the potential impact of a recessionary environment on our customers and business;
-
our ability to sufficiently increase our revenues and maintain or decrease expenses and cash capital expenditures to permit us to fund our operations;
-
our ability to continue to comply with the covenants and terms of our credit facility and to access sufficient capital under our credit agreement or from other sources of debt or equity financing to fund our operations;
-
the impact of any default by any of our credit providers or swap counterparties;
-
our ability to accurately forecast costs to be incurred in providing services under fixed price contracts, including with respect to the leasing costs for our fleet vehicles and related fuel costs;
-
our ability to accurately forecast insurance claims within our self-insured programs;
-
our ability to accurately forecast the performance of business units to which our potential earnout obligations relate and, therefore, to accurately estimate the amount of the earnout obligations we will incur;
-
the potential impact of pricing pressures on pharmaceutical manufacturers from future health care reform initiatives or from changes in the reimbursement policies of third party payers;
-
potential disruptions and switching costs related to vendors’ relationships;
-
the possibility that customer agreements will be terminated or not renewed;
-
our ability to grow our existing client relationships, obtain new clients and cross-sell our services;
-
our ability to successfully operate new lines of business;
-
our ability to manage our infrastructure and resources to support our growth;
-
our ability to successfully identify new businesses to acquire, conclude acquisition negotiations and integrate the acquired businesses into our operations;
-
any disruptions, impairments, or malfunctions affecting software as well as excessive costs or delays that may adversely impact our continued investment in and development of software;
-
the potential impact of government regulation on us and on our client base;
-
our ability to comply with all applicable laws as well as our ability to successfully implement from a timing and cost perspective any changes in applicable laws;
-
our ability to recruit, motivate and retain qualified personnel, including sales representatives and clinical staff;
-
our ability to maintain technological advantages in a variety of functional areas, including sales force automation, electronic claims surveillance and patient compliance
-
the actual impact of the adoption of certain accounting standards;
-
the actual outcome of pending litigation;
-
any potential impairment of intangible assets;
-
consolidation in the pharmaceutical industry;
-
changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing; and
-
our ability to determine the actual time at which the liquidation of our Columbia Strategic Cash Portfolio will be completed or the total losses that we will actually realize from that investment vehicle.
Investors
should carefully consider these risk factors and the matters discussed under
Part I, Item 1A, Risk Factors, of our Form 10-K for the year ended December 31,
2008 and Part II, Item 1A, Risk Factors of our Form 10-Q for the three and six
months ended June 30, 2009.
Except to the
extent required by applicable laws or rules, we do not undertake to update any
forward-looking statements or to publicly announce revisions to any of the
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART
I. FINANCIAL INFORMATION
ITEM
1. Financial
Statements
INVENTIV
HEALTH, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share amounts)
September
30,
|
December
31,
|
|
2009
(unaudited)
|
2008
(Revised)
|
|
ASSETS
|
||
Current
assets:
|
||
Cash
and equivalents
|
$101,601
|
$90,463
|
Restricted
cash and marketable securities
|
3,736
|
8,069
|
Accounts
receivable, net of allowances for doubtful accounts of $6,231 and $4,787
at
|
||
September
30, 2009 and December 31, 2008, respectively
|
149,782
|
158,689
|
Unbilled
services
|
97,502
|
86,390
|
Prepaid
expenses and other current assets
|
12,876
|
16,880
|
Current
tax assets
|
6,506
|
595
|
Current
deferred tax assets
|
13,625
|
9,198
|
Total
current assets
|
385,628
|
370,284
|
Property
and equipment, net
|
67,618
|
63,382
|
Equity
investments
|
1,327
|
1,423
|
Goodwill
|
215,674
|
215,526
|
Other
intangibles, net
|
216,989
|
226,509
|
Non-current
deferred tax assets
|
61,080
|
75,172
|
Deposits
and other assets
|
20,816
|
20,820
|
Total
assets
|
$969,132
|
$973,116
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||
Current
liabilities:
|
||
Current
portion of capital lease obligations
|
$10,070
|
$13,417
|
Current
portion of long-term debt
|
3,642
|
4,279
|
Accrued
payroll, accounts payable and accrued expenses
|
86,537
|
129,009
|
Current
income tax liabilities
|
--
|
2,736
|
Client
advances and unearned revenue
|
61,012
|
57,223
|
Total
current liabilities
|
161,261
|
206,664
|
Capital
lease obligations, net of current portion
|
17,389
|
25,010
|
Long-term
debt
|
319,286
|
321,828
|
Non-current
income tax liabilities
|
5,718
|
5,636
|
Other
non-current liabilities
|
53,639
|
46,334
|
Total
liabilities
|
557,293
|
605,472
|
Equity:
|
||
inVentiv
Health Inc. stockholders’ equity:
|
||
Preferred
stock, $.001 par value, 10,000,000 shares authorized, none issued and
outstanding at
|
||
September
30, 2009 and December 31, 2008, respectively
|
--
|
--
|
Common
stock, $.001 par value, 50,000,000 shares authorized; 33,588,847 and
33,272,543
|
||
shares
issued and outstanding at September 30, 2009 and December 31, 2008,
respectively
|
34
|
33
|
Additional
paid-in-capital
|
404,494
|
394,560
|
Accumulated
other comprehensive losses
|
(17,156)
|
(20,869)
|
Accumulated
earnings (deficit)
|
24,714
|
(6,210)
|
Total
inVentiv Health Inc. stockholders’ equity
|
412,086
|
367,514
|
Noncontrolling
interest
|
(247)
|
130
|
Total
equity
|
411,839
|
367,644
|
Total
liabilities and equity
|
$969,132
|
$973,116
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
INVENTIV
HEALTH, INC.
CONDENSED
CONSOLIDATED INCOME STATEMENTS
(in
thousands, except per share amounts)
(unaudited)
For
the Three-Months Ended
|
For
the Nine-Months Ended
|
||||
September
30,
|
September
30,
|
||||
2009
|
2008
(Revised)
|
2009
|
2008
(Revised)
|
||
Net
revenues
|
$232,765
|
$243,383
|
$689,247
|
$703,964
|
|
Reimbursed
out-of-pocket expenses
|
37,701
|
45,790
|
107,911
|
132,572
|
|
Total
revenues
|
270,466
|
289,173
|
797,158
|
836,536
|
|
Operating
expenses:
|
|||||
Cost
of services
|
145,459
|
153,427
|
438,342
|
441,001
|
|
Reimbursable
out-of-pocket expenses
|
38,864
|
48,649
|
109,433
|
139,083
|
|
Selling,
general and administrative expenses
|
61,588
|
59,498
|
180,659
|
180,983
|
|
Total
operating expenses
|
245,911
|
261,574
|
728,434
|
761,067
|
|
Operating
income
|
24,555
|
27,599
|
68,724
|
75,469
|
|
Interest
expense
|
(5,775)
|
(6,443)
|
(17,322)
|
(19,134)
|
|
Interest
income
|
15
|
438
|
130
|
1,684
|
|
Income
from continuing operations before income tax provision and loss from
equity investments
|
18,795
|
21,594
|
51,532
|
58,019
|
|
Income
tax provision
|
(6,863)
|
(8,125)
|
(20,403)
|
(22,518)
|
|
Income
from continuing operations before loss from equity
investments
|
11,932
|
13,469
|
31,129
|
35,501
|
|
Loss
from equity investments
|
(73)
|
(13)
|
(65)
|
(47)
|
|
Income
from continuing operations
|
11,859
|
13,456
|
31,064
|
35,454
|
|
Income
from discontinued operations:
|
|||||
(Losses)
gains on disposals of discontinued operations, net of
taxes
|
--
|
(3)
|
--
|
104
|
|
(Loss)
income from discontinued operations
|
--
|
(3)
|
--
|
104
|
|
Net
income
|
11,859
|
13,453
|
31,064
|
35,558
|
|
Less: Net
income attributable to the noncontrolling interest
|
(136)
|
(130)
|
(140)
|
(1,022)
|
|
Net
Income attributable to inVentiv Health, Inc.
|
$11,723
|
$13,323
|
$30,924
|
$34,536
|
|
Earnings
per share (see Note 7):
|
|||||
Continuing
operations:
|
|||||
Basic
|
$0.35
|
$0.40
|
$0.92
|
$1.04
|
|
Diluted
|
$0.35
|
$0.40
|
$0.92
|
$1.03
|
|
Discontinued
operations:
|
|||||
Basic
|
$0.00
|
$0.00
|
$0.00
|
$0.01
|
|
Diluted
|
$0.00
|
$0.00
|
$0.00
|
$0.00
|
|
Net
income:
|
|||||
Basic
|
$0.35
|
$0.40
|
$0.92
|
$1.05
|
|
Diluted
|
$0.35
|
$0.40
|
$0.92
|
$1.03
|
|
Weighted
average common shares outstanding:
|
|||||
Basic
|
33,583
|
33,215
|
33,469
|
32,969
|
|
Diluted
|
33,885
|
33,498
|
33,699
|
33,429
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
INVENTIV
HEALTH, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(unaudited)
For
the Nine-months Ended
|
||
September
30,
|
||
2009
|
2008
(Revised)
|
|
Cash
flows from operating activities:
|
||
Net
income
|
$31,064
|
$35,558
|
Income
from discontinued operations
|
--
|
(104)
|
Income
from continuing operations
|
31,064
|
35,454
|
Adjustments
to reconcile net income from continuing operations to net cash provided by
operating activities:
|
||
Depreciation
|
15,750
|
15,196
|
Amortization
|
9,344
|
11,302
|
Tradename
writeoff
|
117
|
--
|
Loss
from equity investments
|
67
|
47
|
Adjustment
on derivative financial instrument
|
--
|
1,001
|
Deferred
taxes
|
9,665
|
6,064
|
Adjustment
on marketable securities
|
(1,986)
|
607
|
Stock
compensation expense
|
7,863
|
8,321
|
Tax
benefit from stock option exercises and vesting of restricted
shares
|
1,008
|
3,131
|
Changes
in assets and liabilities, net of effects from discontinued
operations:
|
||
Accounts
receivable, net
|
8,907
|
14,564
|
Unbilled
services
|
(11,112)
|
(15,227)
|
Prepaid
expenses and other current assets
|
4,004
|
6,031
|
Accrued
payroll, accounts payable and accrued expenses
|
(56)
|
(6,054)
|
Net
tax liabilities
|
(10,773)
|
(8,145)
|
Client
advances and unearned revenue
|
3,789
|
(3,228)
|
Excess
tax benefits from stock based compensation
|
1,201
|
(360)
|
Landlord
allowance
|
7,602
|
--
|
Other
|
2,248
|
2,833
|
Net
cash provided by continuing operations
|
78,702
|
71,537
|
Net
cash used in discontinued operations
|
(613)
|
(52)
|
Net
cash provided by operating activities
|
78,089
|
71,485
|
Cash
flows from investing activities:
|
||
Restricted
cash balances and marketable securities
|
10,184
|
28,687
|
Investment
in cash value of life insurance policies
|
(3,743)
|
(886)
|
Cash
paid for acquisitions, net of cash acquired
|
(532)
|
(18,031)
|
Acquisition
earn-out payments
|
(38,264)
|
(22,126)
|
Equity
investments
|
29
|
42
|
Purchases
of property and equipment
|
(22,132)
|
(13,506)
|
Proceeds
from manufacturers rebates on leased vehicles
|
612
|
3,773
|
Net
cash used in continuing operations
|
(53,846)
|
(22,047)
|
Net
cash provided by discontinued operations
|
613
|
156
|
Net
cash used in investing activities
|
(53,233)
|
(21,891)
|
Cash
flows from financing activities:
|
||
Repayments
on long-term debt
|
(2,569)
|
(2,475)
|
Borrowings
under line of credit
|
(610)
|
--
|
Repayments
on capital lease obligations
|
(9,857)
|
(11,499)
|
Withholding
shares for taxes
|
(547)
|
(1,071)
|
Proceeds
from exercise of stock options
|
855
|
2,372
|
Excess
tax benefits from stock-based compensation
|
(1,201)
|
360
|
Distributions
to noncontrolling interests in affiliated partnership
|
(517)
|
(807)
|
Net
cash used in continuing operations
|
(14,446)
|
(13,120)
|
Net
cash used in discontinued operations
|
--
|
--
|
Net
cash used in financing activities
|
(14,446)
|
(13,120)
|
Effect
of exchange rate changes
|
728
|
(567)
|
Net
change in cash and equivalents
|
11,138
|
35,907
|
Cash
and equivalents, beginning of period
|
90,463
|
50,973
|
Cash
and equivalents, end of period
|
$101,601
|
$86,880
|
Supplemental
disclosures of cash flow information:
|
||
Cash
paid for interest
|
$16,913
|
$17,727
|
Cash
paid for income taxes
|
$21,383
|
$21,168
|
Supplemental
disclosures of non-cash activities:
|
||
Vehicles
acquired through capital lease agreements
|
$6,239
|
$20,139
|
Stock
issuance related to acquisitions
|
$2,335
|
$18,921
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
INVENTIV
HEALTH, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
inVentiv
Health Inc. (together with its subsidiaries, “inVentiv”, or the “Company”) is a
leading provider of value-added services to the pharmaceutical and life sciences
industries. The Company supports a broad range of clinical
development, communications and commercialization activities that are critical
to its customers' ability to complete the development of new drug products and
medical devices and successfully bring them to market. The Company’s
goal is to assist its customers in meeting their objectives in each of its
operational areas by providing our services on a flexible and cost-effective
basis that permits the Company to provide discrete service offerings in focused
areas as well as integrated multidisciplinary solutions. The Company
provides services to over 350 client organizations, including all top 20 global
pharmaceutical companies and numerous emerging and specialty biotechnology
companies.
The
Company’s service offerings reflect the changing needs of its clients as their
products move through the late-stage development and regulatory approval
processes and into product launch. The Company has established
expertise and leadership in providing the services its clients require at each
of these stages of product development and commercialization and seek to address
their outsourced service needs on a comprehensive basis throughout the product
life cycle through both standalone and integrated solutions.
Business
Segments
The
Company currently serves its clients primarily through four business segments,
which correspond to its reporting segments for 2009:
-
inVentiv Clinical, which provides professional resourcing services to pharmaceutical, biotech and device companies. Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing, and strategic resource teams. In addition, inVentiv Clinical provides its clinical research clients with outsourced functional services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (which includes Smith Hanley Associates (“SHA”), Smith Hanley Consulting Group (“SHCG”) and MedFocus), HHI Clinical & Statistical Research Services (“HHI”), and Synergos;
-
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. This segment includes inVentiv Communications, Inc., Jeffrey Simbrow Associates (“JSAI”), Ignite Health and Incendia Health Studios (collectively, “Ignite”), Chamberlain Communications Group, Inc. (“Chamberlain”), Addison Whitney, Angela Liedler GmbH (“Liedler”) and Chandler Chicco Agency (“CCA”);
-
inVentiv Commercial, which consists of our outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. This segment includes Advance Insights, formerly known as inVentiv Strategy & Analytics, and inVentiv Selling Solutions. inVentiv Selling Solutions includes Promotech Logistics Solutions LLC ("PLS"), acquired in December 2008; and
-
inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute (“TTI”), AWAC and Patient Marketing Group, LLC. (“PMG”) (acquired in August 2008).
The
Company’s services are designed to develop, execute and monitor strategic and
tactical sales and marketing plans and programs for the promotion of
pharmaceutical, biotechnology and other life sciences products. For
third party administrators and other payors, the Company provides a variety of
services that enhance savings and improve patient outcomes, including
opportunities to address billing errors, additional discounts and treatment
protocols for patients.
2. Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements present the
condensed consolidated balance sheets, condensed consolidated results of
operations and condensed consolidated cash flows of the Company and its
subsidiaries (the "condensed consolidated financial statements"). These
condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") and pursuant to the rules and regulations of the United States
Securities and Exchange Commission (“SEC”) related to interim financial
statements. Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP have been
omitted. The Company believes that the disclosures made herein are
adequate such that the information presented is not misleading. These condensed
consolidated financial statements reflect all adjustments (consisting of only
normal recurring adjustments) that, in the opinion of management, are necessary
to fairly present the Company's condensed consolidated balance sheets as of
September 30, 2009 and December 31, 2008, the condensed consolidated income
statements of the Company for the three and nine months ended September 30, 2009
and 2008 and the condensed consolidated cash flows for the nine-months ended
September 30, 2009 and 2008. Operating results for the three and nine
months ended September 30, 2009 are not indicative of the results that may be
expected for the year ending December 31, 2009. Certain amounts presented for
prior periods have been reclassified to conform to the current year
presentation. See Note 3 for the retrospective application of
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of
ARB No. 51” (“SFAS 160”), as codified in ASC 810 of the FASB Accounting
Standards Codification (“the codification”, or “ASC”) relating to noncontrolling
interests.
These
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and accompanying notes included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2008 as
filed with the Securities and Exchange Commission on February 27,
2009.
The
consolidated financial statements include the accounts of inVentiv Health, Inc.,
its wholly owned subsidiaries and its 60% owned subsidiary, Taylor Search
Partners (“TSP”), which was acquired in conjunction with the acquisition of
inVentiv Communications, Inc. Our continuing operations consist
primarily of four business segments: inVentiv Clinical, inVentiv Communications,
inVentiv Commercial and inVentiv Patient Outcomes. All significant
intercompany transactions have been eliminated in consolidation. In
December 2007, the Company increased its investment interest from 44% to 85% in
Liedler, a service provider of communication and marketing tools for technical,
medical and pharmaceutical products, located in Germany. The Company
accounted for Liedler as an equity investment until the date of the acquisition
of the additional interest, and then consolidated its results
thereafter.
As a
result of the acquisition of inVentiv Communications, Inc., the Company has a
15% ownership interest in Heart Reklambyra AB (“Heart”), an advertising agency
located in Sweden, which is accounted for by using the equity method of
accounting.
3. Recently
Issued Accounting Standards:
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update 2009-13 (ASU 2009-13), an update to ASC 605, Revenue
Recognition, which addresses how to separate deliverables and how to measure and
allocate arrangement consideration to one or more units of accounting in
multiple-deliverable arrangements,. The amendments in this update will be
effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. The Company is
currently evaluating the impact that this update will have on its Condensed
Consolidated Financial Statements.
In June
2009, the FASB issued SFAS 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles”. SFAS 168 (ASC 105) establishes the codification
as the single official non-governmental source of authoritative accounting
principles (other than guidance issued by the SEC) and supersedes and
effectively replaces previously issued GAAP hierarchy framework. All
other literature that is not part of the codification will be considered
non-authoritative. The codification is effective for interim and
annual periods ending on or after September 15, 2009. The Company has
applied the codification, as required, beginning with this third quarter Form
10Q. The adoption of the codification did not have a material impact
on the Company’s condensed consolidated financial position, results of
operations or cash flows.
In June
2009, the FASB issued SFAS 167, “Amendments to FASB Interpretation
No. 46(R)” (ASC 810),
which amends the consolidation guidance applicable to variable interest
entities. SFAS 167 (ASC 810) requires ongoing assessments of whether
an enterprise is the primary beneficiary of a variable interest entity and
enhanced disclosures that will provide users of financial statements with more
transparent information about an enterprise’s involvement in variable interest
entities. SFAS 167 (ASC 810) is effective for annual reporting
periods after November 15, 2009. The Company does not expect SFAS 167
(ASC 810) to have a material effect on its condensed consolidated financial
statements.
In June
2009, the FASB issued SFAS 166, “Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140” (ASC 860), which amends the
derecognition guidance in FASB Statement No. 140 and eliminates the exemption
from consolidation for qualifying special-purpose entities. SFAS 166
(ASC 860) is effective as of the beginning of the first annual reporting period
that begins after November 15, 2009. The Company does not expect SFAS
166 (ASC 860) to have a material effect on its condensed consolidated financial
statements.
In June
2009, the FASB issued SFAS 165, “Subsequent Events” (ASC
855), which established
principles and requirements for subsequent events. This guidance
details the period after the balance sheet date which the Company should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which the
Company should recognize events or transactions occurring after the balance
sheet date in its financial statements and the required disclosures for such
events. SFAS 165 (ASC 855) is effective for interim and annual
periods ending after June 15, 2009. The implementation of SFAS 165
(ASC 855) did not have a material effect on the Company’s condensed consolidated
financial statements. The Company adopted SFAS 165 (ASC 855),
effective June 30, 2009, as required, and has evaluated all subsequent events
through November 6, 2009 (the date the Company’s financial statements are
issued).
In
April 2009, the FASB issued FSP FAS 157-4 (ASC 820), which provides additional
guidance for estimating fair value when the volume and level of activity for the
asset or liability have decreased significantly. FSP FAS 157-4 (ASC
820) also provides guidance on identifying circumstances that indicate a
transaction is not orderly. The provisions of FSP FAS 157-4 (ASC 820) are
effective for the Company’s interim period ending on June 30, 2009. The
implementation of FSP FAS 157-4 (ASC 820) did not have a material effect on the
Company’s condensed consolidated financial statements.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments” (ASC 825), which requires disclosures
about fair value of financial instruments in interim reporting periods of
publicly traded companies that were previously only required to be disclosed in
annual financial statements. The provisions of FSP FAS 107-1 and APB 28-1 (ASC
825) are effective for the Company’s interim period ending on June 30,
2009. The implementation of FSP 107-1 and APB 28-1 (ASC 825) did not have a
material effect on the Company’s condensed consolidated financial
statements.
In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (ASC 320), which provides additional
guidance designed to create greater clarity and consistency in accounting for
and presenting impairment losses on securities. The provisions of FSP FAS 115-2
and FAS 124-2 (ASC 320) are effective for the Company’s interim period ending on
June 30, 2009. The implementation of FSP FAS 115-2 and FAS 124-2
(ASC 320) did not have a material effect on the Company’s condensed consolidated
financial statements.
In
October 2008, the FASB issued Staff Position No. FSP FAS 157-3 “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active” (ASC 820)
which amends FAS 157 to include guidance on how to determine the fair value of a
financial asset in an inactive market and which is effective immediately on
issuance, including prior periods for which financial statements have not been
issued. The implementation of FSP FAS 157-3 (ASC 820) did not
have a material impact on the Company’s financial position and results of
operations.
In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161
“Disclosures about Derivative
Instruments and Hedging Activities an amendment of FASB Statement
No. 133” (ASC 815), which requires additional disclosures regarding
a company’s derivative instruments and hedging activities by requiring
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also requires disclosure of derivative features
that are credit risk–related as well as cross-referencing within the notes to
the financial statements to enable financial statement users to locate important
information about derivative instruments, financial performance, and cash flows.
SFAS 161 (ASC 815) is effective for fiscal years beginning after November 15,
2008. The Company adopted SFAS 161 (ASC 815), effective January 1, 2009, as
required.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”) (ASC 805), which addresses the recognition and accounting for
identifiable assets acquired, liabilities assumed, and noncontrolling interests
in business combinations. SFAS 141(R) (ASC 805) also establishes expanded
disclosure requirements for business combinations. SFAS 141(R) (ASC 805) is
effective January 1, 2009, being applied prospectively for acquisitions after
this date. Since the Company has not had any acquisitions that are
subject to the provisions of SFAS 141(R) (ASC 805), we continue to evaluate the
impact of this standard on our condensed consolidated financial statements;
however, this will be mainly dependent on the timing, nature and extent of our
acquisitions consummated after January 1, 2009. The Company adopted
SFAS 141(R) (ASC 805), effective January 1, 2009, as required.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”
(“SFAS 160”) (ASC 810), which addresses the accounting and reporting framework
for minority interests by a parent company. SFAS 160 (ASC 810) also
addresses disclosure requirements to distinguish between interests of the parent
and interests of the noncontrolling owners of a subsidiary. The
Company adopted the provisions of SFAS 160 (ASC 810), effective January 1, 2009,
as required. As a result of the adoption, the Company has reported
noncontrolling interest (previously minority interest) as a component of equity
in the Condensed Consolidated Balance Sheets and the net income or loss
attributable to noncontrolling interests has been separately identified in the
Condensed Consolidated Income Statements. The prior periods presented
have also been reclassified to conform to the current classification required by
SFAS 160 (ASC 810).
4. Acquisitions:
Acquisitions
are accounted for using purchase accounting, including SFAS No. 141 (ASC 805),
Business Combinations,
(“SFAS No. 141”) and the financial results of the acquired businesses are
included in the Company’s financial statements from their acquisitions
dates. If a business is acquired subsequent to a reporting period,
but prior to the issuance of the Company’s financial statements, it is disclosed
in the notes to the consolidated financial statements. Earnout
payments from acquisitions are generally accrued at the end of an earnout period
in conjunction with the preparation of the Company’s quarterly financial
statements when the acquired company’s results are reviewed, as more fully
described below. The terms of the acquisition agreements generally
include multiple earnout periods or a multi-year earnout period. Pro
forma financial information was not required to be disclosed under the
Securities and Exchange Commission’s Regulation S-X for the 2007 and 2008
acquisitions noted below because none of the specific thresholds were met as
they were not material to the consolidated operations of the Company at the time
of acquisition. No acquisitions were consummated in 2009.
The
following acquisitions were consummated during 2008:
PLS – In December 2008, the
Company completed the acquisition of the net assets of PLS for approximately
$7.2 million in cash, including certain post-closing adjustments and direct
acquisition costs. There are no earnout provisions related to this
acquisition. PLS is headquartered in New Jersey and provides
non-personal promotion services. PLS’ financial results have been
reflected in the inVentiv Commercial segment since the date of its
acquisition.
PMG - In August 2008, the
Company completed the acquisition of the net assets of PMG for approximately
$15.2 million in cash, including certain post-closing adjustments and direct
acquisition costs. The Company will be obligated to make certain
earnout payments, which may be material, contingent on PMG’s performance
measurements during 2008 through 2009. PMG is headquartered in New
Jersey and is a leading provider of patient relationship marketing
services. PMG’s financial results have been reflected in the inVentiv
Patient Outcomes segment since the date of its acquisition.
The
following acquisitions consummated prior to 2008 still have earnouts outstanding
for future periods:
Acquisition
|
Acquisition
Date
|
Segment
|
Unexpired
Earnout Period
|
CCA
|
July
2007
|
Communications
|
July
2007- June 2010
(1)
|
AWAC
|
July
2007
|
Patient
Outcomes
|
July
2007- June 2010
|
Addison
Whitney
|
June
2007
|
Communications
|
July
2007- June 2010
|
Ignite
|
March
2007
|
Communications
|
April
2007- March 2010
(2)
|
Chamberlain
|
March
2007
|
Communications
|
January
2007-December 2009
|
(1) Under
certain circumstances a portion of the earnout amount will be deferred and
become payable based on the financial results of the CCA for the period July
2010- June 2011.
(2) If
the earnout payment for such period exceeds a specified amount, the excess will
be deferred and become payable based on the financial results of Ignite for the
period April 2010- March 2011.
5. Restricted
Cash and Marketable Securities:
As of September 30, 2009 and December
31, 2008, there was approximately $1.4 million and $1.3 million of restricted
cash, of which $0.4 million collateralizes outstanding letters of credit, to
support the security deposits relating to the New York, Washington D.C,
California and London offices, which are now reflected in the inVentiv
Communications segment. The beneficiaries have not drawn on the $0.4
million letters of credit.
The
Company receives cash advances from its clients as funding for specific projects
and engagements. These funds are deposited into segregated bank accounts and
used solely for purposes relating to the designated projects. Although these
funds are not held subject to formal escrow agreements, the Company considers
these funds to be restricted and has classified these balances. Cash held in
such segregated bank accounts totaled approximately $0.1 million at September
30, 2009 and December 31, 2008, respectively.
As of September 30, 2009 and December
31, 2008, the Company had $2.2 million and $10.0 million, respectively, invested
in the Columbia Strategic Cash Portfolio (“CSCP”). Based on an update
provided by CSCP for September 30, 2009, the Company expects to receive the
remaining balance over the next twelve months. Accordingly, the
Company’s recorded balances in the CSCP of $2.2 million and $6.3 million,
respectively, are classified as restricted cash and marketable securities on the
September 30, 2009 and December 31, 2008 condensed consolidated balance
sheets. During the periods ended September 30, 2009 and December 31,
2008, the Company recorded realized gain of $0.3 million and impairment of $2.6
million, respectively, relating to impairments of the Company's investment in
the CSCP, which held certain asset-backed securities. Subsequent to
September 30, 2009, the value of the CSCP may materially change depending on
market conditions. Consistent with the Company's investment policy
guidelines, the majority of CSCP investments had AAA/Aaa credit ratings at the
time of purchase.
The CSCP maintained a net asset value
of $1 per unit until December 2007, after which the net asset value per unit
fluctuated, and will continue to fluctuate, based on changes in market values of
the securities held by the portfolio. The process of liquidating
CSCP’s portfolio was initiated in December 2007 and is anticipated to continue
through 2010. Future impairment charges may result depending on
market conditions until the fund is fully liquidated. The $3.1 million net loss
($3.4 million cumulative impairment charge offset by $0.3 million realized gain)
from inception through September 30, 2009 does not have a material impact on the
company's liquidity or financial flexibility.
On
February 27, 2008, we entered into an unsecured credit facility (the “Blue Ridge
facility”) with Blue Ridge Investments, L.L.C., an affiliate of Bank of America,
N.A., to allow the Company to separately borrow up to the current balance
remaining in the CSCP. We have not borrowed any funds under
this credit facility. The Blue Ridge facility provides for multiple
drawdowns from time to time until maturity, which shall be the earlier of the
day following the redemption of all of our shares of the CSCP and July 1,
2010. The outstanding balance under the facility may not (subject to
limited exceptions) exceed our account value in the CSCP, and distributions from
the CSCP must be applied to reduce the outstanding principal balance under the
facility. Amounts borrowed bear interest at the one-month LIBOR rate
plus 0.35% per annum, fluctuating daily.
6. Employee
Stock Compensation:
The Company follows SFAS No. 123
(ASC 718) (“SFAS 123R”), Share-Based Payment, which
establishes accounting for share-based awards exchanged for employee services
and requires companies to expense the estimated fair value of these awards over
the requisite employee service period.
Stock-based compensation expense was
$2.8 million, of which $0.5 million was recorded in cost of services and $2.3
million recorded as Selling, General and Administrative expenses (“SG&A”)
for the three months ended September 30, 2009 and $2.6 million, of which $0.6
million was recorded in cost of services and $2.0 million recorded as SG&A
for the three months ended September 30, 2008. For the nine-months ended
September 30, 2009, stock-based compensation expense was $7.9 million, of which
$1.3 million was recorded in cost of services and $6.6 million recorded as
SG&A; for the nine-months ended September 30, 2008, stock-based compensation
expense was $8.3 million, of which $1.9 million was recorded in cost of services
and $6.4 million was recorded as SG&A.
Stock-based
compensation expense caused income before income tax provision and loss from
equity investments to decrease by $2.8 million and $2.6 million for the three
months ended September 30, 2009 and 2008, respectively, caused net income to
decrease by $1.5 million and $1.6 million for the three months ended September
30, 2009 and 2008, respectively, and caused basic and diluted earnings per share
to decrease by $0.05 per share for the three months ended September 30, 2009 and
2008. During the nine months ended September 30, 2009 and September
30, 2008 the stock-based compensation expense caused income before income tax
provision and loss from equity investments to decrease by $7.9 million and $8.3
million, respectively, caused net income to decrease by $4.6 million and $4.9
million for the nine months ended September 30, 2009 and 2008, respectively, and
caused basic and diluted earnings per share to decrease by $0.14 per share and
$0.15 per share for the nine months ended September 30, 2009 and 2008,
respectively.
Cash
provided by financing activities decreased by $1.2 million and increased by $0.4
million for the nine-months ended September 30, 2009 and 2008, respectively,
related to excess tax benefits from the exercise of stock-based
awards.
Assumptions
The fair
value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
Three
Months Ended
September
30,
|
Nine
Months Ended
September
30,
|
|||
2009
|
2008
|
2009
|
2008
|
|
Expected
life of option
|
5.5-6
yrs
|
5.5-6
yrs
|
5.5-6
yrs
|
5.5-6
yrs
|
Risk-free
interest rate
|
2.38%
|
--(1)
|
1.39%
|
3.06%
|
Expected
volatility
|
50%
|
40%
|
47%
|
37%
|
Expected
dividend yield
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
(1) In the third quarter of
2008, no options were granted by the Company, hence, the interest rate was not
applicable.
The Company analyzed historical trends
in expected volatility and expected life of stock options on a quarterly basis;
during 2009 and 2008 the volatility ranged between 37%-50%. As of
January 1, 2008, the Company adopted SAB 110 revision to SAB topic 14 (ASC 718)
for determining the expected term and the range of the expected term remained
unchanged at 5.5 to 6 years as previously reported under SAB 107 (ASC
718). The Company continues to base the estimate of risk-free rate on
the U.S. Treasury yield curve in effect at the time of grant. The Company has
never paid cash dividends, does not currently intend to pay cash dividends, and
has certain restrictions under its credit facility to pay dividends and thus has
assumed a 0% dividend yield. These conclusions were based on several
factors, including past company history, current and future trends, comparable
benchmarked data and other key metrics.
As part of the requirements of SFAS
123R (ASC 718), the Company is required to estimate potential forfeitures of
stock grants and adjust compensation cost recorded accordingly. The
forfeiture rate was estimated based on historical forfeitures. The
estimate of forfeitures will be adjusted over the requisite service period to
the extent that actual forfeitures differ, or are expected to differ, from such
estimates. Changes in estimated forfeitures will be recognized through a
cumulative catch-up adjustment in the period of change and will also impact the
amount of stock compensation expense to be recognized in future
periods. The forfeiture rates utilized for the nine months ended 2009
and 2008 were 5.35% and 6.92%, respectively.
Stock Incentive Plan and
Award Activity
The
Company’s 2006 Stock Incentive Plan (Amended on April 27, 2009) (“Stock Plan” or
“LTIP”) authorizes incentive stock options, nonqualified stock options,
restricted stock awards, restricted stock units and stock appreciation rights
("SARs”). Prior to the adoption of the LTIP, the Company was
authorized to grant equity incentive awards under its 1999 Stock Incentive Plan
(together with the LTIP, the "Equity Incentive Plans"), which was terminated at
the time the LTIP was adopted. The aggregate number of unissued
shares of the Company’s common stock that may be issued under the Stock Plan is
4.2 million shares, which includes 4.1 million additional shares that were
approved by our shareholders on June 17, 2009.
The
exercise price of options granted under the Stock Plan may not be less than 100%
of the fair market value per share of the Company’s common stock on the date of
the option grant. The vesting and other provisions of the options are determined
by the Compensation Committee of the Company’s Board of
Directors.
The
following table summarizes activity under the Company’s Equity Incentive Plans
for the nine months ended September 30, 2009 (in thousands, except per share
amounts):
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2009
|
1,499
|
$22.18
|
||
Granted
and assumed
|
510
|
$10.98
|
||
Exercised
|
(112)
|
$7.64
|
||
Forfeited/expired/cancelled
|
(33)
|
$20.76
|
||
Outstanding
at September 30, 2009
|
1,864
|
$20.01
|
7.01
|
$4,327
|
Vested
and expected to vest at September 30, 2009
|
1,801
|
$20.14
|
6.94
|
$4,057
|
Options
exercisable at September 30, 2009
|
981
|
$20.55
|
5.63
|
$1,397
|
The
weighted-average grant-date fair value of stock options granted during the
three-months ended September 30, 2009 was $8.12 per share. There were
no stock options granted during the three months ended September 30,
2008. The weighted-average grant-date fair value of stock options
granted during the nine-months ended September 30, 2009 and 2008 was $5.05 per
share and $12.83 per share, respectively. The total intrinsic
value of options exercised during the three-months ended September 30, 2009 and
2008 was negligible and $0.2 million, respectively, and was $0.9 million and
$2.4 million during the nine-months ended September 30, 2009 and 2008,
respectively. As of September 30, 2009 and December 31, 2008, there
was approximately $4.8 million and $4.6 million, respectively, of total
unrecognized compensation cost related to nonvested share-based compensation
arrangements granted under the Stock Plan; that cost is expected to be
recognized over a weighted average of 2.7 years and 2.5 years,
respectively.
The
actual tax benefit realized for the tax deductions from option exercise of the
share-based payment arrangements were both negligible for the three months ended
September 30, 2009 and 2008, respectively, and totaled $0.2 million and $1.0
million for the nine-months ended September 30, 2009 and 2008,
respectively.
Options
outstanding and exercisable have exercise price ranges and weighted average
remaining contractual lives of:
Outstanding Options
|
Exercisable Options
|
||||||
Exercise
Price Range
|
Numbers
of Options
|
Weighted
Average Exercise Price
|
Weighted
Average
Remaining
Life
(years)
|
Number
of Options
|
Weighted
Average
Exercise
Price
|
||
$1.66
|
To
|
$10.30
|
110,300
|
$6.35
|
3.73
|
110,300
|
$6.35
|
$10.82
|
To
|
$10.82
|
494,746
|
$10.82
|
9.29
|
--
|
--
|
$10.86
|
To
|
$15.48
|
25,744
|
$14.06
|
4.74
|
25,744
|
$14.06
|
$15.96
|
To
|
$15.96
|
237,500
|
$15.96
|
4.98
|
237,500
|
$15.96
|
$16.32
|
To
|
$17.75
|
192,341
|
$17.18
|
5.13
|
177,341
|
$17.26
|
$18.20
|
To
|
$26.76
|
192,623
|
$24.95
|
5.97
|
146,186
|
$24.81
|
$26.77
|
To
|
$28.66
|
249,788
|
$27.30
|
7.26
|
152,447
|
$26.99
|
$30.64
|
To
|
$32.55
|
211,985
|
$32.17
|
7.93
|
57,222
|
$32.06
|
$35.01
|
To
|
$35.01
|
91,404
|
$35.01
|
7.31
|
45,709
|
$35.01
|
$37.21
|
To
|
$37.21
|
57,914
|
$37.21
|
7.75
|
28,958
|
$37.21
|
1,864,345
|
981,407
|
A summary
of the status and changes of the Company’s nonvested shares related to its
Equity Incentive Plans as of and during the nine months ended September 30, 2009
is presented below:
(in
thousands, except per share amounts)
|
Shares
|
Weighted
Average Grant-Date Fair Value
|
Nonvested
at January 1, 2009
|
667
|
$30.30
|
Granted
|
641
|
$11.03
|
Released
|
(181)
|
$29.58
|
Forfeited
|
(40)
|
$22.21
|
Nonvested
at September 30, 2009
|
1,087
|
$19.35
|
As of
September 30, 2009 and December 31, 2008, there was approximately $13.4 million
and $12.6 million, respectively, of total unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under the Stock Plan;
that cost is expected to be recognized over a weighted average of 2.7 years and
2.5 years, respectively. The total fair value of shares vested during the three
and nine months ended September 30, 2009 was $0.2 million and $2.0 million,
respectively. During the three and nine-months ended September 30,
2008 the amounts were $0.1 million and $5.5 million, respectively.
7. Earnings
Per Share (“EPS”):
Basic
earnings per share excludes dilution for potentially dilutive securities and is
computed by dividing net income or loss attributable to common shareholders by
the weighted average number of common shares outstanding during the
period. Diluted net income per share reflects the potential dilution that
could occur if securities or other instruments to issue common stock were
exercised or converted into common stock. Potentially dilutive
securities are excluded from the computation of diluted net income per share
when their inclusion would be antidilutive.
A summary
of the computation of basic and diluted earnings per share from continuing
operations is as follows:
Three-Months
Ended September 30,
|
Nine-months
Ended September 30,
|
|||
2009
|
2008
|
2009
|
2008
|
|
(in
thousands, except per share data)
|
||||
Basic
EPS from Continuing Operations Computation
|
||||
Income
from continuing operations attributable to inVentiv Health,
Inc.
|
$11,723
|
$13,326
|
$30,924
|
$34,432
|
Weighted
average number of common shares outstanding
|
33,583
|
33,215
|
33,469
|
32,969
|
Basic
EPS from continuing operations attributable to inVentiv Health,
Inc.
|
$0.35
|
$0.40
|
$0.92
|
$1.04
|
Diluted
EPS from Continuing Operations Computation
|
||||
Income
from continuing operations attributable to inVentiv Health,
Inc.
|
$11,723
|
$13,326
|
$30,924
|
$34,432
|
Weighted
average number of common shares outstanding
|
33,583
|
33,215
|
33,469
|
32,969
|
Stock
options (1)
|
59
|
229
|
54
|
293
|
Restricted
stock awards (2)
|
243
|
54
|
176
|
167
|
Total
diluted common shares outstanding
|
33,885
|
33,498
|
33,699
|
33,429
|
Diluted
EPS from continuing operations attributable to inVentiv Health,
Inc.
|
$0.35
|
$0.40
|
$0.92
|
$1.03
|
(1) For
the three-months and nine-months ended September 30, 2009, 324,421 shares and
322,220 shares, respectively, were excluded from the calculation of diluted EPS
due to the fact that the shares are considered anti-dilutive because the number
of potential buyback shares is greater than the number of weighted shares
outstanding. Similarly, for the three and nine months ended September
30, 2008, 798,133 shares and 566,365 shares, respectively, were excluded from
the calculation of diluted EPS due to the fact that the shares are considered
anti-dilutive because the number of potential buyback shares is greater than the
number of weighted shares outstanding.
(2) For
the three-months and nine-months ended September 30, 2009, 1,233,295 shares and
1,728,196 shares, respectively, were excluded from the calculation of diluted
EPS due to the fact that the shares are considered anti-dilutive because the
number of potential buyback shares is greater than the number of weighted shares
outstanding. Similarly, for the three and nine months ended September
30, 2008, 489,774 and 48,303 shares, respectively, were excluded from the
calculation of diluted EPS due to the fact that the shares are considered
anti-dilutive because the number of potential buyback shares is greater than the
number of weighted shares outstanding.
8. Significant
Clients:
During
the nine-months ended September 30, 2009 and 2008, the Company had no clients
that accounted for more than 10%, individually, of the Company's total revenues
across our inVentiv Clinical, inVentiv Communications, inVentiv Commercial and
inVentiv Patient Outcomes segments.
9. Goodwill and Other Intangible
Assets:
Goodwill
consists of the following:
(in
thousands)
|
inVentiv
Clinical
|
inVentiv
Communications
|
inVentiv
Commercial
|
inVentiv
Patient Outcomes
|
Other
|
Total
|
Balance
as of January 1, 2008
|
$56,944
|
$190,958
|
$45,773
|
$90,039
|
--
|
$383,714
|
Goodwill
acquired during the year
|
--
|
--
|
1,561
|
5,202
|
--
|
6,763
|
Goodwill
through contingent consideration(1)
|
32
|
31,127
|
--
|
12,153
|
--
|
43,312
|
Goodwill
allocation (2)
|
--
|
(6,674)
|
--
|
--
|
--
|
(6,674)
|
Other
adjustments
|
186
|
863(4)
|
--
|
--
|
--
|
1,049
|
Impairment
losses(3)
|
(41,344)
|
(112,667)
|
--
|
(58,627)
|
--
|
(212,638)
|
Balance
as of December 31, 2008
|
$15,818
|
$103,607
|
$47,334
|
$48,767
|
--
|
$215,526
|
Goodwill
through contingent consideration(1)
|
--
|
88
|
--
|
--
|
--
|
88
|
Goodwill
allocation(5)
|
--
|
--
|
60
|
--
|
--
|
60
|
Balance
as of September 30, 2009
|
$15,818
|
$103,695
|
$47,394
|
$48,767
|
--
|
$215,674
|
(1) The
contingent consideration represents adjustments relating to the finalization of
the earnouts for the twelve months ended December 31 each year and March 31 for
2008.
(2) The
amount relates to the allocation of the goodwill at year-end to identifiable
intangible assets arising from the final valuation, completed during 2008, for
the Liedler acquisition, which was acquired on December 28,
2007. Under SFAS 141 (ASC 805), if a business combination is
consummated toward the end of an acquiring enterprise's fiscal year or the
acquired enterprise is very large or unusually complex, the acquiring enterprise
may not be able to obtain some of the data required to complete the allocation
of the cost of the purchased enterprise for inclusion in its next annual
financial report. As discussed in Part 2, Item 8 of our Annual Report
on Form 10-K, since Liedler was acquired on December 28, 2007, the valuation was
not completed by the time the 2007 10-K was filed.
(3) These
amounts relate to the respective reporting unit noncash impairment charges of
goodwill as a result of the interim impairment tests the Company performed at
December 31, 2008. The fair value of each reporting unit was
estimated using the expected present value of future cash flows.
(4) This
amount relates to a tax adjustment on the Chamberlain acquisition accounted for
under EITF 93-7 Uncertainties Related to Income Taxes in a Purchase Business
Combination (ASC 805).
(5) The
amount relates to the allocation of the goodwill at year-end to identifiable
intangible assets arising from the PLS acquisition. Identifiable
intangible assets were allocated at December 31, 2008, but were revised
accordingly based on finalization of the valuation, as allowed under SFAS 141
(ASC 805).
Other intangible assets consist of the
following:
September
30, 2009
|
December
31, 2008
|
||||||
(in
thousands)
|
Accumulated
|
Accumulated
|
|||||
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
||
Customer
relationships
|
$113,834
|
$(35,268)
|
$78,566
|
$113,896
|
$(27,177)
|
$86,719
|
|
Technology
|
14,168
|
(5,082)
|
9,086
|
14,168
|
(4,497)
|
9,671
|
|
Noncompete
agreement
|
1,506
|
(1,073)
|
433
|
1,506
|
(911)
|
595
|
|
Tradenames
subject to amortization
|
2,159
|
(1,076)
|
1,083
|
2,275
|
(790)
|
1,485
|
|
Other
|
1,234
|
(903)
|
331
|
1,232
|
(683)
|
549
|
|
Total
definite-life intangibles
|
132,901
|
(43,402)
|
89,499
|
133,077
|
(34,058)
|
99,019
|
|
Tradenames
not subject to amortization (1)
|
127,490
|
--
|
127,490
|
127,490
|
--
|
127,490
|
|
Total
other intangibles (2)
|
$260,391
|
$(43,402)
|
$216,989
|
$260,567
|
$(34,058)
|
$226,509
|
(1) These
indefinite-life tradenames arose primarily from acquisitions where the brand
names of the entities acquired are very strong and
longstanding. These tradenames are also supported annually in the
Company’s impairment test for goodwill and tradenames conducted in June of every
year and the interim impairment test performed at December 31,
2008.
(2) The
decrease in total other intangibles is related to the allocation of
goodwill and identifiable intangible assets for the PLS acquisition, as
described above and the writeoff of the Strategyx name, as described
below.
The Company has the following
identifiable intangible assets:
Intangible
asset
|
Amount
(in
thousands)
|
Weighted
average amortization period
|
|
Tradename
|
$129,649
|
(1)
|
|
Customer
relationships
|
113,834
|
10.8
years
|
|
Technology
|
14,168
|
14.3
years
|
|
Noncompete
agreement
|
1,506
|
4.5
years
|
|
Other
|
1,234
|
4.5
years
|
|
Total
|
$260,391
|
(1) $2.2
million of the tradenames are definite-life intangibles, which have a weighted
average amortization period of 4.8 years.
Amortization expense, based on
intangibles subject to amortization held at September 30, 2009, is expected to
be $3.1 million for the remainder of 2009, $11.9 million in 2010, $11.6 million
in 2011, $11.5 million in 2012, $10.2 million in 2013, $9.8 million in 2014 and
$31.4 million thereafter.
The
balances recorded on the Company’s Condensed Balance Sheet for goodwill and
other indefinite-life intangibles, such as tradenames, are assessed annually for
potential impairment as of June 30, pursuant to the guidelines of SFAS 142 (ASC
350), Goodwill and Other
Intangible Assets and SFAS 144 (ASC 360), Accounting for the Impairment of or
Disposal of Long-Lived Assets. In accordance with SFAS 142
(ASC 350), the Company uses the two-step process for periods in which impairment
testing is performed. The first step compares the fair value of the
reporting unit to its carrying value. If the carrying amount exceeds the fair
value, the second step of the test is performed to measure the amount of
impairment loss, if any. The second step compares the implied fair value of
reporting unit goodwill with the carrying amount of that goodwill. To calculate
the implied fair value of goodwill in this second step, the Company allocates
the fair value of the reporting unit to all of the assets and liabilities of
that reporting unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair value
was the price paid to acquire the reporting unit. The excess of the fair value
of the reporting unit over the amount assigned to the assets and liabilities of
the reporting unit represents the implied fair value of goodwill. If the
carrying amount of goodwill exceeds the implied fair value of goodwill, an
impairment loss is recognized for that difference.
The
Company performed annual impairment tests as of June 30, 2008 and concluded that
the existing goodwill and indefinite lived intangible tradename balances were
not impaired. The Company's declining stock price during the fourth
quarter of 2008 resulted in a market capitalization that was well below the book
value of the Company. This was due to a combination of declining
market conditions and lower than expected operating results for certain
businesses. As such, the Company conducted an interim impairment test
during the fourth quarter of 2008, resulting in the following impairment
charges:
(in thousands) | 2008 Impairment |
Goodwill | $212,638 |
Intangible assets: | |
Customer relationships | 5,605 |
Tradenames | 25,833 |
Technology | 23,772 |
Total Impairment | $267,848 |
Goodwill
and other indefinite-life intangibles were assessed for potential impairment on
June 30, 2009, as noted above, for the Company’s annual impairment
testing. The Company conducted its assessment and concluded
that the foregoing balances on the Company’s Condensed Consolidated Balance
Sheet were not impaired as of June 30, 2009. The Company has
determined that there are no factors present that would more-likely-than-not
reduce the fair value of the Company’s reporting units below their carrying
amounts and therefore the Company believes that no impairment exists as of
September 30, 2009.
During
the first quarter of 2009, the Company strategically changed its Strategy &
Analytics’ name to Advance Insights, thereby discontinuing the usage of Health
Products Research, Strategyx, Ventiv Access Services and Creative Healthcare
Solutions names. The Company accordingly recorded a $0.1 million
tradename writeoff as a result of discontinuing the Strategyx name, which is
included as part of selling, general and administrative expenses on the
condensed consolidated income statement.
10. Fair
Value Measurement
As
discussed in Note 3, the Company adopted SFAS 157 (ASC 820) on January 1,
2008, which among other things, requires enhanced disclosures about assets and
liabilities measured at fair value. Our adoption of SFAS 157 (ASC 820) was
limited to financial assets and liabilities, which primarily relate to our
marketable securities, deferred compensation plan and derivative
contracts.
We
utilize the market approach to measure fair value for our financial assets and
liabilities. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities.
SFAS 157
(ASC 820) includes a fair value hierarchy that is intended to increase
consistency and comparability in fair value measurements and related
disclosures. The fair value hierarchy is based on inputs to valuation techniques
that are used to measure fair value that are either observable or unobservable.
Observable inputs reflect assumptions market participants would use in pricing
an asset or liability based on market data obtained from independent sources
while unobservable inputs reflect a reporting entity’s pricing based upon their
own market assumptions. The fair value hierarchy consists of the following three
levels:
-
Level 1-Inputs are quoted prices in active markets for identical assets or liabilities.
-
Level 2-Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
-
Level 3-Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
The
following table represents the Company’s assets and liabilities measured at fair
value on a recurring basis as of September 30, 2009 and the basis for that
measurement:
(in
thousands)
|
Total
Fair Value Measurement September 30, 2009
|
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
ASSETS
|
||||
Marketable
Securities
|
$2,228
|
--
|
--
|
$2,228
|
Deferred
Compensation
Plan
Assets
|
9,873
|
--
|
9,873
|
--
|
TOTAL
ASSETS
|
$12,101
|
--
|
$9,873
|
$2,228
|
LIABILITIES
|
||||
Deferred
Compensation
Plan
Liabilities
|
$9,783
|
--
|
$9,783
|
--
|
Derivative
Liabilities
|
26,850
|
--
|
--
|
26,850
|
TOTAL
LIABILITIES
|
$36,633
|
--
|
$9,783
|
$26,850
|
As a
result of market conditions related to the interest rate environment, the
Company updated its valuation of its five-year interest rate derivative as of
September 30, 2009, resulting in a credit value adjustment of $2.3 million to
the derivative liability, with a corresponding offset to Other Comprehensive
Income as a result of cash flow hedge accounting (see Note 13). This
valuation, which involved current and future probability-adjusted risk factors,
included inputs derived from valuation techniques in which one or more
significant inputs were unobservable, classifying this as a Level 3 input under
the definition described above. The significant inputs in this
valuation included credit market spread, estimated exposure and company and
counterparty default risk.
As a
result of the decrease in available investment prices from September 30, 2008 to
December 31, 2008 due to market conditions, the Company changed its
classification of marketable securities from a Level 2 input to a Level 3
input. The Company incurred a $2.6 million impairment
charge during 2008, of which $2.0 million was in the fourth quarter of 2008 and
primarily related to the lack of liquidity and resulting distressed values of
investments in the marketplace. These factors resulted in a
significant percentage of the securities within CSCP that required unobservable
inputs, which was not materially present through September 30,
2008. These significant inputs included interest rate curves, credit
curves and creditworthiness of the counterparty. The classification
and significant unobservable inputs remained consistent for the period ended
September 30, 2009. There were no changes to the presentation
of the CSCP in the condensed consolidated financial statements as a result of
the Level 2 input to Level 3 input change.
The
following is a rollforward of the Level 3 assets and liabilities through
September 30, 2009:
Fair
Value Measurements
|
|
(in
thousands)
|
Using
Significant Unobservable Inputs (Level 3)
|
ASSETS
|
CSCP
|
Balance
at January 1, 2009
|
$9,999
|
Included
in earnings (or changes in net assets)
|
312
|
Included
in other comprehensive income
|
142
|
Purchases,
issuances and settlements
|
(8,225)
|
Transfers
in and/or out of Level 3
|
--
|
Balance
at September 30, 2009
|
$2,228
|
LIABILITIES
|
Derivative
|
Balance
at January 1, 2009
|
$30,783
|
Included
in earnings (or changes in net assets)
|
--
|
Included
in other comprehensive income
|
(2,490)
|
Deferred
tax impact of other comprehensive income
|
(1,443)
|
Transfers
in and/or out of Level 3
|
--
|
Balance
at September 30, 2009
|
$26,850
|
11. Debt:
On July
6, 2007, the Company entered into an Amended and Restated Credit Agreement (“the
Credit Agreement”) with UBS AG, Stamford Branch and others. The Credit Agreement
provides for a secured term loan of $330 million which was made available to
inVentiv in a single drawing, up to $20 million in additional term loans
("delayed draw term loans") that was to be advanced no later than January 6,
2008, which we elected not to draw, a $50 million revolving credit facility, of
which $10 million is available for the issuance of letters of credit, and a
swingline facility. The Credit Agreement was used to:
-
amend the existing October 2005 credit facility, with a remaining balance of $164 million, and
-
enter into a new $166 million loan to help fund the acquisitions of Chandler Chicco Agency and AWAC, and pay the fees associated with the new credit facility, with the balance retained by inVentiv as working capital.
The term
loan will mature on the seventh anniversary of the Credit Agreement, with
scheduled quarterly amortization of 1% per year during years one through six and
94% during year seven. The delayed draw term loans will mature on the seventh
anniversary of the Credit Agreement, with scheduled quarterly amortization of
0.25% per quarter and the balance becoming due on such seventh anniversary. The
revolving loans will mature on the sixth anniversary of the Credit Agreement.
Amounts advanced under the Credit Agreement must be prepaid with a percentage,
determined based on a leverage test set forth in the Credit Agreement, of Excess
Cash Flow (as defined in the Credit Agreement) and the proceeds of certain
non-ordinary course asset sales, certain issuances of debt obligations and 50%
of certain issuances of equity securities of inVentiv and its subsidiaries,
subject to certain exceptions. inVentiv may elect to prepay the loans, in whole
or in part at any time, in certain minimum principal amounts, without penalty or
premium (other than normal LIBOR break funding costs). Amounts borrowed under
the Credit Agreement in respect of term loans (including delayed draw term
loans) that are repaid or prepaid may not be reborrowed. Amounts borrowed under
the Credit Agreement in respect of revolving loans may be paid or prepaid and
reborrowed.
Interest
on the loans will accrue, at inVentiv's election, at either (1) the Alternate
Base Rate (which is the greater of UBS's prime rate and federal funds effective
rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods
determined at inVentiv's option of 1, 2, 3 or 6 months (or, if the affected
lenders agree, 9 months), in each case plus a spread based equal to 0.75% for
Alternate Base Rate loans and 1.75% for Adjusted LIBOR Rate loans.
The
Credit Agreement contains, among other things, conditions precedent,
representations and warranties, covenants and events of default customary for
facilities of this type. Such covenants include certain limitations on
indebtedness, liens, sale-leaseback transactions, guarantees, fundamental
changes, dividends and transactions with affiliates. The Credit Agreement also
includes a financial covenant under which inVentiv is required to maintain a
total leverage ratio that does not exceed, as of the last day of any four
consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0
thereafter. The Company’s leverage ratio was 2.5 to 1.0 as of
September 30, 2009, which is in compliance with the financial
covenant.
Under
certain conditions, the lending commitments under the Credit Agreement may be
terminated by the lenders and amounts outstanding under the Credit Agreement may
be accelerated. Such events of default include failure to pay any principal,
interest or other amounts when due, failure to comply with covenants, breach of
representations or warranties in any material respect, non-payment or
acceleration of other material debt of inVentiv and its subsidiaries,
bankruptcy, insolvency, material judgments rendered against inVentiv or certain
of its subsidiaries or a 40% change of control of inVentiv, subject to various
exceptions and notice, cure and grace periods.
The
Company has the intent and ability to choose the three-month LIBOR base rate for
the duration of the term of the Credit Agreement. The three-month
LIBOR base rate as of September 30, 2009 and December 31, 2008 was 0.28% and
1.43%, respectively. As disclosed in Note 13, the Company has a
derivative financial instrument, currently with a notional amount of $323
million, to hedge against the current term loan facility.
The
Company accounts for amendments to its revolving credit facility under the
provisions of EITF Issue No. 98-14 (ASC 470), Debtor’s Accounting for the Changes
in Line-of-Credit or Revolving-Debt Arrangements (EITF 98-14), and
its term loan under the provisions of EITF Issue No. 96-19 (ASC 470), Debtor’s Accounting for a
Modification or Exchange of Debt Instruments (EITF 96-19). In
amending its revolving credit facility, deferred financing costs are being
amortized over the term of the new arrangement since the borrowing capacity
increased in the new loan, per the guidance in EITF 98-14 (ASC
470). In connection with an amendment of our existing $164 million
term loan, under the terms of EITF 96-19 (ASC 470), bank and any
third-party fees were deferred and amortized over the term of the Credit
Agreement since the old and new debt instruments were not substantially
different. The unamortized portion of the deferred financing costs
were approximately $3.5 million and $3.9 million and are included in Deposits
and Other Assets on the condensed consolidated balance sheets as of September
30, 2009 and December 31, 2008, respectively.
12. Capital
Lease Obligations:
During
2000, the Company entered into a master lease agreement to provide a fleet of
automobiles for sales representatives of its inVentiv Commercial Services
operating segment. Subsequent to 2000, the Company entered into other lease
agreements with multiple vendors. Based on the terms of the agreements,
management concluded that the leases were capital leases based on the criteria
established by SFAS No. 13 (ASC 840), Accounting for Leases. The
Company capitalized leased vehicles and recorded the related lease obligations
totaling approximately $6.9 million (including rebates of $0.6 million) and
$23.9 million (including rebates of $3.8 million) during the nine-months ended
September 30, 2009 and 2008, respectively. The Company also incurred
net disposals of $8.6 million and $10.4 million during the nine-months ended
September 30, 2009 and 2008, respectively.
13. Derivative
Financial Instrument:
SFAS No.
133 (ASC 815) “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS 133”), as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires the
recording of all derivatives as either assets or liabilities on the balance
sheet measured at estimated fair value and the recognition of the unrealized
gains and losses. We record the fair market value of our derivatives
as other assets and other liabilities within our consolidated balance
sheet. Derivatives that are not part of hedge relationships are
recorded at fair market value on our Consolidated Balance Sheet with the
offsetting adjustment to interest expense on our Consolidated Income
Statement. For hedge relationships designated as cash flow hedges
under SFAS 133 (ASC 815), changes in fair value of the effective portion of a
designated cash flow hedge are recorded to other comprehensive income or loss;
the ineffective portion is recorded to interest expense in our consolidated
income statement.
We enter
into interest rate swaps to manage interest rate risk associated with variable
rate debt.
On
September 6, 2007, the Company entered into a new amortizing five-year interest
rate swap arrangement with a notional amount of $165 million at hedge inception,
with an accretive notional amount that increased to $325 million effective
December 31, 2008 (concurrently with the expiration of the Company’s original
2005 three-year interest rate swap arrangement) to hedge the total outstanding
debt notional amount. This hedge relationship was designated as a
cash flow hedge. At hedge inception, the Company employed the dollar
offset method by performing a sensitivity analysis to assess effectiveness and
utilized the hypothetical derivative method under DIG Issue G7 (ASC 815) to
measure ineffectiveness. The hypothetical derivative contains the
same terms and conditions as the debt agreement. The fair value of
the derivative, net of credit value adjustment, was approximately $26.9 million
and $30.8 million as of September 30, 2009 and December 31, 2008, respectively,
and was recorded in other non-current liabilities. As a result of the
hypothetical derivative method, there was no ineffectiveness for the period
ended September 30, 2009, and accordingly, $3.9 million ($2.5 million, net of
taxes) was recorded as an increase to Other Comprehensive Income and a decrease
to other non-current liabilities on the Company’s Condensed Consolidated Balance
Sheet. This change in Other Comprehensive Income includes the $2.3
million credit value adjustment as discussed in Note 10. The amount
of loss reclassified from accumulated other comprehensive income into interest
expense for the three months and nine months ended September 30, 2009 was
approximately $3.5 million and $9.3 million, respectively.
Based on
current assumptions regarding the interest rate environment and other market
conditions at September 30, 2009, the estimated amount of accumulated other
comprehensive income that is expected to be reclassified into interest expense
under our hedge relationships within the next 12 months is $14.0
million.
14. Commitments
and Contingencies:
The
Company is subject to lawsuits, investigations and claims arising out of the
conduct of its business, including those related to commercial transactions,
contracts, government regulation and employment matters. Certain claims, suits
and complaints have been filed or are pending against the
Company. All pending matters are of a kind routinely
experienced in our business and are consistent with our historical
experience. In the opinion of management, taking into account the
advice of legal counsel, no matters outstanding as of September 30, 2009 are
likely to have a material adverse effect on inVentiv.
15. Deferred
Compensation:
The
Ventiv Health, Inc. Deferred Compensation Plan (the "NQDC Plan") provides
eligible management and other highly compensated employees with the opportunity
to defer, on a pre-tax basis, their salary, bonus, and other specified cash
compensation and to receive the deferred amounts, together with a deemed
investment return (positive or negative), either at a pre-determined time in the
future or upon termination of employment with the Company or an affiliated
employer participating in the NQDC Plan. The compensation deferrals
were initiated in 2005. The deferred compensation liability of
approximately $9.8 million and $6.8 million were included in other non-current
liabilities in the Company’s Condensed Consolidated Balance Sheets as of
September 30, 2009 and December 31, 2008. The NQDC Plan does not
provide for the payment of above-market interest to participants.
To assist
in the funding of the NQDC Plan obligation, the Company participates in a
corporate-owned life insurance program in a rabbi trust whereby it purchases
life insurance policies covering the lives of certain employees, with the
Company named as beneficiary. Rabbi trusts are grantor trusts
generally set up to fund compensation for a select group of management or highly
paid executives. The cash value of the life insurance policy at
September 30, 2009 and December 31, 2008 was approximately $8.8 million and $5.1
million, respectively, and is currently classified in Deposits and Other Assets
on the Company’s Condensed Consolidated Balance Sheets. In addition,
approximately $1.1 million and $1.6 million as of September 30, 2009 and
December 31, 2008, respectively, were invested in mutual funds and classified in
Prepaid expenses and other current assets on our Condensed Consolidated Balance
Sheets.
16. Income
Taxes
The
Company accounts for income taxes in accordance with the Income Taxes Topic of
FASB 109 (ASC 740). Deferred tax assets and liabilities are
determined based on temporary differences between the financial reporting bases
and the tax bases of assets and liabilities. Deferred tax assets are
also recognized for tax net operating loss carry forwards. These
deferred tax assets and liabilities are measured using the enacted tax rates and
laws that will be in effect when such amounts are expected to be reversed or
utilized. Valuation allowances are provided to reduce such deferred
tax assets to amounts more likely than not to be ultimately
realized.
Income
tax provision includes U.S. federal, state, local and foreign income taxes and
is based on pre-tax income or loss. The interim period provision for
income taxes is based upon the Company’s estimate of its annual effective income
tax rate. In determining the estimated annual effective income tax
rate, the Company analyzes various factors, including projections of the
Company’s annual earnings and taxing jurisdictions in which the earnings will be
generated, the impact of state and local income taxes and the ability of the
Company to use tax credits and net operating loss carry forwards.
The Company
assesses uncertain tax positions in accordance with income tax accounting
standards. Under this method, income tax benefits should be
recognized when, based on the technical merits of a tax position, the Company
believes that if a dispute arose with the taxing authority and were taken to a
court of last resort, it is more likely than not (i.e., a probability of
greater than 50 percent) that the tax position would be sustained as
filed. If a position is determined to be more likely than not of
being sustained, the reporting enterprise should recognize the largest amount of
tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with the taxing authority. The Company’s practice
is to recognize interest and penalties related to income tax matters in income
tax expense.
The
effective tax rate for the nine-month period ended September 30, 2009 was
39.8%. The
rate included a tax benefit due to the expiration of the statute of limitations
related to pre-acquisition liabilities of $1.7 million that were recognized in
accordance with FASB Statement No. 141(R) (ASC 805) which was adopted as of
January 1, 2009, utilization of state net operating losses of $0.3 million, and
a tax detriment of $0.2 million relating to federal tax true-up
items. The effective tax rate for the nine-month period ended
September 30, 2008 was 39.6%. The rate included a tax benefit
relating to state taxes settled of approximately $0.3 million, a tax detriment
relating to interest on unrecognized tax benefits of approximately $0.1 million,
$0.4 million of tax benefits relating to federal tax true-up items and $0.1
million of tax benefit relating to utilization of certain foreign net operating
losses. The Company’s current effective tax rate is based on current
projections for earnings in the tax jurisdictions in which inVentiv does
business and is subject to taxation. The Company’s effective tax rate
could fluctuate due to changes in earnings between operating entities and
related tax jurisdictions.
As of
September 30, 2009 and December 31, 2008 the Company had unrecognized tax
benefits of $4.2 million and $5.3 million, respectively. After
consideration of the adoption of FASB Statement No. 141 (R) (ASC 805) at January
1, 2009, positions totaling $3.4 million are included in this amount that, if
recognized, would affect the effective tax rate. As of December 31, 2008,
positions totaling $0.9 million are included in this amount that, if recognized,
would affect the effective tax rate.
The
Company recognizes potential interest and penalties related to unrecognized tax
benefits in income tax expense. The total amount of accrued interest
and penalties recorded as of September 30, 2009 and December 31, 2008 was $2.2
million and $2.6 million, respectively.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The
Company is no longer subject to U.S. federal income tax examinations for years
before 2006 and generally, is no longer subject to state and local income tax
examinations by tax authorities for years before 2004.
Management has concluded that it is reasonably possible that the unrecognized
tax benefits will decrease by approximately $2.5 million within the next 12
months. The decrease is primarily related to federal and state taxes
that may be settled or have expiring statutes of limitations.
17. Stockholders’
Equity
The following table describes the 2009
activity in the Company’s Stockholders’ Equity accounts for the nine-months
ended September 30, 2009:
inVentiv
Health Inc Shareholders
|
|||||||
(in
thousands, except share amounts)
|
Common
Stock
|
Additional
Paid-In
Capital
|
Accumulated
(deficit) earnings
|
Comprehensive
Income
|
Accumulated
Other Comprehensive Losses (1)
|
Noncontrolling
Interest
|
Total
|
Balance
at December 31, 2008
|
33
|
$394,560
|
($6,210)
|
--
|
$(20,869)
|
$130
|
$367,644
|
Net
income
|
30,924
|
30,924
|
140
|
31,064
|
|||
Net
change in effective portion of
derivative,
net of taxes
|
2,490
|
2,490
|
2,490
|
||||
Unrealized
gain on marketable securities
|
118
|
118
|
118
|
||||
Foreign
currency translation
Adjustment
|
1,105
|
1,105
|
1,105
|
||||
34,637
|
|||||||
Restricted
stock expense
|
1
|
5,432
|
5,433
|
||||
Withholding
shares for taxes
|
(547)
|
(547)
|
|||||
Tax
expense from exercise of
employee
stock options and vesting
of
restricted stock
|
(1,201)
|
(1,201)
|
|||||
Proceeds
from exercise of stock
Options
|
855
|
855
|
|||||
Stock
option expense
|
2,431
|
2,431
|
|||||
Issuance
of shares in connection with
Acquisitions
|
2,335
|
2,335
|
|||||
Distributions
|
(517)
|
(517)
|
|||||
Other
|
629
|
629
|
|||||
Balance
at September 30, 2009
|
34
|
$404,494
|
$24,714
|
$(17,156)
|
$(247)
|
$411,839
|
(1) As of
September 30, 2009 Accumulated Other Comprehensive Losses consists of a $1.5
million loss on currency translation fluctuations in our foreign bank accounts
remaining from the divestitures of our European business units, from continuing
operations of our UK, France, German and Canadian subsidiaries, and equity
investments and noncontrolling interests in our foreign business units as well
as other comprehensive losses of approximately $15.8 million, net of taxes, that
relates to the effective portion of the Company’s derivative instruments, as
described in Note 13.
18. Related
Parties:
Several
inVentiv business units provided services to Cardinal Health, Inc. (“Cardinal”)
during 2009. Revenues generated for services provided to Cardinal
totaled approximately $0.8 million and $0.5 million for the periods ended
September 30, 2009 and December 31, 2008, respectively. Robert
Walter, who is the father of R. Blane Walter, our CEO, served as Executive
Chairman, and subsequently as an Executive Director, of Cardinal during 2007 and
2008. R. Blane Walter and his immediate family members and related
trusts own less than 5% of the outstanding capital stock of
Cardinal. All transactions between the Company and Cardinal were on
arms'-length terms and were negotiated without the involvement of any members of
the Walter family.
The
Company, through its Promotech business unit, purchased warehouse consulting and
procurement services from South Atlantic Systems Group ("SAS") commencing in
2007. These contractual arrangements with SAS have been completed for
2008 and provided for total payments of approximately $0.8 million. Mark
Teixeira, who is the brother-in-law of David Bassin, our Chief Financial
Officer, is the General Manager for South Atlantic Systems and was granted an
11.6% equity interest in SAS as of December 31, 2007.
The Company is party to an acquisition
agreement dated September 6, 2005 pursuant to which the Company acquired
inVentiv Communications, Inc. (then known as inChord Communications, Inc.
("inChord")) from Mr. Walter and other former inChord
shareholders. Mr. Walter and certain of his family members had
approximately a 92% interest in the earnout consideration payable under the
acquisition agreement. As a result, during 2008, Mr. Walter and such
family members received a total of $17.1 million in cash and common stock
constituting their share of the final earnout payment under the agreement, net
of a portion of such payment (the "Deferred Earnout Payment") that the parties
agreed would be deferred pending further evaluation of a customer
receivable. In April of 2009, Mr. Walter and such family members
received a total of $2.2 million in common stock constituting their share of the
Deferred Earnout Payment. The inChord acquisition agreement was
approved prior to its execution by the Board of Directors of the
Company.
inVentiv
Communications’ leases its current headquarters facility in Westerville, Ohio
from Lexington MLP Westerville L.P. Prior to May 15, 2007, this
facility was partially owned by Mr. Walter, his brothers and other current
employees of inVentiv Communications. The term of the lease is
fifteen years, and expires on September 30, 2015. During the
three and nine-months ended September 30, 2009, the Company paid $0.4 million
and $1.3 million, respectively, in rent to Lexington MLP Westerville
L.P.
See Part
II, Item 5 for a description of a separation agreement entered into with one of
our executive officers subsequent to September 30, 2009.
19. Segment
Information:
The
Company currently manages four operating segments: inVentiv Clinical, inVentiv
Communications, inVentiv Commercial and inVentiv Patient Outcomes, and its
non-operating reportable segment, “Other”, which is based on the way management
makes operating decisions and assesses performance. The following
represents the Company’s reportable segments as of September 30,
2009:
-
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, data collection and management and functional service provision primarily in support of pharmaceutical clinical development.
-
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education.
-
inVentiv Commercial, which consists of the Company’s outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area.
-
inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing.
-
Other, which encompasses the activities of the corporate management group.
Three-months
ended September 30, 2009 (in thousands):
inVentiv
Clinical
|
inVentiv
Communications
|
inVentiv
Commercial
|
inVentiv
Patient Outcomes
|
Other
|
Total
|
|
Revenues
|
$53,804
|
$78,362
|
$108,223
|
$34,187
|
--
|
$274,576
|
Less:
Intersegment revenues
|
(31)
|
(729)
|
(3,265)
|
(85)
|
--
|
(4,110)
|
Reported
Revenues
|
$53,773
|
$77,633
|
$104,958
|
$34,102
|
--
|
$270,466
|
Depreciation
and amortization
|
963
|
2,638
|
3,806
|
1,084
|
9
|
8,500
|
Interest
expense
|
--
|
14
|
77
|
1
|
5,683
|
5,775
|
Interest
income
|
--
|
--
|
--
|
--
|
15
|
15
|
Segment
income (loss) (1)
|
$2,016
|
$12,335
|
$10,329
|
$7,236
|
$(13,121)
|
18,795
|
Three-months
ended September 30, 2008 (in thousands):
InVentiv
Clinical
|
inVentiv
Communications
|
inVentiv
Commercial
|
inVentiv
Patient Outcomes
|
Other
|
Total
|
|
Revenues
|
$55,954
|
$84,538
|
$121,388
|
$31,824
|
$--
|
$293,704
|
Less:
Intersegment revenues
|
--
|
(443)
|
(4,088)
|
--
|
--
|
(4,531)
|
Reported
Revenues
|
$55,954
|
$84,095
|
$117,300
|
$31,824
|
$--
|
$289,173
|
Depreciation
and amortization
|
591
|
2,508
|
4,991
|
1,490
|
9
|
$9,589
|
Interest
expense
|
--
|
45
|
358
|
1
|
6,039
|
6,443
|
Interest
income
|
15
|
146
|
--
|
8
|
269
|
438
|
Segment
income (loss) (1)
|
$4,166
|
$9,382
|
$11,268
|
$6,801
|
$(10,023)
|
$21,594
|
Nine-months
ended September 30, 2009 (in thousands):
InVentiv
Clinical
|
inVentiv
Communications
|
inVentiv
Commercial
|
inVentiv
Patient Outcomes
|
Other
|
Total
|
|
Revenues
|
$158,381
|
$225,350
|
$324,157
|
$101,431
|
--
|
$809,319
|
Less:
Intersegment revenues
|
(135)
|
(1,569)
|
(10,244)
|
(213)
|
--
|
(12,161)
|
Reported
Revenues
|
$158,246
|
$223,781
|
$313,913
|
$101,218
|
--
|
$797,158
|
Depreciation
and amortization
|
2,333
|
7,708
|
11,701
|
3,322
|
30
|
25,094
|
Interest
expense
|
--
|
56
|
272
|
4
|
16,990
|
17,322
|
Interest
income
|
1
|
23
|
9
|
2
|
95
|
130
|
Segment
income (loss) (1)
|
$6,918
|
$32,472
|
$28,442
|
$20,994
|
$(37,294)
|
$51,532
|
Nine-months
ended September 30, 2008 (in thousands):
inVentiv
Clinical
|
inVentiv
Communications
|
inVentiv
Commercial
|
inVentiv
Patient Outcomes
|
Other
|
Total
|
|
Revenues
|
$162,592
|
$269,093
|
$328,535
|
$91,467
|
$--
|
$851,687
|
Less:
Intersegment revenues
|
(169)
|
(1,024)
|
(13,958)
|
--
|
--
|
(15,151)
|
Reported
Revenues
|
$162,423
|
$268,069
|
$314,577
|
$91,467
|
$--
|
$836,536
|
Depreciation
and amortization
|
1,690
|
7,579
|
13,111
|
4,086
|
32
|
26,498
|
Interest
expense
|
--
|
96
|
1,083
|
2
|
17,953
|
19,134
|
Interest
income
|
82
|
492
|
--
|
32
|
1,078
|
1,684
|
Segment
income (loss) (1)
|
$12,072
|
$32,869
|
$27,789
|
$16,518
|
$(31,229)
|
$58,019
|
(1) Income from continuing
operations before income tax provision, and loss from equity
investments
(in thousands) | September 30, 2009 | December 31, 2008 |
Total Assets: | ||
inVentiv Clinical | $111,057 | $97,162 |
inVentiv Communications | 372,888 | 377,123 |
inVentiv Commercial | 184,352 | 205,910 |
inVentiv Patient Outcomes | 137,228 | 134,355 |
Other | 163,607 | 158,566 |
Total assets | $969,132 | $973,116 |
ITEM
2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements, accompanying notes and other financial information included herein
and in our Annual Report on Form 10-K for the year ended December 31,
2008.
Overview
inVentiv
Health Inc. (together with its subsidiaries, “inVentiv”, “we”, “us” or “our”) is
a leading provider of value-added services to the pharmaceutical, life sciences
and healthcare industries. We support a broad range of clinical development,
communications and commercialization activities that are critical to our
customers' ability to complete the development of new drug products and medical
devices and successfully commercialize them. In addition, we provide
medical cost containment services to payors in our patient outcomes
business. Our goal is to assist our customers in meeting their
objectives by providing our services in each of our operational areas on a
flexible and cost-effective basis. We provide services to over 350 client
organizations, including all top 20 global pharmaceutical companies, numerous
emerging and specialty biotechnology companies and third party
administrators.
Our
service offerings reflect the changing needs of our clients as their products
move through the late-stage development and regulatory approval processes and
into product launch and then throughout the product lifecycle. We have
established expertise and leadership in providing the services our clients
require at each of these stages of product development and commercialization and
seek to address their outsourced service needs on a comprehensive basis
throughout the product life cycle. For payors, the Company provides a variety of
services that enhance savings and improve patient outcomes including
opportunities to address billing errors, additional discounts and treatment
protocols for patients.
Business
Segments
We
currently serve our clients primarily through four business segments, which
correspond to our reporting segments for 2009:
-
inVentiv Clinical, which provides professional resourcing and services to pharmaceutical, biotech and device companies. Professional resourcing services include providing clinical research professionals in support of clients’ research efforts, including permanent placement, clinical staffing, and strategic resource teams. In addition, inVentiv Clinical provides its clinical research clients with outsourced functional services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (which includes Smith Hanley Associates (“SHA”), Smith Hanley Consulting Group (“SHCG”) and MedFocus), HHI Clinical & Statistical Research Services (“HHI”), and Synergos;
-
inVentiv Communications, which provides services related to pharmaceutical advertising, branding, public relations, interactive communications and physician education. This segment includes inVentiv Communications, Inc., Jeffrey Simbrow Associates (“JSAI”), Ignite Health and Incendia Health Studios (collectively, “Ignite”), Chamberlain Communications Group, Inc. (“Chamberlain”), Addison Whitney, Angela Liedler GmbH (“Liedler”) and Chandler Chicco Agency (“CCA”);
-
inVentiv Commercial, which consists of our outsourced sales and marketing teams, planning and analytics services, sample accountability services, marketing support services, professional development and training, and recruitment of sales representatives in the commercial services area. This segment includes Advance Insights, formerly known as inVentiv Strategy & Analytics and inVentiv Selling Solutions. inVentiv Selling Solutions includes Promotech Logistics Solutions LLC ("PLS"), acquired in December 2008; and
-
inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, clinical educator teams, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), The Therapeutics Institute, AWAC and Patient Marketing Group, LLC. (“PMG”) (acquired in August 2008).
Material
Trends Affecting our Business
Our
business as a whole, and of our inVentiv Clinical, inVentiv Commercial and
inVentiv Patient Outcomes segments in particular, is related significantly to
the degree to which pharmaceutical companies outsource services that have
traditionally been performed internally by fully integrated
manufacturers. Although the pharmaceutical industry is generally
regarded as non-cyclical, the current recessionary environment has impacted
virtually all economic activity in the United States and abroad, including in
the pharmaceutical and life sciences industry, and has resulted in increased
budget scrutiny and efforts to significantly reduce expenditures in all areas of
our clients' businesses.
Our
business has been affected by the tentativeness of clients to make outsourcing
expenditure decisions. We believe that our clients are intently
focused on their short-term spending and cost-cutting efforts, and are
continuing to look for ways to streamline their operations. With
respect to our inVentiv Communications division, in particular, some clients are
reducing marketing expenditures through reducing the scopes of agency projects
and delaying decisions on new marketing initiatives. The consequence
has been to shift the revenue opportunities for our inVentiv Communications
division away from supporting in-market products, where margins have
traditionally been the most attractive. Although we have seen
evidence in recent months that our clients’ expenditures with certain of our
business units are stabilizing, current economic conditions present continuing
challenges and make it difficult for us to predict when a return to our clients'
historical spending levels may occur.
Our
business has also been affected by the difficult financing environment that is
currently faced by biotechnology clients, particularly those that do not yet
have any products approved for commercialization. The financing
challenges in the biotechnology market and the resulting impact on the liquidity
of individual biotechnology companies affect the number of projects our clients
in this segment can initiate, the amount available to be budgeted for the
services we provide and may impact the quality of receivables generated in terms
of both aging and ultimate collectability.
In 2009,
our medical insurance claims experience has increased, mainly due to higher
occurrences of individually large medical and prescription drug
claims. Since we are self-insured to a significant degree,
continuance of these trends could result in a material adverse impact on our
financial condition and results of operations. During the nine months
ended September 30, 2009 and 2008, the Company incurred approximately $22.5
million and $17.8 million in medical costs, respectively.
Management
is addressing the challenges of the current environment by taking steps to
reduce fixed costs and create more flexibility in our cost structure, maximize
and conserve strong cash flow and be in a position to pay down debt over
time. Cost management strategies employed by management
include:
-
reducing fixed cost headcount;
-
our "in balance" staffing initiative, through which we are converting FTE's to hourly positions that can be billed in direct response to the requirements of our client engagements;
-
completion during the first quarter of 2009 of our "super studio" in Columbus, Ohio, which will increase utilization and efficiency by allowing the management of project-based graphic design and production needs for agencies across the Communications division;
-
negotiation of favorable rates with our vendors;
-
ongoing implementation of our Peoplesoft software to manage enterprise-wide resources; and
-
consolidation of certain facilities and operations.
We
believe that these steps will allow inVentiv to provide competitive pricing to
its clients and to improve margins.
A
potential offsetting and longer-term positive trend for us is that our clients
appear to be adopting clear strategies to outsource more of their pharmaceutical
marketing expenditures with select, sophisticated providers who are capable of
delivering lower cost and more flexible solutions consistent with the service
capabilities that inVentiv offers. Our approach to creating
integrated, multi-service offerings is a significant area of opportunity in the
future.
In
addition, the pharmaceutical industry is increasingly investing in
commercialization solutions that drive patient adherence and loyalty to branded
prescription products, and improve health outcomes. We believe that
our Patient Outcomes division is a market leader in terms of expertise and a
breadth of patient-centric services and is well positioned to benefit from this
market development.
Regulatory Uncertainty
Because most of our revenues are
generated by businesses involved in the commercialization of pharmaceutical
products, uncertainties surrounding the approval of our clients' pharmaceutical
products affect us. The pace at which a pharmaceutical product moves
through the FDA approval process, and the application by the FDA of standards
and procedures related to clinical testing, manufacturing, labeling claims and
other matters are difficult to predict and may change over time. FDA
non-approvals and delays in approval can significantly impact revenue because of
the relationship between the approval process and the amount and timing of
client marketing expenditures to support the affected pharmaceutical
products.
Although
delays in FDA approvals have negatively impacted the pharmaceutical industry,
and indirectly inVentiv, the new product pipeline in the industry remains
strong, with many late-stage products awaiting FDA approval. Even if
the FDA approval rate does not improve, we believe that the number of products
awaiting approval, and the requirement for pharmaceutical manufacturers to
support these products as they reach commercialization, represents an
opportunity over the medium to longer-term for inVentiv to capture increasing
levels of outsourced services engagements. As a result of our deep and
long-standing relationships with our clients, we believe that we are well
positioned to capture these opportunities.
Business
Strategy
Although
certain areas of our business have slowed during recent quarters as a result of
the current trends discussed above, our businesses have generated strong overall
revenue growth for the past several years. Our internal revenue
growth reflects our strong track record in winning new business, which in turn
is enhanced by our pursuit of cross-servicing opportunities within and across
our business segments. Our revenues are generally received under
contracts with limited terms and that can be terminated at the client’s option
on short notice. We have been successful historically in obtaining
increasing amounts of repeat business from many of our clients and in expanding
the scope of the services we provide to them and thereby sustaining multi-year
relationships with many of our clients. When relationships do not
renew, we have been successful in redeploying personnel quickly and
efficiently.
Strategic
acquisitions have been a core element of our business strategy since
2004. Acquisitions contributed significantly to our annual revenue
growth over the last few years. We expect to be more selective and
execute fewer acquisitions going forward. We will continue to
evaluate our strategic position and intend to make opportunistic acquisitions
that enable us to expand the scope of our service offerings and drive
shareholder value.
Our
acquisitions are accounted for using purchase accounting and the financial
results of the acquired businesses are included in our consolidated financial
statements from their acquisitions dates. A prior year period that
ended before an acquisition was completed, however, will not include the
corresponding financial results of the acquired business. No new
acquisitions were consummated during the first three quarters of 2009 and,
accordingly, our financial results do not reflect any revenues from acquisitions
completed during the first three quarters of 2009.
During
2009, we established inVentiv Selling Solutions sales teams within Japan. We
believe the potential opportunity in Japan is significant based on the total
number of Japanese representatives, labor laws that are favorable for
outsourcing, the competitive landscape, and a significant number of drugs that
are expected to enter the Japanese market in the coming years.
Earnout
Obligations Related to Completed Acquisitions
The terms
of most of our completed acquisitions include the opportunity for the sellers to
receive contingent earnout consideration based on the performance of the
acquired businesses. The terms of the acquisition agreements
generally include multiple earnout periods or a multi-year earnout
period. Earnout obligations under certain of our acquisitions have
not yet been completed. All of our acquisitions were consummated
prior to January 1, 2009 and fall under the guidance of SFAS 141 (ASC
805). As such, we accrue the earnout obligations at the end of
an earnout period when the contingency is resolved and additional consideration
is distributable for these acquisitions. These earnout
obligations have been, and may be, material in amount
and represent a significant use of cash for the periods in which they are
earned or paid. Based on the performance of the applicable business
units to date and our projections of the financial performance of such
business units for the remainder of the applicable earnout periods,
we project that our use of cash and equity in satisfaction of earnout
obligations during 2009 and payable in 2010 may be between $30 million
and $40 million. Such payout amounts are subject to variability
and could vary significantly based on the actual performance of the acquired
businesses.
International
Operations
The
following is a summary of our non-U.S. operations:
Division
|
Location
|
Percent
Ownership
|
Options
to Acquire Equity Interest
|
inVentiv
Communications
|
United
Kingdom
|
100%
|
n/a
|
France
|
100%
|
n/a
|
|
Canada
|
100%
|
n/a
|
|
Germany
(Liedler)
|
85%
|
inVentiv
has the option to acquire the remaining 15% equity
interest
|
|
Italy
|
37.5%
|
None
|
|
Germany
(Haas and Health)
|
19.9%
|
inVentiv
may acquire an additional 60.1% within 90 days following calendar year
2010, and the remaining 20% for a period of 90 days following the third
anniversary of the acquisition of the 60.1% equity
interest
|
|
Sweden
|
15%
|
None
|
|
inVentiv
Clinical
|
Mexico
|
100%
|
n/a
|
Brazil
|
100%
|
n/a
|
|
India
|
100%
|
Sciformix
Corp. has option to acquire 20% of joint venture entity through January
2010
|
|
inVentiv
Commercial
|
Japan
|
100%
|
n/a
|
Canada
|
100%
|
n/a
|
|
Puerto
Rico
|
100%
|
n/a
|
Foreign
operations are accounted for using the functional currency of the country where
the business is located, translated to US dollars in the inVentiv Health, Inc.
consolidated financial statements. These investments are accounted
for using various methods depending on ownership percent and control. For
investments below the 20% threshold where inVentiv does not have significant
influence, these are maintained on the cost method. For investment
ownership that is between 20% and 50%, or in cases where a lower ownership
percentage is owned but where we exercise significant influence, we use the
equity method of accounting. For investments where we own greater than 50%
and exercise significant influence over the entities, financial results are
consolidated in our financial statements. Although the financial results of our
international operations are immaterial to the financial statements as a whole,
their existence is an important component of our continued global approach and
marketing strategy with our clients.
Critical
Accounting Policies
The Company’s critical accounting
policies are set forth in its Annual Report on Form 10-K for the year ended
December 31, 2008. There has been no material change, update or
revision to the Company’s critical accounting policies.
Three-Months
Ended September 30, 2009 Compared to Three-Months Ended September 30,
2008
Results
of Operations
The
following sets forth, for the periods indicated, certain components of our
operating earnings, including such data stated as percentage of
revenues:
(in
thousands, except for per share data)
|
For
the Three-Months Ended September 30,
|
|||
2009
|
2008
|
|||
Revenues:
|
Percentage
(1)
|
Percentage(1)
|
||
inVentiv
Clinical
|
$53,773
|
19.9%
|
$55,954
|
19.3%
|
inVentiv
Communications
|
77,633
|
28.7%
|
84,095
|
29.1%
|
inVentiv Commercial
|
104,958
|
38.8%
|
117,300
|
40.6%
|
inVentiv
Patient Outcomes
|
34,102
|
12.6%
|
31,824
|
11.0%
|
Total
revenues
|
270,466
|
100.0%
|
289,173
|
100.0%
|
Cost
of services (1)
(2):
|
||||
inVentiv
Clinical
|
39,284
|
73.1%
|
38,083
|
68.1%
|
inVentiv
Communications
|
42,282
|
54.5%
|
50,267
|
59.8%
|
inVentiv Commercial
|
83,247
|
79.3%
|
95,553
|
81.5%
|
inVentiv
Patient Outcomes
|
19,510
|
57.2%
|
18,173
|
57.1%
|
Total
cost of services
|
184,323
|
68.2%
|
202,076
|
69.9%
|
Selling,
general and administrative expenses(1)
|
||||
inVentiv
Clinical
|
12,473
|
23.2%
|
13,719
|
24.5%
|
inVentiv
Communications
|
22,994
|
29.6%
|
24,547
|
29.2%
|
inVentiv Commercial
|
11,304
|
10.8%
|
10,122
|
8.6%
|
inVentiv
Patient Outcomes
|
7,355
|
21.6%
|
6,857
|
21.6%
|
Other
|
7,462
|
--
|
4,253
|
--
|
Total
selling, general and administrative expenses
|
61,588
|
22.8%
|
59,498
|
20.6%
|
Total
operating income
|
24,555
|
9.0%
|
27,599
|
9.5%
|
Interest
expense
|
(5,775)
|
(2.1)%
|
(6,443)
|
(2.2)%
|
Interest
income
|
15
|
--
|
438
|
0.2%
|
Income
from continuing operations before income tax provision
and
loss from equity investments
|
18,795
|
6.9%
|
21,594
|
7.5%
|
Income
tax provision
|
(6,863)
|
(2.5)%
|
(8,125)
|
(2.8)%
|
Income
from continuing operations before loss from equity
investments
|
11,932
|
4.4%
|
13,469
|
4.7%
|
Loss
from equity investments
|
(73)
|
--
|
(13)
|
--
|
Income
from continuing operations
|
11,859
|
4.4%
|
13,456
|
4.7%
|
Income
from discontinued operations:
|
||||
Gains
on disposals of discontinued operations, net of taxes
|
--
|
--
|
(3)
|
--
|
Income
from discontinued operations
|
--
|
--
|
(3)
|
--
|
Net
income
|
11,859
|
4.4%
|
13,453
|
4.7%
|
Less: Net
income attributable to the noncontrolling interest
|
(136)
|
(0.1%)
|
(130)
|
(0.1%)
|
Net
income attributable to inVentiv Health Inc.
|
$11,723
|
4.3%
|
$13,323
|
4.6%
|
Earnings
per share:
|
||||
Continuing
operations attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.35
|
$0.40
|
||
Diluted
|
$0.35
|
$0.40
|
||
Discontinued
operations attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.00
|
$0.00
|
||
Diluted
|
$0.00
|
$0.00
|
||
Net
earnings attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.35
|
$0.40
|
||
Diluted
|
$0.35
|
$0.40
|
(1) Cost of
services and selling, general and administrative expenses are expressed as a
percentage of segment revenue. All other line items are displayed as
a percentage of total revenues.
(2) Cost of
services includes reimbursed out of pocket expenses.
Revenues:
Revenues decreased by approximately $19 million, or 7%, to $270 million during
the three months ended September 30, 2009, from $289 million during the three
months ended September 30, 2008. Net revenues decreased by
approximately $10 million, or 4%, to $233 million during the three months ended
September 30, 2009, from $243 million in the three months ended September 30,
2008.
inVentiv
Clinical’s revenues were $54 million during the third quarter of 2009, a
decrease of $2 million compared to the third quarter of
2008. inVentiv Clinical revenues accounted for 20% of total inVentiv
revenues during the third quarter of 2009. Revenues in inVentiv
Clinical were lower in 2009 predominantly due to a softening in the demand for
our resourcing services due to the current economic environment.
inVentiv
Communications’ revenues were $78 million during the third quarter of 2009, a
decrease of $6 million, or 7%, from the third quarter of
2008. inVentiv Communications’ revenues accounted for 29% of total
inVentiv revenues during the third quarter of 2009. The main reason
revenues were lower is due to lower pass-throughs. Net client
revenues increased by 2%, primarily from our interactive communications
business.
inVentiv
Commercial’s revenues were $105 million during the third quarter of 2009, a
decrease of 10% from the third quarter of 2008. inVentiv Commercial
revenues accounted for 39% of total inVentiv revenues for the third quarter of
2009. The decrease was largely driven by delays in decision making by
our clients and proposals that did not materialize into new contracts, and was
offset by the launch of our Japan sales teams. Less significantly,
the acquisition of PLS contributed $3 million of revenues during the third
quarter of 2009.
inVentiv
Patient Outcomes’ revenues were $34 million during the third quarter of 2009, up
$2 million from the third quarter of 2008. Revenues from acquisition
growth represented 79% of the increase, with the remainder due to organic growth
from our patient services programs.
Cost of
Services: Cost of services decreased by approximately $18 million or 9%,
to $184 million during the third quarter of 2009 from $202 million in the third
quarter of 2008. Most of this variance is due to the decrease in
revenues, as described above. Cost of services as a
percentage of revenues was 68% and 70% during the third quarter of 2009 and
2008, respectively.
inVentiv
Clinical’s cost of services increased by approximately 3%, to $39 million during
the third quarter of 2009 from $38 million during the third quarter of
2008. Cost of services as a percentage of revenues was 73% and 68%
during the third quarter of 2009 and 2008, respectively. The
increased percentage was primarily due to an increase in our Resource
teams’ headcounts and increased pass-through expenses.
inVentiv
Communications’ cost of services decreased by 16% to $42 million during the
third quarter of 2009 when compared to the third quarter of
2008. Cost of services as a percentage of the segment’s revenues
decreased from 60% during the third quarter of 2008 to 54% during the third
quarter of 2009. The decrease in cost of services and the related
percentage was primarily due to the decrease in pass-through revenues, as
described above.
Cost of
services at inVentiv Commercial decreased by approximately $13 million, or 14%,
to $83 million in the third quarter of 2008, mainly due to the decrease in
revenues. Cost of services was 79% of inVentiv Commercial’s revenues
during the third quarter of 2009 and 82% of revenues during the third quarter of
2008. This decreased percentage of cost of services is primarily due
to lower fuel costs in 2009 compared to 2008 for our applicable contract sales
representative agreements.
inVentiv
Patient Outcomes cost of services increased by approximately $2 million, or 11%,
to $20 million in the third quarter of 2009 from $18 million during the third
quarter of 2008, mainly due to growth in revenues, as described
above.
Selling, General
and Administrative Expenses (“SG&A”): SG&A expenses increased by
approximately $3 million, or 5%, to $62 million during the third quarter of 2009
from $59 million during the third quarter of 2008, mainly due to increase in
medical claims and the inclusion of PMG and PLS, offset by cost reductions at
Clinical and Communications, as more fully highlighted below.
SG&A
expenses at inVentiv Clinical decreased by 14% from the third quarter of 2008 to
the third quarter of 2009 due to lower commissions in our resourcing and
permanent placement groups as a result of the lower revenue.
SG&A
expenses at inVentiv Communications decreased $2 million to $23 million during
the third quarter of 2009 due to lower compensation and professional
fees.
SG&A
expenses at inVentiv Commercial increased by approximately $1 million to $11
million during the third quarter of 2009 from $10 million during the third
quarter of 2008. The majority of this increase was due to the
inclusion of PLS’ results and to costs related to moving facilities in July
2009.
SG&A
expenses at inVentiv Patient Outcomes were consistent at $7 million during the
third quarter of 2009 and 2008.
Other
SG&A was approximately $7 million for the third quarter of 2009, an increase
of $3 million from the third quarter of 2008, which was primarily due to
unfavorable claims experience from our self-insured medical plan as well as an
integration of certain divisional departments into a corporate function in 2009.
Interest
Expense: Interest
expense was approximately $6 million during the third quarter of 2009 and the
third quarter of 2008, mainly due to the consistent period interest on our
Credit Agreement, as more fully explained in Liquidity and Capital
Resources.
Provision for
Income Taxes: The effective tax rate for the third quarter of 2009 was
36.9%, versus an effective tax rate of 37.9% during the third quarter of
2008.
The rate
for the third quarter of 2009 included a tax benefit due to the expiration of
the statute of limitations related to pre-acquisition liabilities of $1.7
million that were recognized in accordance with FASB Statement No. 141(R) (ASC
805) which was adopted as of January 1, 2009 and a tax detriment of $0.2 million
relating to federal tax true-up items. The rate for the third quarter
2008 included approximately $0.5 million ($0.2 million after federal tax
effect) of a tax benefit relating to true-up items and $0.2 million of tax
benefit relating to the utilization of certain foreign net operating
losses. The Company’s current effective tax rate is based on current
projections for earnings in the tax jurisdictions in which inVentiv does
business and is subject to taxation. The Company’s effective tax rate
could fluctuate due to changes in earnings between operating entities and
differences in tax rates in the related tax jurisdictions.
Net Income and
Earnings Per Share (“EPS”): inVentiv’s net income
decreased by approximately $1 million to $12 million during the third quarter of
2009 when compared to the third quarter of 2008. Diluted earnings per
share decreased to $0.35 per share during the third quarter of 2009 from $0.40
per share during the third quarter of 2008. Overall EPS and net income
decreased between quarters because of decreased business, offset by cost
containment, as described above.
Nine-months
Ended September 30, 2009 Compared to Nine-months Ended September 30,
2008
Results
of Operations
The
following sets forth, for the periods indicated, certain components of our
operating earnings, including such data stated as percentage of
revenues:
(in thousands,
except for per share data)
|
For
the Nine-months Ended September 30,
|
|||
2009
|
2008
|
|||
Revenues:
|
Percentage(1)
|
Percentage(1)
|
||
inVentiv
Clinical
|
$158,246
|
19.9%
|
$162,423
|
19.4%
|
inVentiv
Communications
|
223,781
|
28.1%
|
268,069
|
32.1%
|
inVentiv Commercial
|
313,913
|
39.3%
|
314,577
|
37.6%
|
inVentiv
Patient Outcomes
|
101,218
|
12.7%
|
91,467
|
10.9%
|
Total
revenues
|
$797,158
|
100.0%
|
$836,536
|
100.0%
|
Cost
of services (1)(2):
|
||||
inVentiv
Clinical
|
116,285
|
73.5%
|
112,007
|
69.0%
|
inVentiv
Communications
|
122,556
|
54.8%
|
159,628
|
59.6%
|
inVentiv Commercial
|
251,040
|
80.0%
|
253,146
|
80.5%
|
inVentiv
Patient Outcomes
|
57,894
|
57.2%
|
55,303
|
60.5%
|
Total
cost of services
|
547,775
|
68.7%
|
580,084
|
69.3%
|
Selling,
general and administrative expenses
|
||||
inVentiv
Clinical
|
35,044
|
22.1%
|
38,427
|
23.7%
|
inVentiv
Communications
|
68,719
|
30.7%
|
75,968
|
28.3%
|
inVentiv Commercial
|
34,170
|
10.9%
|
32,558
|
10.4%
|
inVentiv
Patient Outcomes
|
22,328
|
22.1%
|
19,676
|
21.5%
|
Other
|
20,398
|
--
|
14,354
|
--
|
Total
Selling, general and administrative expenses
|
180,659
|
22.7%
|
180,983
|
21.7%
|
Total
operating income
|
68,724
|
8.6%
|
75,469
|
9.0%
|
Interest
expense
|
(17,322)
|
(2.1)%
|
(19,134)
|
(2.3)%
|
Interest
income
|
130
|
--
|
1,684
|
0.2%
|
Income
from continuing operations before income tax provision,
minority
interest in income of subsidiary and loss from equity
investments
|
51,532
|
6.5%
|
58,019
|
6.9%
|
Income
tax provision
|
(20,403)
|
(2.6)%
|
(22,518)
|
(2.7)%
|
Income
from continuing operations before loss from equity
investments
|
31,129
|
3.9%
|
35,501
|
4.2%
|
Loss
from equity investments
|
(65)
|
--
|
(47)
|
--
|
Income
from continuing operations
|
31,064
|
3.9%
|
35,454
|
4.2%
|
Income
from discontinued operations:
|
||||
Gains
on disposals of discontinued operations, net of taxes
|
--
|
--
|
104
|
--
|
Income
from discontinued operations
|
--
|
--
|
104
|
--
|
Net
income
|
31,064
|
3.9%
|
35,558
|
4.2%
|
Less: Net
income attributable to the noncontrolling interest
|
(140)
|
--
|
(1,022)
|
(0.1)%
|
Net
income attributable to inVentiv Health Inc.
|
$30,924
|
3.9%
|
$34,536
|
4.1%
|
Earnings
per share:
|
||||
Continuing
operations attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.92
|
$1.04
|
||
Diluted
|
$0.92
|
$1.03
|
||
Discontinued
operations attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.00
|
$0.01
|
||
Diluted
|
$0.00
|
$0.00
|
||
Net
earnings attributable to inVentiv Health Inc.:
|
||||
Basic
|
$0.92
|
$1.05
|
||
Diluted
|
$0.92
|
$1.03
|
||
(1) Cost of
services and selling, general and administrative expenses are expressed as a
percentage of segment revenue. All other line items are displayed as
a percentage of total revenues.
(2) Cost of
services includes reimbursed out of pocket expenses.
Revenues:
Revenues decreased by approximately $40 million, or 5%, to $797 million during
the nine-months ended September 30, 2009, from $837 million during the
nine-months ended September 30, 2008. Net revenues decreased by
approximately $15 million, or 2%, to $689 million during the nine-months ended
September 30, 2009, from $704 million during the nine-months ended September 30,
2008.
inVentiv
Clinical’s revenues were $158 million during the nine months ended September 30,
2009, a decrease of $4 million compared to $162 million during the nine months
ended September 30, 2008. inVentiv Clinical revenues
accounted for 20% of total inVentiv revenues during the nine months ended
September 30, 2009. Revenues in inVentiv Clinical were lower in 2009
predominantly due to a softening in the demand for our resourcing services due
to the current economic environment.
inVentiv
Communications’ revenues were $224 million during the nine months ended
September 30, 2009, a decrease of $44 million, or 16%, from the nine months
ended September 30, 2008. inVentiv Communications’ revenues accounted
for 28% of total inVentiv revenues during the nine months ended September 30,
2009. The majority of this decrease is due to lower pass-through
revenues as a result of our clients focus on advertising services that are
efficient in delivering the message to their customers. The remaining
decrease relates to a softening in the demand for our marketing services due to
the current economic environment.
Revenues
in our inVentiv Commercial segment were $314 million during the nine months
ended September 30, 2009, a decrease of $1 million from the nine months ended
September 30, 2008. The decrease in revenues was due to
delays in decision making by our clients and proposals that did not materialize
into new contracts, which was offset by the launch of our Japan sales teams..
Finally, the acquisition of PLS contributed $10 million of revenues during
2009.
inVentiv
Patient Outcomes’ revenues were $101 million during the nine months ended
September 30, 2009, up $10 million from the nine months ended September 30,
2008. Revenues from acquisition growth represented 94% of the
increase, with the remainder due to organic growth from our patient services
programs.
Cost of
Services: Cost of services decreased by approximately $32 million or 6%,
to $548 million for the nine months ended September 30, 2009 from $580 million
in the nine months ended September 30, 2008. Cost of services as a percentage of
revenues stayed consistent at 69% for the nine months ended September 30, 2009
and 2008.
inVentiv
Clinical’s cost of services increased by approximately $4 million, or 4%, to
$116 million during the nine months ended September 30, 2009 from $112 million
during the nine months ended September 30, 2008. Cost of services as
a percentage of revenues was 73% and 69% during the nine months ended September
30, 2009 and 2008, respectively. The increased percentage was
primarily due to an increase in our Resource teams’ headcounts and
increased pass-through expenses.
inVentiv
Communications’ cost of services decreased by approximately $37 million, or 23%,
to $123 million during the nine months ended September 30, 2009 from $160
million during the nine months ended September 30, 2008. Cost of
services as a percentage of the segment’s revenues decreased from 60% during the
nine months ended September 30, 2008 to 55% during the nine months ended
September 30, 2009. The decrease in cost of services and the related
percentage was primarily due to the decrease in pass-through revenues, as
described above.
Cost of
services at inVentiv Commercial decreased by approximately 1% during the nine
months ended September 30, 2009 from the nine months ended September 30,
2008. Cost of services, in comparison to revenues described above and
at 80% of revenues, remained consistent during these respective
periods.
inVentiv
Patient Outcomes’ cost of services increased by approximately $3 million, or 5%,
to $58 million during the nine months ended September 30, 2009 from $55 million
during the nine months ended September 30, 2008. The increase was primarily due
to the growth in revenue, as described above.
SG&A:
SG&A expenses stayed consistent at $181 million for the nine months ended
September 30, 2009 and 2008, respectively. Unfavorable medical claims
experience and the inclusion of PMG and PLS were offset by cost reductions at
Clinical and Communications, as more fully highlighted below.
SG&A
expenses at inVentiv Clinical decreased by approximately 8% for the nine months
ended September 30, 2008 to the nine months ended September 30, 2009 due to lower commissions
in our resourcing and permanent placement groups as a result of the lower
revenue.
SG&A
expenses at inVentiv Communications decreased $7 million to $69 million during
the nine months ended September 30, 2009, primarily due to lower compensation,
professional fees and travel and entertainment expenses.
SG&A
expenses at inVentiv Commercial increased by approximately $1 million to $34
million during the nine months ended September 30, 2009 from the nine months
ended September 30, 2008. This increase was primarily due to the
inclusion of PLS results and to costs related to moving facilities in July
2009.
SG&A
expenses at inVentiv Patient Outcomes increased by $2 million to $22 million
during the nine months ended September 30, 2009, mainly due to the acquisition
of PMG.
Other
SG&A increased by approximately 43% to $20 million from the nine months
ended September 30, 2008 to the same period in 2009. The increase was
mainly related to unfavorable claims experience from our self-insured medical
plan as well as an integration of certain divisional departments into a
corporate function in 2009.
Interest
Expense: Interest
expense was approximately $17 million and $19 million for the nine months ended
September 30, 2009 and September 30, 2008, respectively. This
decrease was mainly
due to the interest savings from a lower principal balance on our Credit
Agreement, as more fully explained in Liquidity and Capital Resources,
and lower capitalized interest on the fleet vehicles from our inVentiv
Commercial segment.
Provision for
Income Taxes: The
effective tax rate for the nine-month period ended September 30, 2009 was 39.8%,
versus an effective tax rate of 39.6% for the nine months ended September 30,
2008.
For the
nine months ended September 30, 2009, the rate included a tax benefit due to the
expiration of the statute of limitations related to pre-acquisition liabilities
of $1.7 million that were recognized in accordance with FASB Statement No.
141(R) (ASC 805) which was adopted as of January 1, 2009, a tax benefit of $0.3
million relating to state net operating losses, a tax detriment of $0.2 million
relating to permanent item and foreign tax credit true-ups. For the
nine months ended September 30, 2008, the rate included a tax benefit relating
to state taxes settled of approximately $0.3 million ($0.2 million after federal
tax effect), a tax detriment relating to interest on unrecognized tax benefits
of approximately $0.1 million, $0.4 million of tax benefits relating to federal
tax true-up items and $0.1 million of tax benefit relating to utilization of
certain foreign net operating. The Company’s current effective tax rate is based
on current projections for earnings in the tax jurisdictions in which inVentiv
does business and is subject to taxation. The Company’s effective tax
rate could fluctuate due to changes in earnings between operating entities and
differences in tax rates in the related tax jurisdictions.
Net Income and
EPS: inVentiv’s
net income decreased by approximately $4 million to $31 million during the nine
months ended September 30, 2009 when compared to the same period in
2008. Diluted earnings per share decreased to $0.92 per share during
the nine months ended September 30, 2009 from $1.03 per share during the nine
months ended September 30, 2008. Overall EPS and net income decreased
between the periods because of lower revenues and related operating income, and
increased medical claims, as described above.
Liquidity
and Capital Resources
At
September 30, 2009, inVentiv had $102 million of unrestricted cash and
equivalents, an increase of $12 million from December 31, 2008.
Cash
provided by operations was $78 million during the nine-months ended September
30, 2009, while cash provided by operations was $71 million in the nine-months
ended September 30, 2008. This increase primarily resulted from
landlord reimbursements from the relocation of our Corporate facility in New
Jersey during the third quarter of 2009.
Cash used
in investing activities was $53 million for the nine-months ended September 30,
2009 compared to $22 million used during the same period in
2008. During the nine months ended September 30, 2009 and 2008, the
Company paid approximately $39 million and $40 million of cash, respectively,
relating to the PMG and PLS acquisitions, earnout contingency payments and
post-closing adjustments from previous acquisitions. During the nine
months ended September 30, 2009 and 2008, the Company also received proceeds of
$8 million and $28 million, respectively, from our investment in the Columbia
Strategic Cash Portfolio (“CSCP”). Finally, we acquired $22 million
of property and equipment during the nine months ended September 30, 2009 versus
$14 million during the nine months ended September 30, 2008. The
majority of the difference relates to acquiring new property and equipment for
our Corporate facility in New Jersey, as noted above.
Cash used
in financing activities was $14 million for the nine-months ended September 30,
2009, compared to $13 million for the nine-months ended September 30,
2008. The difference primarily relates to the decrease in the
Company’s stock price for these comparative periods, which has resulted in
significantly less exercises of stock options as well as tax expense for the
nine months ended September 30, 2009 as opposed to excess tax benefits for the
nine months ended September 30, 2008 from stock-based compensation.
Our
principal external source of liquidity is our syndicated, secured credit
agreement, which we entered into with UBS AG, and others in connection with the
inVentiv Communications, Inc. acquisition. On July 6, 2007, we
amended this credit facility and in connection therewith entered into an Amended
and Restated Credit Agreement with UBS AG and the other lenders party to the
credit facility. The key features of the Amended and Restated Credit
Agreement are as follows:
-
A $330 million term loan facility was made available to inVentiv in a single drawing, which was used to
-
refinance the existing October 2005 credit facility, which had a remaining balance of $164 million, and
-
fund the acquisitions of CCA and AWAC and pay the fees associated with the new credit facility, with the balance retained by inVentiv as working capital.
-
The credit agreement also included up to $20 million in additional term loans (“delayed draw term loans”) that was to be advanced no later than January 6, 2008. The Company elected not to draw additional amounts under the agreement. The credit agreement also contains a $50 million revolving credit facility, of which $10 million is available for the issuance of letters of credit, and a swingline facility. The term loan will mature on the seventh anniversary of the credit agreement, with scheduled amortization of 1% per year during years one through six and 94% during year seven. The revolving loans will mature on the sixth anniversary of the credit agreement.
-
Amounts advanced under the credit agreement must be prepaid with a percentage, determined based on a leverage test set forth in the credit agreement, of Excess Cash Flow (as defined in the credit agreement) and the proceeds of certain non-ordinary course asset sales and certain issuances of debt obligations and 50% of certain issuances of equity securities of inVentiv and its subsidiaries, subject to certain exceptions. We may elect to prepay the loans, in whole or in part at any time, in certain minimum principal amounts, without penalty or premium (other than normal LIBOR break funding costs). Amounts borrowed under the credit agreement in respect of term loans (including delayed draw term loans) that are repaid or prepaid may not be reborrowed. Amounts borrowed under the credit agreement in respect of revolving loans may be paid or prepaid and reborrowed.
-
Interest on the loans accrue, at our election, at either (1) the Alternate Base Rate (which is the greater of UBS’s prime rate and federal funds effective rate plus 1/2 of 1%) or (2) the Adjusted LIBOR Rate, with interest periods determined at our option of 1, 2, 3 or 6 months (or, if the affected lenders agree, 9 months), in each case plus a spread based on the type of loan and method of interest rate determination elected.
-
The credit agreement contains, among other things, conditions precedent, representations and warranties, covenants and events of default customary for facilities of this type. Such covenants include certain limitations on indebtedness, liens, sale-leaseback transactions, guarantees, fundamental changes, dividends and transactions with affiliates. The credit agreement also includes a financial covenant under which inVentiv is required to maintain a total leverage ratio that does not exceed, as of the last day of any four consecutive fiscal quarters, 4.0 to 1.0 through December 31, 2009 and 3.5 to 1.0 thereafter. Our leverage ratio was 2.5 to 1.0 as of September 30, 2009, which is in compliance with the financial covenant.
Effective September 6, 2007, we entered
into a five-year swap arrangement for $165 million, in which the notional amount
increased to $325 million upon the expiration of our 2005 swap arrangement in
December 2008, to hedge against our credit exposure under the Amended and
Restated Credit Agreement. The swap arrangement is explained in more
detail in Part I, Item 3 below.
We
believe that our cash and equivalents, cash to be provided by operations and
available credit under our credit facility will be sufficient to fund our
current operating requirements over the next 12 months. However, we
cannot assure you that these sources of liquidity will be sufficient to fund all
internal growth initiatives, investments and acquisition activities that we may
wish to pursue. If we pursue significant internal growth initiatives or if we
wish to acquire additional businesses in transactions that include cash payments
as part of the purchase price, we may pursue additional debt or equity sources
to finance such transactions and activities, depending on market
conditions. The acquisition agreements entered into in connection
with our 2007 and 2008 acquisitions include earn-out provisions pursuant to
which the sellers will become entitled to additional consideration, which may be
material, if the acquired businesses achieve specified performance
measurements. See Note 4 to our condensed consolidated financial
statements included in Part I, Item 1 of this Form 10-Q.
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk
Long-Term
Debt Exposure
At
September 30, 2009, the Company had $323 million debt outstanding under its
secured term loan as described under “Liquidity and Capital Resources” in Item 2
above. The Company will incur variable interest expense with respect
to our outstanding loan. This interest rate risk may be partially
offset by our derivative financial instrument, as described
below. Based on our debt obligation outstanding at September 30,
2009, a hypothetical increase or decrease of 10% of our variable interest rate
would have an immaterial effect on interest expense due to the fixed rate
associated with our derivative financial instruments.
Derivative
Financial Instrument
On
September 6, 2007, we entered into a new amortizing five-year interest rate swap
arrangement with a notional amount of $165 million at hedge inception, with an
accretive notional amount that increased to $325 million effective December 31,
2008 (concurrently with the expiration of our original 2005 three-year interest
rate swap arrangement) to hedge the total outstanding debt notional
amount. This hedge relationship was designated as a cash flow
hedge. At hedge inception, we employed the dollar offset method by
performing a sensitivity analysis to assess effectiveness and utilized the
hypothetical derivative method under DIG Issue G7 (ASC 815) to measure
ineffectiveness. The hypothetical derivative contains the same terms
and conditions as the debt agreement. The fair value of the
derivative, net of credit value adjustment, was approximately $26.9 million and
$30.8 million as of September 30, 2009 and December 31, 2008, respectively, and
was recorded in other non-current liabilities. As a result of the
hypothetical derivative method, there was no ineffectiveness for the period
ended September 30, 2009, and accordingly, $3.9 million ($2.5 million, net of
taxes) was recorded as an increase to Other Comprehensive Income and a decrease
to other non-current liabilities on our Condensed Consolidated Balance
Sheet.
Foreign
Currency Exchange Rate Exposure
The
Company is not currently affected by foreign currency exchange rate exposure,
except for any fluctuations in the foreign bank accounts remaining from the
divestitures of our European business units, from continuing operations of
our UK, France and Canadian subsidiaries and equity investments and minority
interests in our foreign business units, which are not material to its
consolidated financial statements. Our treatment of foreign
subsidiaries is consistent with the guidelines set forth in SFAS 52 (ASC 830),
Foreign Currency
Translations. The financial statements of our
subsidiaries expressed in foreign currencies are translated from the respective
functional currencies to U.S. Dollars, with results of operations and cash flows
translated at average exchange rates during the period, and assets and
liabilities translated at end of the period exchange rates. At
September 30, 2009, the accumulated other comprehensive losses related to
foreign currency translations was approximately $1.5 million. Foreign
currency transaction gains and (losses) are included in the results of
operations and are not material.
ITEM 4. Controls and
Procedures
Based on
their evaluation as of September 30, 2009, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) were effective as of September 30,
2009 to provide reasonable assurance that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized, and reported
within the time periods specified by the SEC, and that material information
relating to the Company and its consolidated subsidiaries is made known to
management, including the Chief Executive Officer and Chief Financial Officer,
particularly during the period when our periodic reports are being
prepared. There were no changes in our internal controls over
financial reporting during the quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
Our
management, including the Chief Executive Officer and Chief Financial Officer,
does not expect that our Disclosure Controls or our internal control over
financial reporting will prevent or detect all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met. The
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
PART
II. OTHER INFORMATION
ITEM 1. Legal
Proceedings
We are
subject to lawsuits, investigations and claims arising out of the conduct of our
business, including those related to commercial transactions, contracts,
government regulation and employment matters. Certain such claims
have been filed or are pending against us. All such matters are of a
kind routinely experienced in our business and are consistent with our
historical experience. We do not believe that any such routine action
will have a material adverse effect on us.
ITEM 1A. Risk Factors
There
have been no material changes in the risk factors discussed in Item 1A of our
Form 10-K for the year ended December 31, 2008 except as set forth in Part II,
Item 1A of our Form 10-Q for the three and six months ended June 30,
2009.
ITEM 5. Other
Information
On November 5, 2009, Terrell Herring,
our President and Chief Operating Officer, entered into a separation agreement
with us pursuant to which he will resign from his position effective December
30, 2009. Under the terms of the separation agreement, Mr. Herring
will receive a $750,000 payment in consideration for extending his
non-competition covenant from one year to two years and providing us with
transition services until May 1, 2010 in connection with client retention and
business development matters. Mr. Herring will not be entitled to any
other post-termination payments or benefits whatsoever under the separation
agreement or his existing employment agreement, and all vesting under his equity
award agreements will terminate as of December 30, 2009. Mr. Herring
has agreed to remain on inVentiv's Board of Directors until our 2010 annual
meeting of stockholders without compensation.
Mr. Herring joined inVentiv in November
1999 and has provided leadership to the organization in various roles, including
as President and Chief Executive Officer, inVentiv Commercial from October 2005
until his promotion to President in September 2008. He also has
played a critical role in guiding the organization to become more integrated and
operationally efficient. We believe that the services to be provided by Mr.
Herring pursuant to the separation agreement, and his extended non-competition
covenant, are of critical importance to inVentiv in maintaining our customer
base and goodwill.
ITEM 6. Exhibits
10.1
|
Separation
Agreement dated as of November 5, 2009 between the registrant and Terrell
Herring
|
|
31.1
|
Certification
by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
|
Chief
Executive Officer’s Certification of Financial Statements Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
32.2
|
|
Chief
Financial Officer’s Certification of Financial Statements Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
SIGNATURES
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.
INVENTIV
HEALTH, INC.
Date:
November 6,
2009 By: /s/David S.
Bassin
David S. Bassin
Chief Financial Officer and
Secretary
(Principal financial officer and
principal accounting officer)