Attached files
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| EX-31.1 - CEO CERTIFICATION SECTION 302 - INVENTIV HEALTH INC | ceocertificationsection302.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-31.2 - CFO CERTIFICATION SECTION 302 - INVENTIV HEALTH INC | cfocertificationsection302.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 March 31, 2010
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) (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company. See definitions of "large accelerated filer”, “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X ]
Non-accelerated filer [_] Smaller Reporting Company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
As of April 28, 2010, there were 33,890,968 outstanding shares of the registrant's common stock.
INVENTIV HEALTH, INC.
INDEX TO QUARTERLY REPORT ON
FORM 10-Q
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PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
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and December 31, 2009 (unaudited)
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ended March 31, 2010 and 2009 (unaudited)
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ended March 31, 2010 and 2009 (unaudited)
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Results of Operations
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PART II. OTHER INFORMATION
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SIGNATURES
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EXHIBITS
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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:
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our business strategy, outlook, objectives, plans, intentions and goals;
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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;
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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;
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our expectations regarding our pursuit of additional debt or equity sources to finance our internal growth initiatives or acquisitions;
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our estimates regarding our future earnout obligations from completed acquisitions;
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our belief that there are ample opportunities for cross-selling to our existing clients;
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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;
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our expectations regarding the impact of our acquisitions, joint ventures and partnerships;
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our expectations regarding the impact of the adoption of certain accounting standards; and
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our expectations regarding the potential impact of pending litigation.
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:
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the potential impact of a recessionary environment on our customers and business;
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our ability to sufficiently increase our revenues and maintain or decrease expenses and cash capital expenditures to permit us to fund our operations;
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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;
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the impact of any default by any of our credit providers or swap counterparties;
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our ability to accurately forecast costs to be incurred in providing services under fixed price contracts;
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our ability to accurately forecast insurance claims within our self-insured programs;
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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;
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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;
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potential disruptions and switching costs related to vendors’ relationships;
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the possibility that customer agreements will be terminated or not renewed;
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our ability to grow our existing client relationships, obtain new clients and cross-sell our services;
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our ability to successfully operate new lines of business;
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our ability to manage our infrastructure and resources to support our growth;
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our ability to successfully identify new businesses to acquire, conclude acquisition negotiations and integrate the acquired businesses into our operations;
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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;
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the potential impact of government regulation on us and on our clients base;
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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;
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our ability to recruit, motivate and retain qualified personnel, including sales representatives and clinical staff;
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our ability to maintain technological advantages in a variety of functional areas, including sales force automation, electronic claims surveillance and patient compliance;
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the actual impact of the adoption of certain accounting standards;
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the actual outcome of pending litigation;
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any potential impairment of intangible assets;
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consolidation in the pharmaceutical industry; and
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changes in trends in the pharmaceutical industry or in pharmaceutical outsourcing.
Investors should carefully consider these risk factors and the matters discussed under Item 1A, Risk Factors, of our Form 10-K for the year ended December 31, 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.
(in thousands, except share and per share amounts)
(unaudited)
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March 31,
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December 31,
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2010
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2009
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ASSETS
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Current assets:
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Cash and equivalents
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$ | 83,533 | $ | 132,818 | ||||
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Restricted cash and marketable securities
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1,503 | 2,539 | ||||||
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Accounts receivable, net of allowances for doubtful accounts of $4,832 and $5,254 at
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March 31, 2010 and December 31, 2009, respectively
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162,066 | 160,012 | ||||||
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Unbilled services
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92,430 | 76,502 | ||||||
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Prepaid expenses and other current assets
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16,572 | 12,676 | ||||||
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Current tax assets
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5,746 | 4,408 | ||||||
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Current deferred tax assets
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13,092 | 12,881 | ||||||
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Total current assets
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374,942 | 401,836 | ||||||
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Property and equipment, net
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66,106 | 65,243 | ||||||
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Equity investments
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1,802 | 1,873 | ||||||
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Goodwill
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267,486 | 262,528 | ||||||
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Other intangibles, net
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216,718 | 218,283 | ||||||
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Non-current deferred tax assets
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55,250 | 58,920 | ||||||
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Deposits and other assets
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18,968 | 21,280 | ||||||
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Total assets
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$ | 1,001,272 | $ | 1,029,963 | ||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Current portion of capital lease obligations
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$ | 9,501 | $ | 9,293 | ||||
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Current portion of long-term debt
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3,101 | 3,455 | ||||||
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Accrued payroll, accounts payable and accrued expenses
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109,142 | 129,471 | ||||||
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Client advances and unearned revenue
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66,480 | 65,437 | ||||||
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Total current liabilities
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188,224 | 207,656 | ||||||
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Capital lease obligations, net of current portion
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14,189 | 14,080 | ||||||
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Long-term debt
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297,831 | 318,450 | ||||||
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Non-current income tax liabilities
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5,779 | 5,758 | ||||||
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Other non-current liabilities
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54,632 | 54,766 | ||||||
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Total liabilities
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560,655 | 600,710 | ||||||
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Commitments and Contingencies (Note 14)
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Equity:
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inVentiv Health, Inc. stockholders’ equity:
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Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued and outstanding at
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March 31, 2010 and December 31, 2009, respectively
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-- | -- | ||||||
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Common stock, $.001 par value, 50,000,000 shares authorized; 33,872,655 and 33,630,886
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Shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively
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34 | 34 | ||||||
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Additional paid-in-capital
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406,138 | 404,763 | ||||||
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Accumulated other comprehensive loss
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(16,447 | ) | (16,203 | ) | ||||
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Accumulated earnings
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50,812 | 40,661 | ||||||
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Total inVentiv Health, Inc. stockholders’ equity
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440,537 | 429,255 | ||||||
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Noncontrolling interest
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80 | (2 | ) | |||||
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Total equity
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440,617 | 429,253 | ||||||
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Total liabilities and equity
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$ | 1,001,272 | $ | 1,029,963 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
(in thousands, except per share amounts)
(unaudited)
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For the Three-Months Ended March 31,
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2010
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2009
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Net revenues
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$ | 229,611 | $ | 220,984 | ||||
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Reimbursable out-of-pockets
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39,750 | 36,668 | ||||||
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Total revenues
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269,361 | 257,652 | ||||||
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Operating expenses:
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Cost of services
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142,515 | 144,486 | ||||||
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Reimbursed out-of-pocket expenses
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41,648 | 36,690 | ||||||
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Selling, general and administrative expenses
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63,401 | 57,154 | ||||||
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Total operating expenses
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247,564 | 238,330 | ||||||
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Operating income
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21,797 | 19,322 | ||||||
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Interest expense
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(7,553 | ) | (5,774 | ) | ||||
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Interest income
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44 | 65 | ||||||
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Income from operations before income tax provision and (loss) income from equity investments
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14,288 | 13,613 | ||||||
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Income tax provision
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(3,856 | ) | (5,772 | ) | ||||
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Income from operations before (loss) income from equity investments
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10,432 | 7,841 | ||||||
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(Loss) income from equity investments
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(85 | ) | 17 | |||||
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Net income
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10,347 | 7,858 | ||||||
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Less: Net (income) loss attributable to the noncontrolling
interest
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(196 | ) | 51 | |||||
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Net income attributable to inVentiv Health, Inc.
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$ | 10,151 | $ | 7,909 | ||||
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Earnings per share (see Note 7):
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Net income attributable to inVentiv Health, Inc.:
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Basic
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$ | 0.30 | $ | 0.24 | ||||
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Diluted
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$ | 0.30 | $ | 0.24 | ||||
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Weighted average common shares outstanding:
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Basic
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33,770 | 33,351 | ||||||
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Diluted
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34,099 | 33,460 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
(in thousands)
(unaudited)
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For the Three-Months Ended
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March 31,
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2010
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2009
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Cash flows from operating activities:
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Net Income
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10,347 | 7,858 | ||||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation
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5,716 | 5,360 | ||||||
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Amortization
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3,165 | 3,154 | ||||||
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Tradename writeoff
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-- | 117 | ||||||
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Loss (income) from equity investments
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85 | (17 | ) | |||||
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Partial termination of derivative financial instrument
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1,741 | -- | ||||||
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Deferred taxes
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3,459 | 2,639 | ||||||
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Gains on marketable securities
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(216 | ) | (1,682 | ) | ||||
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Stock-based compensation expense
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2,175 | 2,561 | ||||||
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Tax benefit from stock option exercises and vesting of restricted shares
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1,742 | 594 | ||||||
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Changes in assets and liabilities, net of effects from discontinued operations:
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Accounts receivable, net
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846 | 8,571 | ||||||
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Unbilled services
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(15,801 | ) | 7,561 | |||||
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Prepaid expenses and other current assets
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(3,896 | ) | 5,074 | |||||
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Accrued payroll, accounts payable and accrued expenses
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(4,246 | ) | (12,519 | ) | ||||
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Net tax liabilities
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(3,702 | ) | 35 | |||||
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Client advances and unearned revenue
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151 | (4,539 | ) | |||||
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Excess tax benefits from stock based compensation
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-- | 1,137 | ||||||
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Other
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3,796 | (3,967 | ) | |||||
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Net cash provided by continuing operations
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5,362 | 21,937 | ||||||
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Net cash used in discontinued operations
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-- | (613 | ) | |||||
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Net cash provided by operating activities
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5,362 | 21,324 | ||||||
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Cash flows from investing activities:
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Restricted cash balances and sales of marketable securities
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1,252 | 4,924 | ||||||
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Investment in cash value of life insurance policies
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(1,234 | ) | 1,865 | |||||
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Cash paid for acquisitions, net of cash acquired
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(2,136 | ) | (517 | ) | ||||
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Acquisition earn-out payments
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(23,000 | ) | (16,792 | ) | ||||
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Equity investments
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(14 | ) | 12 | |||||
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Purchases of property and equipment
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(3,099 | ) | (4,727 | ) | ||||
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Proceeds from manufacturers rebates on leased vehicles
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-- | 434 | ||||||
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Net cash used in continuing operations
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(28,231 | ) | (14,801 | ) | ||||
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Net cash provided by discontinued operations
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-- | 613 | ||||||
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Net cash used in investing activities
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(28,231 | ) | (14,188 | ) | ||||
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Cash flows from financing activities:
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Repayments on long-term debt
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(20,973 | ) | 42 | |||||
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Borrowings under line of credit
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-- | (948 | ) | |||||
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Repayments on capital lease obligations
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(2,828 | ) | (4,272 | ) | ||||
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Cash paid for unwinding of an interest rate swap on debt
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(1,741 | ) | -- | |||||
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Withholding shares for taxes
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(1,335 | ) | (506 | ) | ||||
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Proceeds from exercise of stock options
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1,113 | 13 | ||||||
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Excess tax benefits from stock-based compensation
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-- | (1,137 | ) | |||||
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Distributions to noncontrolling interests in affiliated partnership
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(114 | ) | (257 | ) | ||||
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Net cash used in financing activities
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(25,878 | ) | (7,065 | ) | ||||
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Effect of exchange rate changes
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(538 | ) | (355 | ) | ||||
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Net change in cash and equivalents
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(49,285 | ) | (284 | ) | ||||
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Cash and equivalents, beginning of period
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132,818 | 90,463 | ||||||
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Cash and equivalents, end of period
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$ | 83,533 | $ | 90,179 | ||||
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Supplemental disclosures of cash flow information:
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Cash paid for interest
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$ | 7,328 | $ | 5,632 | ||||
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Cash paid for income taxes
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$ | 2,648 | $ | 2,580 | ||||
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Supplemental disclosures of non-cash activities:
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Vehicles acquired through capital lease agreements
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$ | 4,401 | $ | 3,279 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
INVENTIV HEALTH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
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 and third party administrators.
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
Certain balances in segment reporting have been reclassified to conform to the current segment reporting structure. In the first quarter of 2010, the Company realigned The Therapeutics Institute (“TTI”) from inVentiv Patient Outcomes to inVentiv Commercial Services. This realignment is reflected in the Company’s condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009, the condensed consolidated income statements of the Company for the three months ended March 31, 2010 and 2009 and the condensed consolidated cash flows for the three months ended March 31, 2010 and 2009. See Note 19, Segment Information, for further details.
The Company currently serves its clients primarily through four business segments, which correspond to its reporting segments for 2010:
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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 full service late-stage clinical development, Risk Evaluation and Mitigation Strategy ("REMS") and outsourced functional services and CRO services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (“Smith Hanley”), inVentiv Clinical Solutions (“iCS”) and Paragon Rx (“Paragon”), which was acquired in December 2009;
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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”);
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inVentiv Commercial, which consists of our sales teams, sales support services, market research, commercial analytics, healthcare strategies, clinical educator teams, managed markets access, biotech/specialty managed markets, and integrated commercialization. This segment includes Advance Insights and inVentiv Selling Solutions; and
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inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), AWAC and Patient Marketing Group, LLC (“PMG”).
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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.
Subsequent Event. On May 6, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Papillon Holdings, Inc. (“Parent”) and Papillon Acquisition, Inc. (“Merger Sub”), each of which is an affiliate of Thomas H. Lee Partners, L.P., providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Certain terms of the Merger Agreement and the Merger are summarized in, and the Merger Agreement has been filed as an exhibit to, the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2010. Refer to Note 11 for terms and conditions of a change of control under the Company’s Amended and Restated Credit Agreement.
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 March 31, 2010 and December 31, 2009, the condensed consolidated income statements of the Company for the three-months ended March 31, 2010 and 2009 and the condensed consolidated cash flows for the three-months ended March 31, 2010 and 2009. Operating results for the three-months ended March 31, 2010 are not indicative of the results that may be expected for the year ending December 31, 2010.
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, 2009 as filed with the Securities and Exchange Commission on February 24, 2010.
Our operations consist primarily of four business segments: inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes The condensed 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. 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. In December 2009 the Company increased its investment interest from 85% to 100%. The Company accounted for Liedler as an equity investment until the 2007 acquisition date, and then included its results in our consolidated results thereafter. Intercompany transactions have been eliminated in consolidation.
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 February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-09, which provided an update to Accounting Standards Codification (“ASC”) 855. ASU 2010-09 removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The Company adopted this ASU as of March 31, 2010.
In January 2010, the FASB issued ASU 2010-06, which provided an update to ASC 820. ASU 2010-06 requires new disclosures of transfers into and out of Level 1 and Level 2 of the fair value hierarchy as well as the activity of purchases, sales, issuances and settlements of Level 3 measurements. The ASU 2010-06 update did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In October 2009, the FASB issued ASU 2009-13, which provided an update to ASC 605. ASU 2009-13 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.
4. Acquisitions:
Acquisitions are accounted for using purchase accounting, including the guidance of ASC 805 for all acquisitions prior to 2009 and the updated guidance the FASB issued relating to ASC 805 for acquisitions after January 1, 2009. The financial results of the acquired businesses are included in the Company’s financial statements from their acquisition dates. Earnout payments from acquisitions prior to 2009 are generally accrued at the end of an earnout period in conjunction with the preparation of the Company’s financial statements when the acquired company’s results are reviewed, as more fully described below. The present value of earnout payments from acquisitions after January 1, 2009 is estimated and recorded as of the acquisition date, as required by the updated guidance of ASC 805. 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 for the 2009 and 2010 acquisitions noted below as they were not material to the consolidated operations of the Company prior to the dates they were acquired and began to be consolidated into the Company.
The following acquisitions were consummated during 2010 and 2009:
iCS Chicago – In February 2010, the Company completed the acquisition of the net assets of Essential Group, Inc. (“Essential” or “iCS Chicago”) for approximately $3.1 million and $1.0 million of assumed liabilities, including post-closing adjustments yet to be finalized. Essential is a growing clinical research organization that has been folded under the inVentiv Clinical brand as iCS Chicago. The Company acquired iCS Chicago to expand the depth of its clinical operations offering with associates who bring trial monitoring and project management experience in a variety of therapeutic areas.
Paragon – In December 2009, the Company completed the acquisition of the net assets of Paragon for approximately $5.9 million in upfront cash and stock consideration. As required by the updated guidance of ASC 805, effective January 1, 2009, the Company recorded an additional $4.1 million in earnout consideration based on Paragon’s estimated performance measurements during 2010 through 2012. The Company remeasured the fair value of the liability as of March 31, 2010 and no adjustment was made to the liability. The $4.1 million is included on the March 31, 2010 and December 31, 2009 condensed consolidated balance sheets as part of other non-current liabilities. Paragon is headquartered in Delaware and is a leading provider in designing and implementing REMS. The Company acquired Paragon to strengthen its REMS capabilities, to complement its broad array of risk communications and REMS implementation services and to expand the breadth of inVentiv Clinical’s scope of safety science offerings.
The following table summarizes the purchase price for 2009 and 2010 acquisitions:
|
(in thousands)
|
Paragon
|
iCS Chicago
|
2009 and 2010 Total
|
|
Fair Value of the Net Assets (Liabilities) Acquired
|
$277
|
$(950)
|
$(673)
|
|
Customer Relationships
|
3,100
|
1,600
|
4,700
|
|
Technology
|
1,000
|
--
|
1,000
|
|
Tradename subject to amortization
|
250
|
--
|
250
|
|
Goodwill, excluding contingent consideration (tax deductible)
|
1,248
|
2,468
|
3,716
|
|
Total purchase price, before contingent consideration
|
5,875
|
3,118
|
8,993
|
|
Contingent consideration estimate at acquisition date
|
4,100
|
--
|
4,100
|
|
Total purchase price, including estimate of contingent consideration
|
$9,975
|
$3,118
|
$13,093
|
The $4.1 million of contingent consideration, as described above, is based on Paragon’s estimated performance measurements during 2010 through 2012 and represents the present value of the expected payments during these respective periods, using a discounted cash flow analysis. As described above, the Company remeasured the fair value of the liability as of March 31, 2010 and no adjustment was made to the liability.
The following acquisitions consummated prior to 2009 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)
|
(1) Under certain circumstances a portion of the earnout amount will be deferred and become payable based on the financial results of CCA for the period July 2010- June 2011.
(2) The amount accrued for the Ignite earnout as of March 31, 2010 was $2.5 million.
5. Restricted Cash and Marketable Securities
As of March 31, 2010 and December 31, 2009, there were approximately $1.3 million and $1.4 million, respectively, of restricted cash, of which $0.9 million and $1.0 million, respectively, relate to security deposits for the London office in the inVentiv Communications segment and $0.4 million for both periods relate to letters of credit for the New York, Washington D.C and California offices, which are also 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 accordingly. Cash held in such segregated bank accounts totaled approximately $0.2 million and $0.1 million as of March 31, 2010 and December 31, 2009, respectively.
6. Employee Stock Compensation:
The Company follows ASC 718, which provides guidance in 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 $2.2 million, of which $0.1 million was recorded in cost of services and $2.1 million recorded as Selling, General and Administrative expenses (“SG&A”) for the three months ended March 31, 2010 and $2.6 million, of which $0.3 million was recorded in cost of services and $2.3 million recorded as SG&A for the three months ended March 31, 2009.
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
March 31,
|
||
|
2010
|
2009
|
|
|
Expected life of option
|
6yrs
|
6yrs
|
|
Risk-free interest rate
|
2.65%
|
1.36%
|
|
Expected volatility
|
52%
|
47%
|
|
Expected dividend yield
|
0.00%
|
0.00%
|
The Company analyzed historical trends in expected volatility and expected life of stock options on a quarterly basis; during 2010 and 2009 the volatility ranged between 47%-52%. As of January 1, 2008, the Company applied updated guidance from 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. 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 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 three months ended March 31, 2010 and 2009 were 5.30% and 5.29%, 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"). The Company discontinued making grants under the 1999 Stock Incentive Plan 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. As of March 31, 2010, the aggregate number of unissued shares of the Company’s common stock that may be issued under the Stock Plan is 3.7 million shares.
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 three months ended March 31, 2010 (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, 2010
|
1,672
|
$20.55
|
6.39
|
$2,926
|
|
Granted and assumed
|
279
|
$16.92
|
||
|
Exercised
|
(69)
|
$16.00
|
||
|
Forfeited/expired/cancelled
|
(2)
|
$27.61
|
||
|
Outstanding at March 31, 2010
|
1,880
|
$20.18
|
6.39
|
$9,648
|
|
Vested and expected to vest at March 31, 2010
|
1,821
|
$20.29
|
6.35
|
$9,245
|
|
Options exercisable at March 31, 2010
|
1,092
|
$21.11
|
5.51
|
$4,908
|
The weighted-average grant-date fair value of stock options granted during the three-months ended March 31, 2010 and 2009 was $8.74 per share and $4.96 per share, respectively. The total intrinsic value of options exercised during the three-months ended March 31, 2010 and 2009 was $1.1 million and negligible, respectively. As of March 31, 2010 and December 31, 2009, there was approximately $4.8 million and $4.2 million, respectively, of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted; that cost is expected to be recognized over a weighted average of 2.8 years and 2.5 years, respectively.
The actual tax benefit realized for the tax deductions from option exercises related to share-based payment arrangements totaled $0.1 million and negligible for the three months ended March 31, 2010 and 2009, respectively.
INVENTIV HEALTH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
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
|
100,925
|
$6.73
|
3.39
|
100,925
|
$6.73
|
|
$10.82
|
To
|
$10.82
|
343,488
|
$10.82
|
8.79
|
85,876
|
$10.82
|
|
$10.86
|
To
|
$15.48
|
19,308
|
$13.88
|
4.25
|
19,308
|
$13.88
|
|
$15.96
|
To
|
$15.96
|
200,000
|
$15.96
|
4.48
|
200,000
|
$15.96
|
|
$16.13
|
To
|
$16.89
|
98,614
|
$16.68
|
5.18
|
67,500
|
$16.89
|
|
$16.92
|
To
|
$16.92
|
279,310
|
$16.92
|
6.76
|
--
|
$--
|
|
$17.25
|
To
|
$25.62
|
192,316
|
$21.01
|
4.90
|
192,316
|
$21.01
|
|
$25.63
|
To
|
$26.77
|
254,000
|
$26.74
|
6.00
|
209,000
|
$26.73
|
|
$28.66
|
To
|
$32.55
|
258,277
|
$31.21
|
7.60
|
127,008
|
$31.54
|
|
$35.01
|
To
|
$37.21
|
133,713
|
$35.96
|
6.26
|
89,713
|
$35.72
|
|
1,879,951
|
1,091,646
|
||||||
A summary of the status of and changes in the Company’s nonvested shares related to its restricted shares from equity incentive plans as of and during the three months ended March 31, 2010 is presented below:
|
(in thousands, except per share amounts)
|
Shares
|
Weighted Average Grant-Date Fair Value
|
|
Nonvested at January 1, 2010
|
1,008
|
$19.00
|
|
Granted
|
347
|
$16.88
|
|
Released
|
(253)
|
$21.72
|
|
Forfeited
|
(16)
|
$28.84
|
|
Nonvested at March 31, 2010
|
1,086
|
$17.55
|
As of March 31, 2010 and December 31, 2009, there was approximately $14.7 million and $11.8 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 period of 2.9 years and 2.5 years, respectively. The total fair value of shares vested during the three months ended March 31, 2010 and 2009 was $4.2 million and $1.5 million, respectively.
7. Earnings Per Share (“EPS”):
Basic earnings per share exclude dilution from 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.
INVENTIV HEALTH, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Continued
A summary of the computation of basic and diluted earnings per share is as follows:
|
Three-Months Ended March 31,
|
||
|
2010
|
2009
|
|
|
Basic EPS Computation
|
||
|
Net income attributable to inVentiv Health, Inc.
|
$10,151
|
$7,909
|
|
Weighted average number of common shares outstanding
|
33,770
|
33,351
|
|
Basic EPS attributable to inVentiv Health, Inc.
|
$0.30
|
$0.24
|
|
Diluted EPS Computation
|
||
|
Net income attributable to inVentiv Health, Inc.
|
$10,151
|
$7,909
|
|
Weighted average number of common shares outstanding
|
33,770
|
33,351
|
|
Stock options (1)
|
87
|
65
|
|
Restricted stock awards (2)
|
242
|
44
|
|
Total weighted average number of diluted common shares outstanding
|
34,099
|
33,460
|
|
Diluted EPS attributable to inVentiv Health, Inc.
|
$0.30
|
$0.24
|
(1) For the three-months ended March 31, 2010 and 2009, 1,230,952 and 1,697,012 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 ended March 31, 2010 and 2009, 58,010 and 899,891 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 three-months ended March 31, 2010, the Company had one client that accounted for approximately 11% of the Company’s total revenues across the inVentiv Clinical, inVentiv Communications, inVentiv Commercial and inVentiv Patient Outcomes segments. During the three-months ended March 31, 2009, the Company had no clients that accounted for more than 10%, individually, of the Company's total revenues across the 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, 2009
|
$15,818
|
$103,607
|
$47,334
|
$48,767
|
--
|
$215,526
|
|
Goodwill acquired during the year
|
1,248
|
--
|
--
|
--
|
--
|
1,248
|
|
Goodwill through contingent consideration(1)
|
4,100
|
23,088
|
--
|
18,506
|
--
|
45,694
|
|
Goodwill allocation (2)
|
--
|
--
|
60
|
--
|
--
|
60
|
|
Balance as of December 31, 2009
|
$21,166
|
$126,695
|
$47,394
|
$67,273
|
--
|
$262,528
|
|
Goodwill acquired during the year
|
2,468
|
--
|
-- | -- | -- |
2,468
|
|
Goodwill through contingent consideration(3)
|
--
|
2,490
|
--
|
--
|
--
|
2,490
|
|
Balance as of March 31, 2010
|
$23,634
|
$129,185
|
$47,394
|
$67,273
|
--
|
$267,486
|
|
(1)
|
For acquisitions before January 1, 2009, the contingent consideration represents adjustments relating to the finalization of the earnouts for the respective periods. For Paragon, the contingent consideration represents the estimated earnout at the acquisition date.
|
|
(2)
|
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 ASC 805 guidance.
|
|
(3)
|
The contingent consideration represents adjustments relating to the finalization of the earnouts for the respective periods for acquisitions before January 1, 2009.
|
Other intangible assets consist of the following:
|
March 31, 2010
|
December 31, 2009
|
||||||
|
(in thousands)
|
Accumulated
|
Accumulated
|
|||||
|
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
||
|
Customer relationships
|
$118,534
|
$(40,634)
|
$77,900
|
$116,934
|
$(37,917)
|
$79,017
|
|
|
Technology
|
15,168
|
(5,502)
|
9,666
|
15,168
|
(5,277)
|
9,891
|
|
|
Noncompete agreement
|
1,506
|
(1,181)
|
325
|
1,506
|
(1,127)
|
379
|
|
|
Tradenames subject to amortization
|
2,409
|
(1,262)
|
1,147
|
2,409
|
(1,163)
|
1,246
|
|
|
Other
|
1,232
|
(1,042)
|
190
|
1,232
|
(972)
|
260
|
|
|
Total definite-life intangibles
|
138,849
|
(49,621)
|
89,228
|
137,249
|
(46,456)
|
90,793
|
|
|
Tradenames not subject to amortization (1)
|
127,490
|
--
|
127,490
|
127,490
|
--
|
127,490
|
|
|
Total other intangibles (2)
|
$266,339
|
$(49,621)
|
$216,718
|
$264,739
|
$(46,456)
|
$218,283
|
|
|
(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.
|
|
(2)
|
The increase in total gross other intangibles are related to the identifiable intangible assets for the iCS Chicago acquisition.
|
The Company has the following identifiable intangible assets:
|
Intangible asset
|
Amount
(in thousands)
|
Weighted average amortization period
|
|
|
Tradename
|
$129,899
|
(1)
|
|
|
Customer relationships
|
118,534
|
10.7 years
|
|
|
Technology
|
15,168
|
13.8 years
|
|
|
Noncompete agreement
|
1,506
|
4.5 years
|
|
|
Other
|
1,232
|
4.5 years
|
|
|
Total
|
$266,339
|
|
(1)
|
$2.4 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 March 31, 2010, is expected to be $9.4 million for the remainder of 2010, $12.3 million in 2011, $12.1 million in 2012, $10.8 million in 2013, $10.5 million in 2014, $9.5 million in 2015 and $24.5 million thereafter.
The balances recorded on the Company’s Condensed Consolidated 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 ASC 350 and ASC 360. In accordance with 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.
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 does not believe that an event occurred or circumstances changed that would more-likely-than-not reduce the fair value of the Company’s reporting units below their carrying amounts as of March 31, 2010. As the Company’s annual impairment testing is June 30 of each year, any changes in economic conditions or other factors subsequent to March 31, 2010 will be evaluated as part of June 30, 2010 impairment testing.
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 $0.1million 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
The Company adopted fair value guidance on January 1, 2008, which among other things, requires enhanced disclosures about assets and liabilities measured at fair value. Our adoption of fair value measurement guidance 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.
Fair value guidance 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 March 31, 2010 and December 31, 2009 and the basis for that measurement:
As of March 31, 2010:
|
(in thousands)
|
Total Fair Value Measurement
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|
LIABILITIES
|
||||
|
Derivative Liabilities
|
24,167
|
--
|
--
|
24,167
|
|
Acquisition-related contingent consideration
|
4,100(1)
|
--
|
--
|
4,100
|
|
TOTAL LIABILITIES
|
$28,267
|
--
|
--
|
$28,267
|
As of December 31, 2009:
|
(in thousands)
|
Total Fair Value Measurement
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
|
ASSETS
|
||||
|
Marketable Securities
|
$1,014
|
$--
|
$1,014
|
$--
|
|
Deferred Compensation Plan Assets
|
10,413
|
--
|
10,413
|
--
|
|
TOTAL ASSETS
|
$11,427
|
$--
|
$11,427
|
$--
|
|
LIABILITIES
|
||||
|
Deferred Compensation Plan Liabilities
|
$9,393
|
$--
|
$9,393
|
$--
|
|
Derivative Liabilities
|
24,572
|
--
|
--
|
24,572
|
|
Acquisition–related contingent consideration
|
4,100(1)
|
--
|
--
|
4,100
|
|
TOTAL LIABILITIES
|
$38,065
|
--
|
$9,393
|
$28,672
|
|
(1)
|
See Note 4 for further details of the acquisition–related contingent consideration.
|
The Company recorded its valuation of its five-year interest rate derivative as of March 31, 2010 and December 31, 2009, resulting in a credit value adjustment of $1.6 million and $1.8 million, respectively, 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. There were no transfers into or out of Levels 1 or 2 during the three months ended March 31, 2010.
The following is a rollforward of the Level 3 assets and liabilities from January 1, 2009 through March 31, 2010:
|
Fair Value Measurements
|
|
|
(in thousands)
|
Using Significant Unobservable Inputs (Level 3)
|
|
ASSETS
|
Marketable Securities
|
|
Balance at January 1, 2009
|
$9,999
|
|
Included in earnings (or changes in net assets)
|
415
|
|
Included in other comprehensive income
|
--
|
|
Purchases, issuances and settlements
|
(10,414)
|
|
Transfers in and/or out of Level 3
|
--
|
|
Balance at January 1, 2010
|
$--
|
|
Included in earnings (or changes in net assets)
|
--
|
|
Included in other comprehensive income
|
--
|
|
Purchases, issuances and settlements
|
--
|
|
Transfers in and/or out of Level 3
|
--
|
|
Balance at March 31, 2010
|
$--
|
|
LIABILITIES
|
Derivative/Acquisition-related Contingent Consideration
|
|
Balance at January 1, 2009
|
$30,783
|
|
Included in earnings (or changes in net assets)
|
--
|
|
Included in other comprehensive income
|
(3,828)
|
|
Deferred tax impact of other comprehensive income
|
(2,383)
|
|
Acquisition–related contingent consideration (1)
|
4,100
|
|
Transfers in and/or out of Level 3
|
--
|
|
Balance at January 1, 2010
|
$28,672
|
|
Included in earnings (or changes in net assets)
|
--
|
|
Included in other comprehensive income
|
(313)
|
|
Deferred tax impact of other comprehensive income
|
(92)
|
|
Acquisition–related contingent consideration (1)
|
--
|
|
Transfers in and/or out of Level 3
|
--
|
|
Balance at March 31, 2010
|
$28,267
|
(1) See Note 4 for further details of the acquisition–related contingent consideration
11. Debt:
The Company is party to 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, 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 July 6, 2014, with scheduled quarterly amortization of 1% per year until the final year (July 2013 – July 2014) of the Amended and Restated Credit Agreement, during which 94% of the term loan is to be repaid. The revolving loans will mature on July 6, 2013. 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 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.
In March 2010, the Company paid down approximately $21 million of its term loan, including a $20 million prepayment, a portion of which was required as part of the Excess Cash Flow requirement described above. In conjunction with the prepayment of debt, the Company terminated approximately $20 million notional of its swap arrangement as described in Note 13.
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 Company has certain restrictions under this Credit Agreement to pay dividends. 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, 3.5 to 1.0 (the permitted leverage ratio was 4.0 to 1.0 through December 31, 2009; the Company’s leverage ratio was 2.3 to 1.0 and 2.5 to 1.0 as of March 31, 2010 and December 31, 2009, respectively).
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 March 31, 2010 and December 31, 2009 was 0.27% and 0.25%, respectively. As disclosed in Note 13, the Company has a derivative financial instrument, currently with a notional amount of approximately $301 million, to hedge against the current term loan facility.
The Company accounts for amendments to its revolving credit facility and term loan under the provisions of ASC 470. In amending its revolving credit facility and term loan, 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 ASC 470. In connection with an amendment of our existing $164 million term loan, under the terms of 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 was approximately $3.2 million and $3.4 million and are included in Deposits and Other Assets on the condensed consolidated balance sheets as of March 31, 2010 and December 31, 2009, 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 ASC 840. The Company capitalized leased vehicles and recorded the related lease obligations totaling approximately $4.4 million and $3.7 million (including no rebates and $0.4 million of rebates, respectively) during the three-months ended March 31, 2010 and 2009, respectively. The Company also incurred net disposals of $1.7 million and $3.4 million during the three-months ended March 31, 2010 and 2009, respectively.
13. Derivative Financial Instrument:
ASC 815, 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. The Company records the fair market value of its derivatives as other assets and other liabilities within the Company’s condensed consolidated balance sheet. Derivatives that are not part of hedge relationships are recorded at fair market value on the Company’s Condensed Consolidated Balance Sheet with the changes in fair value recorded to interest expense on its Condensed Consolidated Income Statement. For hedge relationships designated as cash flow hedges under 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 Condensed Consolidated Income Statement.
The Company enters 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 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 $24.2 million and $24.6 million as of March 31, 2010 and December 31, 2009, 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 March 31, 2010, and accordingly, $0.4 million ($0.3 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 $1.6 million and $1.8 million credit value adjustment for March 31, 2010 and December 31, 2009, respectively, as discussed in Note 10. The total amount of loss reclassified from accumulated other comprehensive income into interest expense for the three months ended March 31, 2010 was approximately $5.5 million.
As described in Note 11, the Company terminated approximately $20 million notional of its swap arrangement in conjunction with the prepayment of debt in addition to the $0.8 million amortization relating to the first quarter 2010 principal loan payment . The Company de-designated $20 million notional amount of the cash flow hedge and reclassified $1.7 million from accumulated other comprehensive income into interest expense (included in the $5.5 million reclassification mentioned above) in connection with the termination of this portion of the hedge.
Based on current assumptions regarding the interest rate environment and other market conditions at March 31, 2010, 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 $13.2 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. In the opinion of management, taking into account the advice of legal counsel, no matters outstanding as of March 31, 2010 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 $9.7 million and $9.4 million were included in other non-current liabilities in the Company’s Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009. 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 March 31, 2010 and December 31, 2009 was approximately $10.3 million and $9.1 million, respectively, and is currently classified in Deposits and Other Assets on the Company’s Condensed Consolidated Balance Sheets. In addition, approximately $0.4 million and $1.3 million as of March 31, 2010 and December 31, 2009, respectively, were invested in mutual funds and classified in Prepaid expenses and other current assets on the Company’s Condensed Consolidated Balance Sheets.
16. Income Taxes
The Company accounts for income taxes in accordance with 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 effective tax rate for the three-month period ended March 31, 2010 was 27.5%. The rate includes a tax benefit of $2.1 million due to the expiration of the statute of limitations related to uncertain tax positions which was recognized in accordance with ASC 805. The effective tax rate for the three-month period ended March 31, 2009 was 42.2%. The rate included a tax detriment of 1% due to settlement of various state audits. 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 March 31, 2010 and December 31, 2009, the Company had unrecognized tax benefits of $3.6 million and $5.1 million, respectively. The decrease primarily resulted from the expiration of the statute of limitations related to uncertain tax positions as noted above. Included in these balances were positions totaling $3.1 million at March 31, 2010 and $4.5 million at December 31, 2009 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 March 31, 2010 and December 31, 2009 was $1.3 million and $2.1 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 2005.
Management has concluded that it is reasonably possible that the unrecognized tax benefits will decrease by approximately $0.7 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. Equity
The following table describes the 2010 activity in the Company’s Total Equity accounts for the three-months ended March 31, 2010:
|
inVentiv Health, Inc Shareholders
|
|||||||
|
(in thousands)
|
Common Stock
|
Additional Paid-In
Capital
|
Accumulated earnings
|
Comprehensive
Income
|
Accumulated Other Comprehensive Loss (1)
|
Noncontrolling Interest
|
Total
|
|
Balance at December 31, 2009
|
$34
|
$404,763
|
$40,661
|
$(16,203)
|
$(2)
|
$429,253
|
|
|
Net income
|
10,151
|
$10,151
|
196
|
10,347
|
|||
|
Net change in effective portion of
derivative, net of taxes
|
313
|
313
|
313
|
||||
|
Unrealized gain on marketable securities
|
46
|
46
|
46
|
||||
|
Foreign currency translation
adjustment
|
(603)
|
(603)
|
(603)
|
||||
|
$9,907
|
|||||||
|
Restricted stock expense
|
1,552
|
1,552
|
|||||
|
Withholding shares for taxes
|
(1,335)
|
(1,335)
|
|||||
|
Consultant compensation
|
65
|
65
|
|||||
|
Tax expense from exercise of
employee stock options and vesting
of restricted stock
|
(643)
|
(643)
|
|||||
|
Proceeds from exercise of stock
options
|
1,113
|
1,113
|
|||||
|
Stock option expense
|
623
|
623
|
|||||
|
Distributions
|
(114)
|
(114)
|
|||||
|
Balance at March 31, 2010
|
$34
|
$406,138
|
$50,812
|
$(16,447)
|
$80
|
$440,617
|
|
(1) As of March 31, 2010 Accumulated Other Comprehensive Loss consists of a $2.4 million loss on currency translation fluctuations in our foreign bank accounts of our UK, France, German, Japanese and Canadian subsidiaries, and equity investments and noncontrolling interest in our foreign business units as well as other comprehensive loss of approximately $14.1 million, net of taxes, that relates to the effective portion of the Company’s derivative instruments, as described in Note 13.
18. Related Parties:
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 an approximately 92% interest in the earnout consideration payable under the acquisition agreement. In April of 2009, Mr. Walter and such family members received a total of $2.2 million in cash and common stock constituting earnout consideration. 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 periods ended March 31, 2010 and December 31, 2009, the Company paid $0.5 million and $1.8 million, respectively, in rent to Lexington MLP Westerville L.P.
inVentiv Commercial provided services to Mission Pharmacal (“Mission”) during 2009 and 2010. Revenues generated for services provided to Mission totaled approximately $3.8 million and $13.0 million for the quarter ended March 31, 2010 and year ended December 31, 2009, respectively. Terrell G. Herring, who is one of our directors, serves as President of the Pharmaceutical Division of Mission Pharmacal. Mr. Herring has recused himself from any negotiations between the Company and Mission Pharmacal.
Our Chairman, Eran Broshy, has been engaged to provide consulting services to the Company pursuant to a consulting agreement entered into effective August 1, 2009. Pursuant to the consulting agreement, which has a term of three years, Mr. Broshy will earn a consulting fee of $100,000 per year.
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. As mentioned in Note 1, the Company realigned TTI from inVentiv Patient Outcomes to inVentiv Commercial, and has reclassified its segment reporting to conform to the current segment structure. The following represents the Company’s reportable segments as of March 31, 2010:
|
·
|
inVentiv Clinical, which provides services related to permanent placement, clinical staffing, CRO Services, REMS, 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, clinical educator teams, 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, medical cost containment and consulting solutions and patient relationship marketing.
|
|
·
|
Other, which encompasses the activities of the corporate management group.
|
The following segment information has been prepared as if the TTI realignment from inVentiv Patient Outcomes to inVentiv Commercial described above had been in effect from January 1, 2009:
Three-months ended March 31, 2010 (in thousands):
|
inVentiv
Clinical
|
inVentiv Communications
|
inVentiv Commercial
|
inVentiv Patient Outcomes
|
Other
|
Total
|
|
|
Revenues
|
$54,007
|
$88,374
|
$100,315
|
$30,887
|
--
|
$273,583
|
|
Less: Intersegment revenues
|
(68)
|
(253)
|
(3,745)
|
(156)
|
--
|
(4,222)
|
|
Reported Revenues
|
$53,939
|
$88,121
|
$96,570
|
$30,731
|
--
|
$269,361
|
|
Depreciation and amortization
|
1,435
|
2,727
|
3,656
|
1,060
|
3
|
8,881
|
|
Interest expense
|
--
|
55
|
106
|
--
|
7,392
|
7,553
|
|
Interest income
|
--
|
3
|
--
|
--
|
41
|
44
|
|
Segment income (loss) (1)
|
1,662
|
10,571
|
10,174
|
6,751
|
(14,870)
|
14,288
|
Three-months ended March 31, 2009 (in thousands):
|
inVentiv
Clinical
|
inVentiv Communications
|
inVentiv Commercial
|
inVentiv Patient Outcomes
|
Other
|
Total
|
|
|
Revenues
|
$51,218
|
$71,352
|
$111,049
|
$28,667
|
--
|
$262,286
|
|
Less: Intersegment revenues
|
(48)
|
(421)
|
(4,097)
|
(68)
|
--
|
(4,634)
|
|
Reported Revenues
|
$51,170
|
$70,931
|
$106,952
|
$28,599
|
--
|
$257,652
|
|
Depreciation and amortization
|
562
|
2,485
|
4,310
|
1,147
|
10
|
8,514
|
|
Interest expense
|
--
|
19
|
111
|
2
|
5,642
|
5,774
|
|
Interest income
|
1
|
--
|
--
|
28
|
36
|
65
|
|
Segment income (loss) (1)
|
$1,511
|
$9,867
|
$6,972
|
$5,912
|
$(10,649)
|
$13,613
|
|
(1)
|
Income before income tax provision and (loss) income from equity investments
|
|
(in thousands)
|
March
31, 2010
|
December 31, 2009
|
|||||
|
Total Assets:
|
|||||||
|
inVentiv Clinical
|
$
|
120,498
|
$119,744
|
||||
|
inVentiv Communications
|
404,789
|
407,920
|
|||||
|
inVentiv Commercial
|
182,069
|
178,678
|
|||||
|
inVentiv Patient Outcomes
|
152,882
|
151,862
|
|||||
|
Other
|
141,034
|
171,759
|
|||||
|
Total assets
|
$
|
1,001,272
|
$1,029,963
|
||||
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 in the Annual Report on Form 10-K for the year ended December 31, 2009.
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 lifecycle. For payors, we provide a variety of services that enhance savings and improve patient outcomes including opportunities to address billing errors, additional discounts and treatment protocols for patients.
We were incorporated in Delaware in 1999.
Business Segments
We serve our clients primarily through four business segments, which correspond to our reporting segments for 2010:
|
·
|
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 full service late-stage clinical development, Risk Evaluation and Mitigation Strategy ("REMS") and outsourced functional services and CRO services in various areas, including clinical operations, medical affairs and biometrics/data management. inVentiv Clinical consists of the Smith Hanley group of companies (“Smith Hanley”), inVentiv Clinical Solutions (“iCS”) and Paragon Rx (“Paragon”), which was acquired in December 2009;
|
|
·
|
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”);
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inVentiv Commercial, which consists of our sales teams, sales support services, market research, commercial analytics, healthcare strategies, clinical educator teams, managed markets access, biotech/specialty managed markets, and integrated commercialization. This segment includes Advance Insights and inVentiv Selling Solutions; and
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inVentiv Patient Outcomes, which provides services related to patient pharmaceutical compliance programs, patient support programs, medical cost containment and consulting solutions and patient relationship marketing. This segment includes Adheris, Inc. (“Adheris”), The Franklin Group (“Franklin”), AWAC and Patient Marketing Group, LLC (“PMG”).
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Material Trends Affecting our Business
Our business is related significantly to the research and development efforts of pharmaceutical and biotechnology companies and 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. Furthermore, increased competition as a result of patent expirations, market acceptance of generic drugs and governmental and privately managed care organization efforts to reduce healthcare costs have also added to drug pricing pressures. Our clients continue to make efforts to significantly reduce expenditures in all areas of their businesses, resulting in increased budget scrutiny. The pharmaceutical industry as a whole is responding by consolidating.
These circumstances present both risks and opportunities for inVentiv. We aggressively pursue opportunities to enhance our business and market share with clients who seek the efficiencies and cost savings that can be attained by consolidating their outsourcing programs with a smaller number of high quality providers, and we believe that these opportunities will continue. In the longer term, we believe the pressures on our customers to reduce unit costs are likely to drive decisions to outsource a greater scope of commercialization services and a concomitant increase in the overall size of the markets in which we operate. Our clients already appear to be adopting 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.
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. Our business was affected during 2009 by the tentativeness of clients to make outsourcing expenditure decisions. 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 client marketing spend levels. For example, our Clinical staffing business has recently experienced an increase in new order volumes and positive net starts; however, the sustainability of such a trend is based on future client demand. Delays in FDA approval of drug candidates also impact our clients from time to time and can lead to unanticipated reduction or deferral of outside marketing spend.
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 or acquire businesses over time. Cost management strategies employed by management include:
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reducing fixed cost headcount;
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our "in balance" staffing initiative, through which we have converted full time employees to hourly positions that can be billed in direct response to the requirements of our client engagements;
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completion during the first quarter of 2009 of our "super studio" in Columbus, Ohio, which has increased utilization and efficiency by allowing the management of project-based graphic design and production needs for agencies across the inVentiv Communications division;
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negotiation of favorable rates with our vendors;
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ongoing implementation of our Peoplesoft software to manage enterprise-wide resources; and
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consolidation of certain facilities and operations.
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We believe that these steps will allow inVentiv to provide competitive pricing to its clients and to improve margins.
Pharmaceutical industry consolidation is likely to make more pronounced both the downside risks and the upside opportunities for providers of outsourced commercialization services. To date, although there have been isolated instances in which a program or relationship has been eliminated or reduced following a business combination involving one or more existing clients, we do not believe we have been materially impacted by consolidation. The concentration of business with our largest clients has increased slightly in recent years, while the total number of clients and functional areas we cover has expanded substantially.
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.
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 to be submitted for and 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 slowed during early 2009 as a result of the current trends discussed above, our businesses have generated strong overall revenue growth for the past several years. Our organic 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 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. We expect to 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 acquisition dates. A prior year period that ended before an acquisition was completed, however, will not include the corresponding financial results of the acquired business.
During 2009, we established inVentiv Japan, a business unit within inVentiv Selling Solutions. We believe the potential opportunity in Japan is significant based on the total number of Japanese representatives, labor laws that could encourage 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. The acquisitions consummated prior to January 1, 2009 fall under the guidance of ASC 805, excluding the requirements of contingent consideration for acquisitions made after January 1, 2009. As such, we accrue the earnout obligations for these acquisitions 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 2010 and payable in 2010 is approximately $2.0 to $3.0 million. Such payout amounts are subject to variability and could vary significantly based on the actual performance of the acquired businesses.
Earnout obligations for acquisitions consummated after January 1, 2009 are initially recorded as part of the purchase price at the estimated fair value at the date of acquisition in accordance with the updated guidance of ASC 805. Any subsequent changes in the earnout amounts expected to be paid in future years will not be adjustments to purchase accounting, but will be recorded as a gain or loss in the respective periods and will result in fluctuations in our Condensed Consolidated Income Statements.
International Operations
The following is a summary of our non-U.S. operations:
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Division
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Location
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Percent Ownership
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inVentiv Communications
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United Kingdom
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100%
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France
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100%
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Canada
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100%
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Germany (Liedler)
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100%
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Japan (Admed)
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19.9%
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Italy
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37.5%(1)
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Germany (Haas and Health)
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19.9%
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Sweden
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15%
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Mexico
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100%
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inVentiv Clinical
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Brazil
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100%
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India
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100%
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inVentiv Commercial
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Japan
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100%
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Canada
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100%
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Puerto Rico
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100%
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(1)
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Subsequent to March 31, 2010, the Company acquired an additional 51.3% of DWA Health for $0.7 million, increasing our total ownership percentage to 88.8%.
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We have an option to acquire an additional 60.1% of Haas and Health 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.
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. condensed 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 described in its Annual Report on Form 10-K for the year ended December 31, 2009. There has been no material change, update or revision to the Company’s critical accounting policies.
Three-Months Ended March 31, 2010 Compared to Three-Months Ended March 31, 2009
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:
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(in thousands, except for per share data)
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For the Three-Months Ended March 31,
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2010
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2009
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Revenues:
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Percentage (1)
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Percentage(1)
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inVentiv Clinical
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$ | 53,939 | 20.0 | % | $ | 51,170 | 19.9 | % | ||||||||
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inVentiv Communications
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88,121 | 32.7 | % | 70,931 | 27.5 | % | ||||||||||
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inVentiv Commercial
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96,570 | 35.9 | % | 106,952 | 41.5 | % | ||||||||||
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inVentiv Patient Outcomes
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30,731 | 11.4 | % | 28,599 | 11.1 | % | ||||||||||
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Total revenues
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269,361 | 100.0 | % | 257,652 | 100.0 | % | ||||||||||
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Cost of services (1) (2):
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inVentiv Clinical
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40,353 | 74.8 | % | 38,529 | 75.3 | % | ||||||||||
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inVentiv Communications
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52,281 | 59.3 | % | 38,875 | 54.8 | % | ||||||||||
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inVentiv Commercial
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75,308 | 78.0 | % | 88,504 | 82.8 | % | ||||||||||
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inVentiv Patient Outcomes
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16,221 | 52.8 | % | 15,268 | 53.4 | % | ||||||||||
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Total cost of services
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184,163 | 68.4 | % | 181,176 | 70.3 | % | ||||||||||
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Selling, general and administrative expenses(1):
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inVentiv Clinical
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11,924 | 22.1 | % | 11,131 | 21.8 | % | ||||||||||
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inVentiv Communications
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25,217 | 28.6 | % | 22,161 | 31.2 | % | ||||||||||
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inVentiv Commercial
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10,982 | 11.4 | % | 11,365 | 10.6 | % | ||||||||||
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inVentiv Patient Outcomes
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7,758 | 25.2 | % | 7,445 | 26.0 | % | ||||||||||
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Other
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7,520 | -- | 5,052 | -- | ||||||||||||
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Total selling, general and administrative expenses
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63,401 | 23.5 | % | 57,154 | 22.2 | % | ||||||||||
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Total operating income
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21,797 | 8.1 | % | 19,322 | 7.5 | % | ||||||||||
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Interest expense
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(7,553 | ) | (2.8 | )% | (5,774 | ) | (2.2 | )% | ||||||||
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Interest income
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44 | -- | 65 | -- | ||||||||||||
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Income before income tax provision and income (loss) from equity investments
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14,288 | 5.3 | % | 13,613 | 5.3 | % | ||||||||||
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Income tax provision
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(3,856 | ) | (1.4 | )% | (5,772 | ) | (2.3 | )% | ||||||||
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Income before income (loss) from equity investments
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10,432 | 3.9 | % | 7,841 | 3.0 | % | ||||||||||
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(Loss) income from equity investments
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(85 | ) | -- | 17 | -- | |||||||||||
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Net income
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10,347 | 3.9 | % | 7,858 | 3.0 | % | ||||||||||
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Plus (less): Net (income) loss attributable to the noncontrolling interest
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(196 | ) | (0.1 | )% | 51 | 0.1 | % | |||||||||
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Net income attributable to inVentiv Health, Inc.
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$ | 10,151 | 3.8 | % | $ | 7,909 | 3.1 | % | ||||||||
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Earnings per share:
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Net income attributable to inVentiv Health, Inc.:
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Basic
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$ | 0.30 | $ | 0.24 | ||||||||||||
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Diluted
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$ | 0.30 | $ | 0.24 | ||||||||||||
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(1)
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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.
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(2)
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Cost of services includes reimbursed out of pocket expenses.
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Revenues: Revenues increased by approximately $11 million, or 4%, to $269 million during the first quarter of 2010, from $258 million during the first quarter of 2009. Net revenues (revenues, net of pass-through costs) increased by approximately $9 million, or 4%, to $230 million during the first quarter of 2010 from $221 million in the first quarter of 2009.
inVentiv Clinical’s revenues were $54 million during the first quarter of 2010, an increase of $3 million compared to $51 million during the first quarter of 2009. inVentiv Clinical revenues accounted for 20% of total inVentiv revenues during the first quarter of 2010. Revenues in inVentiv Clinical were higher in 2010 mainly due to the acquisitions of Paragon and iCS Chicago, which contributed $2 million in revenues during the first quarter of 2010, as well as organic growth from our strategic resource groups and CRO services.
inVentiv Communications’ revenues were $88 million during the first quarter of 2010, an increase of $17 million or 24% from the first quarter of 2009. inVentiv Communications’ revenues accounted for 33% of total inVentiv revenues during the first quarter of 2010. This increase is due to higher organic growth across the segment and a higher level of pass-through revenues in 2010.
inVentiv Commercial’s revenues were $97 million during the first quarter of 2010, a decrease of $10 million, or 9% from the first quarter of 2009. inVentiv Commercial revenues accounted for 36% of total inVentiv revenues for the first quarter of 2010. The decrease is primarily due to a decrease in pass-through revenues both in total and as a percentage of total revenues and sales representatives for the comparative periods, which is offset by the inclusion of inVentiv Japan revenues, which was launched during the first half of 2009.
inVentiv Patient Outcomes’ revenues were $31 million during the first quarter of 2010, up $2 million from the first quarter of 2009. The increase was due to organic growth in our patient pharmaceutical compliance programs and patient support programs.
Cost of Services: Cost of services increased by approximately $3 million or 2%, to $184 million during the first quarter of 2010 from $181 million in the first quarter of 2009. Cost of services as a percentage of revenues was 68% and 70% during the first quarter of 2010 and 2009, respectively.
inVentiv Clinical’s cost of services increased by approximately $1 million, or 3%, to $40 million during the first quarter of 2010 from $39 million during the first quarter of 2009. The increase in cost of services was primarily due to an increase in revenues from our strategic resource groups, in addition to the acquisitions of Paragon and iCS Chicago, as described above in revenues. Cost of services as a percentage of revenues was 75% for both respective periods.
inVentiv Communications’ cost of services increased by 33% to $52 million during the first quarter of 2010 when compared to the first quarter of 2009. This variance is related to the increase in pass-through and organic revenues described above. Cost of services as a percentage of the segment’s revenues increased from 55% during the first quarter of 2009 to 59% during the first quarter of 2010.
Cost of services at inVentiv Commercial decreased by approximately $14 million, or 16%, to $75 million in the first quarter of 2010, mainly due to the decrease in revenues described above. Cost of services as a percentage of revenues decreased from 83% during the first quarter of 2009 to 78% during the first quarter of 2010, which was primarily due to improved operating cost management in the first quarter of 2010 and increased business in Japan, which incurred start-up costs during the first quarter of 2009 without meaningful revenue.
inVentiv Patient Outcomes cost of services increased by approximately $1 million, or 7%, to $16 million in the first quarter of 2010 from $15 million during the first quarter of 2009. The increase is related to the increase in revenues described above.
Selling, General and Administrative Expenses (“SG&A”): SG&A expenses increased by approximately $6 million, or 11%, to $63 million during the first quarter of 2010 from $57 million during the first quarter of 2009.
SG&A expenses at inVentiv Clinical increased by approximately $1 million to approximately $12 million during the first quarter of 2010, compared to $11 million during the first quarter of 2009. The increase is primarily due to the acquisitions of Paragon and iCS Chicago.
SG&A expenses at inVentiv Communications increased $3 million to $25 million during the first quarter of 2010 due to compensation, professional fees and occupancy costs.
SG&A expenses at inVentiv Commercial were approximately $11 million during the first quarter of 2010 and the first quarter of 2009.
SG&A expenses at inVentiv Patient Outcomes increased $0.4 million to $7.8 million during the first quarter of 2010 due to increased compensation.
Other SG&A was approximately $8 million for the first quarter of 2010, an increase of $3 million from the first quarter of 2009. The increase was primarily due to a pre-acquisition contingency recorded in accordance with ASC 805 in the first quarter of 2010, as well as the sale of certain marketable securities during 2009 which did not occur in the first quarter of 2010.
Interest Expense: Interest expense was approximately $8 million during the first quarter of 2010, an increase of $2 million from the first quarter of 2009. The Company terminated approximately $20 million notional of its swap arrangement in conjunction with the prepayment of debt in addition to the $0.8 million amortization relating to the first quarter 2010 principal loan payment . The Company de-designated $20 million notional amount of the cash flow hedge and reclassified an additional $1.7 million from accumulated other comprehensive income into interest expense in connection with the termination of this portion of the hedge. Our loan agreement and hedge are more fully explained below in Liquidity and Capital Resources.
Provision for Income Taxes: The effective tax rate for the first quarter of 2010 was 27.5%, versus an effective tax rate of 42.2% during the first quarter of 2009. The rate for the first quarter of 2010 included tax benefits of $2.1million due to the expiration of the statute of limitations related to uncertain tax positions which was recognized in accordance with ASC 805. The rate for the first quarter 2009 included a tax detriment of 1% due to the settlement of various state audits. 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 was $10 million during the first quarter of 2010, an increase of $2 million from the first quarter of 2009. Diluted earnings per share during the first quarter of 2010 were $0.30, and the diluted earnings per share were $0.24 during the first quarter of 2009. Net income and diluted earnings per share increased due to stronger volumes of Communications services and solid operating results in our Commercial and Patient Outcomes segments for the comparative periods.
Liquidity and Capital Resources
At March 31, 2010, inVentiv had approximately $84 million of unrestricted cash and equivalents, a decrease of $49 million from the December 31, 2009 balance. For the three-months ended March 31, 2009 compared to March 31, 2010, cash provided by operations decreased by $16 million from a source of $21 million to a source of $5 million. Cash used in investing activities increased from $14 million to $28 million for the three-months ended March 31, 2009 and 2010, respectively. Cash used by financing activities increased from a use of $7 million to a use of $26 million over the same comparative periods.
Cash provided by operations was $5 million during the three-months ended March 31, 2010, while cash provided by operations was $21 million for the three-months ended March 31, 2009. This decrease was primarily due to the timing of our collections, unbilled services and accrued expenses across our segments in the first quarter of 2010 as compared to first quarter of 2009.
Cash used in investing activities was $28 million for the three-months ended March 31, 2010 compared to $14 million used during the same period in 2009. We paid $25 million of cash in 2010 primarily relating to the earnout contingency payments from previous acquisitions and the iCS Chicago acquisition, and we paid $17 million in 2009 primarily relating to the earnout contingency payments from previous acquisitions. During the three months ended March 31, 2009, the Company received proceeds of $5 million, mainly from redemptions from the Columbia Strategic Cash Portfolio (“CSCP”), which was not applicable in 2010 since the CSCP was fully liquidated in December 2009.
Cash used in financing activities was $26 million for the three-months ended March 31, 2010, compared to $7 million used by financing activities for the three-months ended March 31, 2009. The difference primarily relates to a $20 million repayment of our loan, which is described further below. Offsetting the loan payment was $1 million of proceeds from exercises of stock options.
Our principal external source of liquidity is our syndicated, secured Amended and Restated Credit Agreement with UBS AG, and the other lenders party thereto. The key features of the Amended and Restated Credit Agreement are as follows:
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A $330 million term loan facility was made available to inVentiv in a single drawing, which was used to:
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refinance the existing October 2005 credit facility, which had a remaining balance of $164 million, and
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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.
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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 July 6, 2014, with scheduled amortization of 1% per year until the final year of the Amended and Restated Credit Agreement, during which 94% of the term loan is to be repaid. The revolving loans will mature on July 6, 2013.
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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 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.
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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. We have the intent and ability to choose the three-month LIBOR base rate for the duration of the term of the Credit Agreement.
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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, 3.5 to 1.0 commencing with our 2010 fiscal year (the permitted leverage ratio was 4.0 to 1.0 through December 31, 2009; our leverage ratio was 2.3 to 1.0 and 2.5 to 1.0 as of March 31, 2010 and December 31, 2009, respectively).
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In March 2010, the Company paid down approximately $21 million of our term loan, including a $20 million prepayment of our loan, a portion of which was required as part of the Excess Cash Flow requirement described above. In conjunction with the prepayment of debt, the Company terminated approximately $20 million notional of its swap arrangement in addition to the $0.8 million amortization relating to the first quarter 2010 principal loan payment . The Company de-designated $20 million notional amount of the cash flow hedge and reclassified $1.7 million from accumulated other comprehensive income into interest expense (included in the $5.5 million reclassification mentioned above) in connection with the termination of this portion of the hedge.
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, 2008 and 2009 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.
Long-Term Debt Exposure
At March 31, 2010 the Company had approximately $301 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 March 31, 2010, a hypothetical increase or decrease of 10% in the 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, 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 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 $24.2 million and $24.6 million as of March 31, 2010 and December 31, 2009, 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 March 31, 2010, and accordingly, $0.4 million ($0.3 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.
As described above, the Company terminated approximately $20 million notional of its swap arrangement in conjunction with the prepayment of debt in addition to the $0.8 million amortization relating to the first quarter 2010 principal loan payment. The Company de-designated $20 million notional amount of the cash flow hedge and reclassified $1.7 million from accumulated other comprehensive income into interest expense in connection with the termination of this portion of the hedge.
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, Japanese and Canadian subsidiaries and equity investments and noncontrolling 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 ASC 830. 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 March 31, 2010, the accumulated other comprehensive loss related to foreign currency translations was approximately $2.4 million. Foreign currency transaction gains and losses are included in the results of operations and are not material.
Based on their evaluation as of March 31, 2010, 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 March 31, 2010 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 March 31, 2010 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
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, 2009 except as follows:
Failure to complete the proposed Merger could adversely affect our business.
On May 6, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Papillon Holdings, Inc. (“Parent”) and Papillon Acquisition, Inc. (“Merger Sub”), each of which is an affiliate of Thomas H. Lee Partners, L.P., providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Parent. There is no assurance that our shareholders will approve the Merger Agreement or that other closing conditions will be satisfied. We are subject to several risks as a result of this Merger Agreement, including the following:
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If the proposed Merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the proposed Merger will be completed;
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Certain costs related to the proposed Merger, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed Merger is not completed;
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Under circumstances as defined in the Merger Agreement, we may be required to pay a termination fee and/or reimburse expenses if the Merger Agreement is terminated;
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Shareholder lawsuits may be filed against us in connection with the Merger Agreement;
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Our management and employees’ attention may have been diverted from day-to-day operations; and
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A failed Merger may result in negative publicity and/or a negative impression of us in the investment community or business community generally.
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ITEM 5. Other Information
On May 6, 2010, we entered into the Merger Agreement. Certain terms of the Merger Agreement and the Merger are summarized in, and the Merger Agreement has been filed as an exhibit to, our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2010.
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10.1
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Form of Executive Officer Restricted Stock Award (filed with the registrant's Current Report on Form 8-K filed on March 19, 2010) +
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31.1
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Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1
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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
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32.2
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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
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+ Management contract or compensatory plan or arrangement
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.
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Date: May 10, 2010
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By:
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/s/ DAVID S. BASSIN | |
| Name: David S. Bassin | |||
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Title: Chief Financial Officer and Secretary
(Principal financial officer)
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