OREANDA-NEWS. INC Research Holdings, Inc. (Nasdaq:INCR), a leading global Phase I to Phase IV contract research organization, today reported financial results for the second quarter and year-to-date periods ended June 30, 2016.

“INC Research employees once again delivered a robust quarter of solid financial results, excellent operational performance and strong customer focus resulting in strong backlog coverage for the remainder of 2016,” said CEO Jamie Macdonald. “As we look to the second half of the year, we remain focused on achieving our financial targets and becoming the CRO of Choice for all of our stakeholders. At the end of the day it’s about helping to develop new therapies for patients in need, and INC is particularly excited to be partnering with CISCRP on the ‘Inspiring Hope’ Ideathon event September 27-28 in Boston to shine a light on the importance of clinical trial participation in advancing public health.”

Second Quarter 2016 Results

Net service revenue for the three months ended June 30, 2016 increased by 13.8% to $258.8 million, compared to net service revenue of $227.4 million for the three months ended June 30, 2015. Net service revenue for the six months ended June 30, 2016 increased by 15.7% to $507.8 million, compared to net service revenue of $438.9 million for the six months ended June 30, 2015. Net service revenue growth during both the second quarter and first half of 2016 was primarily driven by continued strong awards over the last two years. In the first half of 2016, revenue has grown across all therapeutic areas and was particularly strong in the central nervous system ("CNS"), oncology and other complex therapeutic areas. During the three and six months ended June 30, 2016, fluctuations in foreign currency exchange rates resulted in an unfavorable impact of $0.1 million and $6.1 million on net service revenue compared to the same period in the prior year.    

Income from operations for the three months ended June 30, 2016 increased 10.3% to $39.7 million, compared to $35.9 million for the three months ended June 30, 2015. Income from operations for the six months ended June 30, 2016 increased 5.6% to $72.2 million, compared to $68.3 million for the six months ended June 30, 2015. Operating margin for the three and six months ended June 30, 2016 was 15.3% and 14.2%, respectively, compared to 15.8% and 15.6% for the same periods in the prior year.

The Company's income from operations includes certain expenses and transactions that it believes are not representative of its core operations, as described in more detail below under “Use of Non-GAAP Financial Measures.” Excluding these items, adjusted income from operations was $55.0 million for the three months ended June 30, 2016, compared to $48.8 million for the three months ended June 30, 2015, representing growth of 12.6%. Adjusted income from operations was $107.2 million for the six months ended June 30, 2016, compared to $95.3 million for the six months ended June 30, 2015, representing growth of 12.5%. Adjusted operating margin for the three and six months ended June 30, 2016, was 21.3% and 21.1%, respectively, compared to 21.5% and 21.7% for the same periods in 2015.

The Company reported net income for the three months ended June 30, 2016 of $30.4 million, resulting in diluted earnings per share of $0.54, compared to net income of $23.3 million, or $0.39 per diluted share, for the three months ended June 30, 2015. The Company reported net income for the six months ended June 30, 2016 of $47.8 million, resulting in diluted earnings per share of $0.85, compared to net income of $48.6 million, or $0.79 per diluted share, for the six months ended June 30, 2015. Adjusted net income for the three months ended June 30, 2016 was $34.3 million, or $0.61 per diluted share, compared to $28.6 million, or $0.47 per diluted share, for the same period in the prior year. Adjusted net income for the six months ended June 30, 2016 was $66.8 million, or $1.19 per diluted share, compared to $54.9 million, or $0.89 per diluted share, for the same period in the prior year.

Adjusted EBITDA for the three months ended June 30, 2016 increased 12.8% to $60.1 million, up from $53.3 million for the three months ended June 30, 2015. Adjusted EBITDA for the six months ended June 30, 2016 increased 12.1% to $117.1 million, up from $104.5 million for the six months ended June 30, 2015. Adjusted EBITDA margins decreased to 23.2% and 23.1%, for the three and six months ended June 30, 2016, respectively, from 23.4% and 23.8%, for the three and six months ended June 30, 2015, respectively.

Important disclosures about and reconciliations of non-GAAP measures, including adjusted income from operations, adjusted operating margin, adjusted net income and adjusted diluted earnings per share,  EBITDA and adjusted EBITDA, to the corresponding GAAP measures, are provided below and attached to this press release.

New Business Awards and Backlog

Backlog grew by 13.9% to $1.9 billion as of June 30, 2016, as compared to $1.7 billion for the period ended June 30, 2015.  For the three, six and twelve months ended June 30, 2016, fluctuations in foreign currency exchange rates resulted in an unfavorable impact on our June 30, 2016 backlog in the amount of $8.2 million, $1.2 million and $13.3 million, respectively. Net new business awards were $302.1 million, representing a book-to-bill ratio of 1.2x, for the three months ended June 30, 2016, as compared to $295.9 million for the three months ended June 30, 2015. Net new business awards were $604.4 million, representing a book-to-bill ratio of 1.2x, for the six months ended June 30, 2016, as compared to $551.4 million for the six months ended June 30, 2015.

Net new business awards were higher in the first six months of 2016 compared to the first six months of 2015 primarily due to the continued growth of the Company's business across its CNS, oncology and other complex therapeutic areas, partially offset by a large program cancellation during the second quarter of 2016. Specifically, the Company's net new business awards for the three months ended June 30, 2016, were negatively impacted by a $57 million cancellation by one of its customers due to insufficient clinical efficacy of the underlying compound.

Stock Repurchase Plan

On July 26, 2016, the Company’s board of directors approved a $150.0 million stock repurchase program for shares of the Company’s common stock commencing on August 1, 2016 and ending no later than December 31, 2017. The Company intends to use cash on hand and borrowings under its 2015 Credit Facility to fund the stock repurchase program.  The stock repurchase program does not obligate the Company to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. The timing and amount of repurchases will be determined by the Company’s management based on a variety of factors such as the market price of the Company’s common stock, the Company’s corporate requirements, and the overall market condition.

Business Outlook

The Company is updating its 2016 full-year guidance as outlined in the following table.  The guidance takes into account a number of factors, including our current sales pipeline, existing backlog and our expectations for net awards for the remainder of 2016. Further, our guidance is based on current foreign currency exchange rates, current interest rates, our expected tax rates, and does not take into account the effects of future stock repurchases. 

    Guidance Issued   Guidance Issued
    7/28/2016   5/2/2016
    Low   High   Low   High
Net service revenue   $1,030 million   $1,040 million   $1,020 million   $1,030 million
GAAP diluted EPS   $ 1.74     $ 1.85     $ 1.60     $ 1.70  
Adjusted diluted EPS   $ 2.39     $ 2.50     $ 2.34     $ 2.46  
                                 

Important disclosures about and reconciliations of non-GAAP measures, including adjusted net income and diluted adjusted earnings per share, to the corresponding GAAP measures are provided below and attached to this press release.

 

About INC Research

INC Research (Nasdaq:INCR) is a leading global contract research organization providing the full range of Phase I to Phase IV clinical development services for the biopharmaceutical and medical device industries. Leveraging the breadth of our service offerings and the depth of our therapeutic expertise across multiple patient populations, INC Research connects customers, clinical research sites and patients to accelerate the delivery of new medicines to market. The Company was named “Best Contract Research Organization” in December 2015 by a distinguished panel for Scrip Intelligence and ranked “Top CRO to Work With” among large global CROs in the 2015 CenterWatch Global Investigative Site Relationship Survey.  INC Research is headquartered in Raleigh, NC, with operations across six continents and experience spanning more than 110 countries. For more information, please visit www.incresearch.com.

 

Use of Non-GAAP Financial Measures

In addition to the financial measures prepared in accordance with GAAP, this press release contains the following non-GAAP financial measures: Adjusted Income from Operations, Adjusted Operating Margin, Adjusted Net Income (including Adjusted Diluted Earnings per Share), EBITDA and Adjusted EBITDA.  A “non-GAAP financial measure” is generally defined as a numerical measure of a company’s financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with GAAP in the statements of operations, balance sheets or statements of cash flows of the Company.

The Company defines Adjusted Income from Operations as income from operations excluding expenses and transactions that the Company believes are not representative of its core operations, namely, acquisition-related amortization, restructuring and other costs, transaction expenses, asset impairment charges, share-based compensation expense, and contingent consideration related to acquisitions and other.  The Company defines Adjusted Operating Margin as adjusted income from operations as a percentage of net service revenue.

The Company defines Adjusted Net Income (including Adjusted Diluted Earnings per Share) as net income (including diluted earnings per share) excluding the items excluded from adjusted income from operations mentioned previously, other expense (income), and loss on extinguishment of debt. After giving effect to these items and other unusual tax impacts during the period, the Company has also included an adjustment to its income tax rate to reflect the expected long-term income tax rate.

EBITDA represents earnings before interest, taxes, depreciation and amortization.  The Company defines Adjusted EBITDA as EBITDA excluding certain expenses and transactions that the Company believes are not representative of its core operations, namely, restructuring and other costs, transaction expenses, asset impairment charges, share-based compensation expense, contingent consideration related to acquisitions and other, other expense (income), and loss on extinguishment of debt.  The Company presents EBITDA and Adjusted EBITDA because it believes they are useful metrics for investors as they are commonly used by investors, analysts and debt holders to measure the Company's ability to service its debt obligations, fund capital expenditures and meet working capital requirements.

Each of the non-GAAP measures noted above are used by management and the Board to evaluate the Company's core operating results as they exclude items whose fluctuations from period-to-period do not necessarily correspond to changes in the core operations of the business. Adjusted Income from Operations, Adjusted Operating Margin, and Adjusted Net Income (including Adjusted Diluted Earnings per Share) are used by management and the Board to assess the Company's business. The Company believes these measures are used by investors and analysts to measure the Company's performance.  Adjusted EBITDA is also a useful metric for management, investors and debt holders to measure the Company's ability to service its debt obligations.

Non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.  Also, other companies might calculate these measures differently. Investors are encouraged to review the reconciliations of the non-GAAP financial measures to their most directly comparable GAAP measures included in this press release and the accompanying tables.

INC Research Holdings, Inc. and Subsidiaries
GAAP Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
         
    Three Months Ended June 30,   Six Months Ended June 30,
    2016   2015   2016   2015
Net service revenue   $ 258,804     $ 227,376     $ 507,801     $ 438,890  
Reimbursable out-of-pocket expenses   140,843     109,916     304,933     207,319  
Total revenue   399,647     337,292     812,734     646,209  
                 
Costs and operating expenses:                
Direct costs   159,497     138,010     311,555     263,458  
Reimbursable out-of-pocket expenses   140,843     109,916     304,933     207,319  
Selling, general and administrative   42,596     37,125     86,075     72,925  
Restructuring and other costs   1,364     2,012     7,402     1,594  
Transaction expenses   1,169     397     1,730     519  
Asset impairment charges   —     —     —     3,931  
Depreciation   5,060     4,420     9,952     9,186  
Amortization   9,463     9,473     18,924     18,951  
Total operating expenses   359,992     301,353     740,571     577,883  
Income from operations   39,655     35,939     72,163     68,326  
                 
Other income (expense), net:                
Interest income   43     45     77     129  
Interest expense   (3,087 )   (4,233 )   (6,091 )   (9,622 )
Loss on extinguishment of debt   —     (9,795 )   —     (9,795 )
Other (expense) income, net   (3,260 )   1,675     (8,377 )   5,141  
Total other expense, net   (6,304 )   (12,308 )   (14,391 )   (14,147 )
Income before provision for income taxes   33,351     23,631     57,772     54,179  
Income tax expense   (2,948 )   (310 )   (9,964 )   (5,602 )
Net income   $ 30,403     $ 23,321     $ 47,808     $ 48,577  
                 
Earnings per share:                
Basic   $ 0.56     $ 0.40     $ 0.88     $ 0.81  
Diluted   $ 0.54     $ 0.39     $ 0.85     $ 0.79  
Weighted average common shares outstanding:                
Basic   54,298     58,231     54,127     59,731  
Diluted   56,078     60,464     55,970     61,805  
                         
INC Research Holdings, Inc. and Subsidiaries
Reconciliation of GAAP to Non-GAAP Measures
(in thousands)
(unaudited)
           
      Three Months Ended June 30,   Six Months Ended June 30,
      2016   2015   2016   2015
Adjusted Income from Operations:                  
GAAP income from operations     $ 39,655     $ 35,939     $ 72,163     $ 68,326  
Amortization (a)     9,463     9,473     18,924     18,951  
Restructuring and other costs (b)     1,364     2,012     7,402     1,594  
Transaction expenses (c)     1,169     397     1,730     519  
Asset impairment charges (d)     —     —     —     3,931  
Share-based compensation (e)     3,071     913     5,887     1,620  
Contingent consideration and other (f)     286     111     1,085     332  
Adjusted Income from Operations     $ 55,008     $ 48,845     $ 107,191     $ 95,273  
GAAP Operating Margin     15.3 %   15.8 %   14.2 %   15.6 %
Adjusted Operating Margin     21.3 %   21.5 %   21.1 %   21.7 %
                   
EBITDA and Adjusted EBITDA:                  
Net income as reported     $ 30,403     $ 23,321     $ 47,808     $ 48,577  
Interest expense, net     3,044     4,188     6,014     9,493  
Income tax expense     2,948     310     9,964     5,602  
Depreciation     5,060     4,420     9,952     9,186  
Amortization     9,463     9,473     18,924     18,951  
EBITDA     50,918     41,712     92,662     91,809  
Restructuring and other costs (b)     1,364     2,012     7,402     1,594  
Transaction expenses (c)     1,169     397     1,730     519  
Asset impairment charges (d)     —     —     —     3,931  
Share-based compensation (e)     3,071     913     5,887     1,620  
Contingent consideration and other (f)     286     111     1,085     332  
Other expense (income) (g)     3,260     (1,675 )   8,377     (5,141 )
Loss on extinguishment of debt (h)     —     9,795     —     9,795  
Adjusted EBITDA     $ 60,068     $ 53,265     $ 117,143     $ 104,459  
Adjusted EBITDA Margin     23.2 %   23.4 %   23.1 %   23.8 %
                           
INC Research Holdings, Inc. and Subsidiaries
Reconciliation of GAAP to Non-GAAP Full-Year 2016 Guidance
(in millions, except per share data)
(unaudited)
       
  Adjusted Net Income   Adjusted Diluted
Earnings Per Share
  Low   High   Low   High
Net income and diluted earnings per share $ 97.5     $ 104.0     $ 1.74     $ 1.85  
Adjustments:              
Amortization (a)   37.8       37.8          
Share-based compensation expense (a)   13.1       13.1          
Contingent consideration and other expense (a)   1.3       1.3          
Restructuring and other costs (a)   8.1       8.6          
Transaction Costs (a)   1.7       1.7          
Other (a)   8.7       8.5          
Income tax effect of share-based compensation (b)   (12.6 )     (12.6 )        
Income tax effect of above adjustments (c)   (21.1 )     (21.9 )        
Adjusted net income and adjusted diluted earnings per share $ 134.5     $ 140.5     $ 2.39     $ 2.50  
                               
(a) Amounts are estimates with an estimated range of +/- 5% and are presented gross without the benefit of income tax reduction.
(b) Income tax effect of share-based compensation is calculated using the statutory rates applicable to the tax jurisdictions  of the applicable deduction, plus the amount of discrete tax adjustments related to excess tax benefits on share-based payments as a result of share-based payments activity.
(c) Income tax expense is calculated and the adjustments are tax-affected at an approximate rate of 34%, which is the midpoint of our range for the expected income tax rate of 33% to 35%, less the Income tax effect of share-based compensation. This adjustment also reverses the impact of unusual tax items during the period.
 
INC Research Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
         
    June 30, 2016   December 31, 2015
ASSETS        
Current assets:        
Cash and cash equivalents   $ 91,916     $ 85,011  
Restricted cash   617     452  
Accounts receivable:        
Billed, net   190,376     158,315  
Unbilled   165,701     139,697  
Prepaid expenses and other current assets   35,819     38,571  
Total current assets   484,429     422,046  
Property and equipment, net   46,350     44,813  
Goodwill   552,815     553,008  
Intangible assets, net   133,434     152,340  
Deferred income taxes   11,109     12,073  
Other long-term assets   23,967     26,939  
Total assets   $ 1,252,104     $ 1,211,219  
         
LIABILITIES AND SHAREHOLDERS' EQUITY        
Current liabilities:        
Accounts payable   $ 27,092     $ 22,497  
Accrued liabilities   147,545     111,262  
Deferred revenue   284,205     311,029  
Current portion of long-term debt   15,625     29,804  
Total current liabilities   474,467     474,592  
Long-term debt, less current portion   456,804     472,035  
Deferred income taxes   3,749     28,066  
Other long-term liabilities   28,447     19,092  
Total liabilities   963,467     993,785  
         
Commitments and contingencies        
         
Shareholders' equity:        
Preferred stock, $0.01 par value; 30,000,000 authorized, 0 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively   —     —  
Common stock, $0.01 par value; 600,000,000 shares authorized; 54,569,305 and 53,871,484 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively   546     539  
Additional paid-in-capital   572,600     559,910  
Accumulated other comprehensive loss, net of taxes   (38,399 )   (41,543 )
Accumulated deficit   (246,110 )   (301,472 )
Total shareholders' equity   288,637     217,434  
Total liabilities and shareholders' equity   $ 1,252,104     $ 1,211,219