UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007

OR

o                                 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: 001-14049

IMS Health Incorporated

(Exact Name of Registrant as Specified in its Charter)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.       x Yes   o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes     x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  At March 31, 2007, there were 196,238,638 shares of IMS Health Incorporated Common Stock, $0.01 par value, outstanding.

 

IMS HEALTH INCORPORATED

INDEX TO FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Financial Position As of March 31, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Income Three Months Ended March 31, 2007 and 2006		4
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2007 and 2006		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3. Quantitative and Qualitative Disclosures About Market Risk		44
Item 4. Controls and Procedures		44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		45
Item 1A. Risk Factors		45
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		51
Item 6. Exhibits		52
SIGNATURES		53
EXHIBITS		54

 

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
(Dollars and shares in thousands, except per share data)

		As of March 31,			As of December 31,
		2007			2006
Assets:
Current Assets:
Cash and cash equivalents		$	162,477		$	157,346
Accounts receivable, net of allowances of $7,676 and $7,860 in 2007 and 2006, respectively		401,967			367,413
Other current assets		189,311			168,534
Total Current Assets		753,755			693,293
Securities and other investments		6,315			6,401
Property, plant and equipment, net of accumulated depreciation of $187,404 and $181,543 in 2007 and 2006, respectively		156,423			148,190
Computer software		255,617			255,285
Goodwill		545,493			531,610
Other assets		291,003			271,815
Total Assets		$	2,008,606		$	1,906,594
Liabilities, Minority Interests and Shareholders’ (Deficit) Equity:
Current Liabilities:
Accounts payable		$	95,611		$	82,013
Accrued and other current liabilities		209,065			256,672
Accrued income taxes		61,338			74,485
Short-term deferred tax liability		7,206			7,238
Deferred revenues		109,529			122,466
Total Current Liabilities		482,749			542,874
Postretirement and postemployment benefits		88,442			85,846
Long-term debt (Note 9)		1,162,587			975,406
Other liabilities		238,287			168,149
Total Liabilities		$	1,972,065		$	1,772,275
Commitments and Contingencies (Note 7)
Minority Interests		$	100,618		$	100,410
Shareholders’ (Deficit) Equity:
Common Stock, par value $.01, authorized 800,000 shares; issued 335,045 shares in 2007 and 2006, respectively		$	3,350		$	3,350
Capital in excess of par		506,882			497,955
Retained earnings		2,640,740			2,612,939
Treasury stock, at cost, 138,807 and 134,367 shares in 2007 and 2006, respectively		(3,176,134		)	(3,044,996		)
Cumulative translation adjustment		24,013			28,786
Unamortized postretirement and postemployment balances (SFAS No. 158)		(63,013		)	(64,264		)
Unrealized gain on changes in fair value of cash flow hedges, net of tax		6			6
Unrealized gain on investments, net of tax		79			133
Total Shareholders’ (Deficit) Equity		$	(64,077	)	$	33,909
Total Liabilities, Minority Interests and Shareholders’ (Deficit) Equity		$	2,008,606		$	1,906,594

 

See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

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IMS HEALTH INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars and shares in thousands, except per share data)

		Three Months Ended March 31,
		2007			2006
Information and analytics revenue		411,187			377,135
Consulting and services revenue		99,162			69,019
Operating Revenue		$	510,349		$	446,154
Operating costs		229,249			197,718
External-use software amortization		11,245			10,292
Selling and administrative expenses		139,641			124,351
Depreciation and other amortization		19,151			17,057
Operating Income		111,063			96,736
Interest income		1,798			1,543
Interest expense		(8,556		)	(8,459		)
(Losses) gains from investments, net		(211		)	2,673
Other (expense) income, net		(2,778		)	1,772
Non-Operating Loss, Net		(9,747		)	(2,471		)
Income before provision for income taxes		101,316			94,265
(Provision) benefit for income taxes (Note 11)		(15,747		)	23,832
Net Income		$	85,569		$	118,097
Basic Earnings Per Share of Common Stock		$	0.44		$	0.56
Diluted Earnings Per Share of Common Stock		$	0.43		$	0.56
Weighted average number of shares outstanding — Basic		196,639			209,262
Dilutive effect of shares issuable as of period-end under stock-based compensation plans and other		3,751			2,559
Adjustment of shares outstanding applicable to exercised and cancelled stock options during the period		374			81
Weighted Average Number of Shares Outstanding — Diluted		200,764			211,902

 

See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

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IMS HEALTH INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars and shares in thousands, except per share data)

		Three Months Ended March 31,
		2007			2006
Cash Flows from Operating Activities:
Net income		$	85,569		$	118,097
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		30,396			27,349
Bad debt expense		275			—
Deferred income taxes		(9,726		)	(2,892		)
Losses (gains) from investments, net		211			(2,673		)
Minority interests in net income of consolidated companies		1,898			891
Non-cash stock-based compensation charges		10,510			11,155
Excess tax benefits from stock-based compensation		(1,659		)	(454		)
Change in assets and liabilities, excluding effects from acquisitions and dispositions:
Net increase in accounts receivable		(35,484		)	(10,527		)
Net decrease (increase) in inventory		1,217			(1,343		)
Net increase in prepaid expenses and other current assets		(25,496		)	(12,580		)
Net increase (decrease) in accounts payable		12,053			(2,195		)
Net decrease in accrued and other current liabilities		(46,185		)	(27,201		)
Net decrease in accrued severance, impairment and other charges		(1,564		)	(11,081		)
Net decrease in deferred revenues		(14,200		)	(918		)
Net increase (decrease) in accrued income taxes		5,843			(37,558		)
Net decrease (increase) in pension assets (net of liabilities)		1,236			(7,212		)
Net decrease (increase) in other long-term assets (net of long-term liabilities)		1,155			(1,286		)
Net tax benefit on stock-based compensation		3,542			204
Net Cash Provided by Operating Activities		19,591			39,776
Cash Flows Used in Investing Activities:
Capital expenditures		(13,940		)	(5,406		)
Additions to computer software		(19,891		)	(19,257		)
Payments for acquisitions of businesses, net of cash acquired		(13,453		)	(18,298		)
Proceeds from sales of investments, net		—			4,057
Other investing activities, net		(3,995		)	1,966
Net Cash Used in Investing Activities		(51,279		)	(36,938		)
Cash Flows Provided by (Used in) Financing Activities:
Net increase in revolving credit facility and other		178,463			51,750
Proceeds from short-term credit agreement and private placement notes		—			450,000
Payments for purchase of treasury stock		(170,000		)	(728,201		)
Proceeds from exercise of stock options		34,632			9,792
Excess tax benefits from stock-based compensation		1,659			454
Dividends paid		(5,952		)	(6,035		)
Proceeds from employee stock purchase plans		66			—
(Decrease) increase in cash overdrafts		(2,196		)	2,986
Payments to minority interests and other financing activities		(1,691		)	(808		)
Net Cash Provided by (Used in) Financing Activities		34,981			(220,062		)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		1,838			705
Increase (Decrease) in Cash and Cash Equivalents		5,131			(216,519		)
Cash and Cash Equivalents, Beginning of Period		157,346			362,943
Cash and Cash Equivalents, End of Period		$	162,477		$	146,424

 

See accompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).

5

IMS HEALTH INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(Dollars and shares in thousands, except per share data)

Note 1.  Interim Condensed Consolidated Financial Statements (Unaudited)

The accompanying Condensed Consolidated Financial Statements (Unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Article 10 of Regulation S-X under the Securities and Exchange Act of 1934, as amended.  The Condensed Consolidated Financial Statements (Unaudited) do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments, all of which are of a normal recurring nature (except for those adjustments related to the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) (see Note 11)), considered necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented have been included.  The results of operations for interim periods are not necessarily indicative of the results expected for the full year.  The December 31, 2006 balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.  The Condensed Consolidated Financial Statements (Unaudited) and related notes should be read in conjunction with the Consolidated Financial Statements and related notes of IMS Health Incorporated (the “Company” or “IMS”) included in its 2006 Annual Report on Form 10-K.  Certain prior year amounts have been reclassified to conform to the 2007 presentation.  Amounts presented in the Condensed Consolidated Financial Statements (Unaudited) may not add due to rounding.

Note 2.  Basis of Presentation

IMS is the leading global provider of market intelligence to the pharmaceutical and healthcare industries. We offer leading-edge market intelligence products and services that are integral to our clients’ day-to-day operations, including portfolio optimization capabilities; launch and brand management solutions; sales force effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve ROI and the delivery of quality healthcare worldwide. Our information products are developed to meet our clients’ needs by using data secured from a worldwide network of suppliers in more than 100 countries. Our key information products include:

·                       Sales Force Effectiveness to optimize sales force productivity and territory management;

·                       Portfolio Optimization to provide clients with insights into market opportunity and business development assessment; and

·                       Launch, Brand Management and Other to support client needs relative to market segmentation and positioning, life cycle management for prescription and consumer health pharmaceutical products and health economics and outcomes research offerings.

Within these key information products, we provide consulting and services that use in-house capabilities and methodologies to assist pharmaceutical clients in analyzing and evaluating market

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trends, strategies and tactics, and to help in the development and implementation of customized software applications and data warehouse tools.

The Company operates in more than 100 countries.

The Company is managed on a global business model with global leaders for the majority of its critical business processes and accordingly has one reportable segment (See Note 15).

Note 3.  Summary of Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating this statement to determine any potential impact that it may have on its financial results.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value.  Entities shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company is currently evaluating this statement to determine any potential impact that it may have on its financial results.

Note 4.   Summary of Significant Accounting Policies

Stock-Based Compensation Expense

On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and non-employee directors including employee stock options, restricted stock, restricted stock units and employee stock purchases related to the Employee Stock Purchase Plan based on estimated fair values. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in  2006.  In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.  The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s fiscal year 2006. See Note 8 for additional information.

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SFAS 123R requires companies to estimate the fair value of stock option awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period of the award in the Company’s Consolidated Statements of Income. Prior to the adoption of SFAS 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, stock-based compensation expense had been recognized in the Company’s Consolidated Statements of Income only for stock option modifications and restricted stock units because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in the Company’s  Consolidated Statements of Income for 2006 and 2007 included compensation expense for share-based payment awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123, and compensation expense for the share-based payment awards granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.   Prior to the adoption of SFAS 123R, the Company used the straight-line method of attributing the value of stock-based compensation and continued to use that method after the adoption.  As stock-based compensation expense recognized in the Consolidated Statements of Income for 2006 and 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under SFAS 123 for the periods prior to 2006, the Company accounted for stock options by estimating forfeitures in the first three quarters of the year and applying the full year actual forfeitures in the fourth quarter of the year, as well as an estimate of future forfeitures, and recognized forfeitures as they occurred for restricted stock grants.  The Company’s method of valuation for stock option awards granted after January 1, 2006 is the Black-Scholes option-pricing model which was also previously used for the Company’s pro forma information required under SFAS 123. See Note 8 for additional information.

Computation of Net Income per Share

 Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares primarily consist of employee stock options and restricted stock units.

SFAS No. 128, “Earnings per Share,” requires that employee equity share options, restricted stock units and similar equity instruments granted by the Company be treated as potential common shares outstanding in computing diluted earnings per share. Diluted shares outstanding include restricted stock units and the dilutive effect of in-the-money options which is calculated based on the

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average share price for each fiscal period using the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of benefits that would be recorded in additional paid-in capital when the award becomes deductible for tax purposes are assumed to be used to repurchase shares.

Note 5.  Acquisitions

The Company makes acquisitions in order to expand its products, services and geographic reach.  During the three months ended March 31, 2007, the Company completed one acquisition of ValueMedics Research, LLC (U.S.) at a cost of approximately $9,800.  This acquisition was accounted for under the purchase method of accounting.  As such, the aggregate purchase price has been allocated on a preliminary basis to the assets acquired based on estimated fair values as of the closing date.  The purchase price allocations will be finalized after the completion of the valuation of certain assets and liabilities.  Any adjustments resulting from the finalization of the purchase price allocations are not expected to have a material impact on the Company’s results of operations.  The Condensed Consolidated Financial Statements (Unaudited) include the results of this acquired company subsequent to the closing of the acquisition.  Had this acquisition occurred as of January 1, 2007 or 2006, the impact on the Company’s results of operations would not have been significant.  Goodwill of approximately $6,200 was recorded in connection with this acquisition.  The amount deductible for tax purposes has not yet been determined.

During the three months ended March 31, 2006, the Company completed one acquisition of Läkemedelsstatistik AB (Sweden) for an aggregate cost of approximately $12,000.  This acquisition was accounted for under the purchase method of accounting.  As such, the aggregate purchase price has been allocated on a preliminary basis to the assets acquired based on estimated fair values as of the closing date.  The Company finalized the purchase price allocation for this acquisition during 2006 which did not have a material impact on the Company’s results of operations.  The Condensed Consolidated Financial Statements (Unaudited) include the results of this acquired company subsequent to the closing of the acquisition.  Had this acquisition occurred as of January 1, 2006, the impact on the Company’s results of operations would not have been significant.  Goodwill of approximately $9,300 was recorded in connection with this acquisition, of which none is deductible for tax purposes.

Note 6.  Goodwill and Intangible Assets

During the three months ended March 31, 2007, the Company recorded additional goodwill of approximately $8,000 related to the preliminary allocation of purchase price for the acquisition completed during the first quarter of 2007 and also to earn-out agreements for acquisitions completed prior to 2007 (see Note 7).  During the three months ended March 31, 2006, the Company recorded additional goodwill of approximately $11,000 related primarily to the preliminary allocation of purchase price for the acquisition completed during the first quarter of 2006 and to earn-out agreements for acquisitions completed prior to 2006.

All of the Company’s other acquired intangibles are subject to amortization.  Intangible asset amortization expense was $4,655 and $4,399 during the three months ended March 31, 2007 and

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2006, respectively.  At March 31, 2007, intangible assets were primarily composed of customer relationships, databases and trade names (included in Other assets) and computer software.  The gross carrying amounts and related accumulated amortization of these intangibles were $153,597 and $66,503, respectively, at March 31, 2007 and $133,160 and $46,423, respectively, at December 31, 2006.  These intangibles are amortized over periods ranging from two to fifteen years.  As of March 31, 2007, the weighted average amortization periods of the acquired intangibles by asset class are listed in the following table:

Intangible Asset Type		Weighted Average Amortization (Years) Period
Customer Relationships		10.1
Computer Software and Algorithms		7.0
Databases		4.7
Trade Names		4.3
Other		3.7
Weighted average		8.9

 

Based on current estimated useful lives, amortization expense associated with intangible assets at March 31, 2007 is estimated to be approximately $4,200 for each of the remaining three quarters in 2007.  Thereafter, annual amortization expense associated with intangible assets is estimated to be as follows:

Year Ended December 31,		Amortization Expense
2008		$	14,890
2009		12,835
2010		9,385
2011		8,222
2012		6,449
Thereafter		$	22,839

 

Note 7.  Contingencies

The Company and its subsidiaries are involved in legal and tax proceedings, claims and litigation arising in the ordinary course of business.  Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available.  For those matters where management currently believes it is probable that the Company will incur a loss and that the probable loss or range of loss can be reasonably estimated, the Company has recorded reserves in the Condensed Consolidated Financial Statements (Unaudited) based on its best estimates of such loss.  In other instances, because of the uncertainties related to either the probable outcome or the amount or range of loss, management is unable to make a reasonable estimate of a liability, if any.  However, even in many instances where the Company has recorded a reserve, the Company is unable to predict with certainty the final outcome of the matter or whether resolution of the matter will materially affect the Company’s results of operations, financial position or cash flows.  As additional information becomes available, the Company adjusts its assessment and estimates of such liabilities accordingly.

 

10

The Company routinely enters into agreements with its suppliers to acquire data and with its customers to sell data, all in the normal course of business.  In these agreements, the Company sometimes agrees to indemnify and hold harmless the other party for any damages such other party may suffer as a result of potential intellectual property infringement and other claims related to the use of the data.  These indemnities typically have terms of approximately two years.  The Company has not accrued a liability with respect to these matters, as the exposure is considered remote.

In connection with the agreements (the “LLC Agreements”) governing the relationship among the Company and two of its subsidiaries and two third-party investors with respect to IMS Health Licensing Associates, L.L.C., the Company also entered into a guaranty agreement.  Under the terms of this guaranty agreement, the Company guarantees in favor of the third-party investors the performance of the Company’s subsidiaries under the LLC Agreements and agrees to indemnify and hold harmless the third-party investors against damages, including specified delay damages, the third-party investors may suffer as a result of failures to perform under the LLC Agreements by the Company and its subsidiaries.

Based on its review of the latest information available, in the opinion of management, the ultimate liability of the Company in connection with pending tax and legal proceedings, claims and litigation will not have a material effect on the Company’s results of operations, cash flows or financial position, with the possible exception of the matters described below.

D&B Legacy and Related Tax Matters

Sharing Disputes.  In 1996 the company then known as The Dun & Bradstreet Corporation (“D&B”) and now known as R.H. Donnelley Corporation (“Donnelley”) separated into three public companies by spinning off ACNielsen Corporation (“ACNielsen”) and the company then known as Cognizant Corporation (“Cognizant”) (the “1996 Spin-Off”).  Cognizant is now known as Nielsen Media Research, Inc., a subsidiary of The Nielsen Company, formerly known as VNU N.V. (“NMR”).  The agreements effecting the 1996 Spin-Off allocated tax-related liability with respect to certain prior business transactions (the “Legacy Tax Controversies”) between D&B and Cognizant.  The D&B portion of such liability is now shared among Donnelley and certain of its former affiliates (the “Donnelley Parties”), and the Cognizant portion of such liability is shared between NMR and the Company pursuant to the agreements effecting Cognizant’s spin-off of the Company in 1998 (the “1998 Spin-Off”).

The underlying tax controversies with the Internal Revenue Service (the “IRS”) have substantially all been resolved and the Company paid to the IRS the amounts that it believed were due and owing.  In the first quarter of 2006, Donnelley indicated that it disputed the amounts contributed by the Company toward the resolution of these matters based on the Donnelley Parties’ interpretation of the allocation of liability under the 1996 Spin-Off agreements.  The Donnelley Parties on the one hand, and NMR and the Company, on the other hand, have attempted to resolve these disputes through negotiation.  The 1996 Spin-Off agreements provide that if the parties cannot reach agreement through negotiation they must arbitrate the disputes.  As of March 31, 2007, the Company had a reserve of approximately $20,400 for these matters.

On August 14, 2006, the Donnelley Parties commenced arbitration regarding one of these

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disputes (referred to herein as the “Dutch Partnership Dispute”) by filing a Notice of Arbitration and Statement of Claim (the “Donnelley Statement”) with the American Arbitration Association International Center for Dispute Resolution (the “AAA”).  In the Donnelley Statement, the Donnelley Parties claim that the Company and NMR collectively owe approximately an additional $10,800 with respect to the Dutch Partnership Dispute; (if determined liable, the Company’s share of this amount would be approximately $5,400).  On October 16, 2006, the Company and NMR filed a Statement of Defense denying all claims made by the Donnelley Parties in the Donnelley Statement.  The parties are currently engaged in discovery in this arbitration.  The Company intends to vigorously defend itself with respect to the Dutch Partnership Dispute and the remaining disputes.

The Partnership (Tax Year 1997).  The IRS is seeking to reallocate certain items of partnership income and expense as well as disallow certain items of partnership expense with respect to a partnership now substantially owned by the Company (the “Partnership”) on the Partnership’s 1997 tax return.  During 1997, the Partnership was substantially owned by Cognizant, but liability for this matter was allocated to the Company pursuant to the agreements effecting the 1998 Spin-Off.  The Company has filed a formal protest relating to the proposed assessment for 1997 with the IRS Office of Appeals.  The Company is attempting to resolve this matter in the administrative appeals process before proceeding to litigation if necessary. If the IRS were to ultimately prevail in its position, the Company’s liability (tax and interest, net of tax benefit) with respect to tax year 1997 would be approximately $20,600, which amount the Company had reserved in current accrued income taxes payable at March 31, 2007.  During the second quarter of 2007, the Company intends to file an amended return for this period to prevent further interest from accruing.

In addition to these matters, the Company and its predecessors have entered, and the Company continues to enter, into global tax planning initiatives in the normal course of their businesses.  These activities are subject to review by applicable tax authorities.  As a result of the review process, uncertainties exist and it is possible that some of these matters could be resolved adversely to the Company.

Matters Before the Belgian Competition Service

Complaints were filed in 1998 and 1999 against the Company with the Belgian Competition Service (“BCS”) alleging abuse of a dominant position on the Belgian market.  In October 1999 and 2000, the Chairman of the Belgian Competition Council (“BCC”) adopted interim measures against the Company, with which the Company complied.  In December 2004, the Company received a formal statement of objections alleging that the Company had abused its dominant position on the Belgian market in violation of Article 82 of the EC Treaty and corresponding Belgian law.  The Company submitted its comments to the statement of objections in writing to the BCC in February 2005.

In a separate matter, in October 2004, the BCS notified IMS of a request for information in connection with IMS’s acquisition in April 2004 of a competitor in the Belgian market, Source Informatics Belgium S.A.  The BCS is investigating whether such acquisition may have violated Article 82 of the EC Treaty and corresponding Belgian law.  The Company responded to the request for information in December 2004.

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The Company intends to continue to vigorously defend itself in these matters before the Belgian competition authorities.  Management of the Company is unable to predict at this time the final outcome of these matters or whether adverse resolutions thereof could materially affect the Company’s results of operations, cash flows or financial position in the period in which such adverse resolution occurs.

Contingent Consideration

Under the terms of certain purchase agreements related to acquisitions made since 2002, the Company may be required to pay additional amounts as contingent consideration based on the achievement of certain performance related targets during 2006 through 2009.  Substantially all of these additional payments will be recorded as goodwill in accordance with Emerging Issues Task Force (“EITF”) No. 95-8, “Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.”  As of March 31, 2007, approximately $48,000 had been earned under these contingencies.  Based on current estimates, the Company expects that additional contingent payments under these agreements may total approximately $20,000.  It is expected that these contingent payments will be resolved within a specified time period after the end of each respective calendar year from 2006 through 2009.

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Note 8.  Stock-Based Compensation

The following table summarizes stock option activity for the periods indicated.

 

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The following table summarizes activity of restricted stock units with service conditions.

 

The following table summarizes activity of restricted stock units with performance conditions.

 

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The following table summarizes the components and classification of stock-based compensation expense in the first quarter of 2007 and 2006.

For the Three Months Ended March 31,		2007			2006
Stock Options		$	5,516		$	9,141
Restricted Stock Units		$	4,767		$	1,772
Employee Stock Purchase Plan		$	227		$	242
Total Stock-Based Compensation Expense		$	10,510		$	11,155
Operating Costs		$	1,856		$	1,540
Selling, & Administrative Expenses		$	8,654		$	9,615
Total Stock-Based Compensation Expense		$	10,510		$	11,155
Tax Benefit on Stock-Based Compensation Expense		$	3,220		$	3,326
Capitalized Stock-Based Compensation Expense		$	76		—

 

Note 9.  Financial Instruments

Foreign Exchange Risk Management

The Company transacts business in more than 100 countries and is subject to risks associated with changing foreign exchange rates. The Company’s objective is to reduce earnings and cash flow volatility associated with foreign exchange rate changes. Accordingly, the Company enters into foreign currency forward contracts to minimize the impact of foreign exchange movements on net income, non-U.S. dollar anticipated royalties, and on the value of non-functional currency assets and liabilities.

It is the Company’s policy to enter into foreign currency transactions only to the extent necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for investment or speculative purposes. The principal currencies hedged are the Euro, the Japanese Yen, the British Pound, the Swiss Franc and the Canadian Dollar.

The impact of foreign exchange risk management activities on pre-tax income in the three months ended March 31, 2007 was a net loss of $836, and net gain of $2,691 in the three months ended March 31, 2006.  In addition, at March 31, 2007, the Company had approximately $761,064 in foreign exchange forward contracts outstanding with various expiration dates through February 2008 relating to non - U.S. Dollar Operating Income, non-U.S. Dollar anticipated royalties and non-functional currency assets and liabilities.  Foreign exchange forward contracts are recorded at estimated fair value.  The estimated fair values of the forward contracts are based on quoted market prices.

Unrealized and realized gains and losses on the contracts hedging non-U.S. Dollar Operating Income and non-functional currency assets and liabilities do not qualify for hedge accounting in accordance with SFAS 133 “Accounting for Derivative Instruments and Hedging Activities,” as

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amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” (collectively, “SFAS No. 133”),  and therefore are not deferred and are included in the Condensed Consolidated Statements of Income (Unaudited) in Other income, net.

Unrealized gains and losses on the contracts hedging non-U.S. Dollar anticipated royalties qualify for hedge accounting under SFAS No. 133 and are therefore deferred and included in OCI “Other Comprehensive Income.”

Fair Value of Financial Instruments

At March 31, 2007, the Company’s financial instruments included cash, cash equivalents, receivables, accounts payable and long-term debt.  At March 31, 2007, the fair values of cash, cash equivalents, receivables and accounts payable approximated carrying values due to the short-term nature of these instruments.  At March 31, 2007, the fair value of long-term debt approximated carrying value. 

Credit Concentrations

The Company continually monitors its positions with, and the credit quality of, the financial institutions which are counterparties to its financial instruments and does not anticipate non-performance by the counterparties.  The Company would not realize a material loss as of March 31, 2007 in the event of non-performance by any one counterparty.  The Company enters into transactions only with financial institution counterparties that have a credit rating of A or better.  In addition, the Company limits the amount of credit exposure with any one institution.

The Company maintains accounts receivable balances ($401,967 and $367,413, net of allowances, at March 31, 2007 and December 31, 2006, respectively), principally from customers in the pharmaceutical industry.  The Company’s trade receivables do not represent significant concentrations of credit risk at March 31, 2007 due to the high quality of its customers and their dispersion across many geographic areas.

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Lines of Credit

The following table summarizes the Company’s long-term debt at March 31, 2007 and December 31, 2006:

		March 31, 2007			December 31, 2006
4.6% Private Placement Notes, principal payment of $150,000 due January 2008, net of interest rate swaps of $(1,758) and $(2,819), respectively		$	148,242		$	147,181
5.55% Private Placement Notes, principal payment of $150,000 due April 2016		150,000			150,000
1.70% Private Placement Notes, principal payment of 34,395,000 Japanese Yen due January 2013		291,807			288,670
Revolving Credit Facility:
Japanese Yen denominated borrowings at average floating rates of approximately 1.01%		381,941			249,097
Swiss Franc denominated borrowings at average floating rates of approximately 2.53%		51,497			59,258
U.S. Dollar denominated borrowings at average floating rates of approximately 5.75%		89,100			31,200
Bank Term Loan, principal payment of $50,000 due June, 2009 at average floating rate of approximately 5.60%		50,000			50,000
Total Long-Term Debt		$	1,162,587		$	975,406

 

In July 2006, the Company entered into a $1,000,000 revolving credit facility with a syndicate of 12 banks (“Revolving Credit Facility”) replacing its existing $700,000 Amended and Restated Facility (see below).  The terms of the Revolving Credit Facility extended the maturity of the facility in its entirety to a term of five years, maturing July 2011, reduced the borrowing margins, and increased subsidiary borrowing limits.  Total borrowings under the Revolving Credit Facility were $522,538 and $339,555 at March 31, 2007 and December 31, 2006, respectively, all of which were classified as long-term.  In April 2004, the Company entered into a $700,000 revolving credit facility with a syndicate of 12 banks (the “Unsecured Facility”).  The Unsecured Facility replaced the Company’s lines of credit with several domestic and international banks.  On March 9, 2005, the Company renegotiated with the syndicate of 12 banks to amend and restate the Unsecured Facility (the “Amended and Restated Facility”).  The terms of the Amended and Restated Facility extended the maturity of the facility in its entirety to a term of five years, maturing March 2010, reduced the borrowing margins and increased subsidiary borrowing limits.

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The Company defines long-term lines as those where the lines are non-cancellable for more than 365 days from the balance sheet date by the financial institutions except for specified, objectively measurable violations of the provisions of the agreement.  Although the 4.6% Private Placement Notes principal payment of $150,000 is due within 365 days, the Company has the ability and intent to refinance the notes with another long-term debt arrangement and continues to classify them as long-term in compliance with SFAS No. 6, “Classification of Short-Term Obligations Expected to be Refinanced.”

In general, rates for borrowing under the Revolving Credit Facility are LIBOR plus 30 basis points and can vary based on the Company’s Debt to EBITDA ratio.  The weighted average interest rates for the Company’s lines were 1.97% and 1.61% at March 31, 2007 and December 31, 2006, respectively.  In addition, the Company is required to pay a commitment fee on any unused portion of the facilities of 0.075%.  At March 31, 2007, the Company had approximately $477,462 available under its existing bank credit facilities.

In June 2006, the Company closed a $50,000 three year term loan with a bank.  The term loan allows the Company to borrow at a floating rate with a lower borrowing margin than the Company’s revolving credit facility, and provides the Company with an option to extend the term up to an additional two years.  The Company used the proceeds to refinance existing debt borrowed under the revolving credit facility.

In April 2006, the Company closed a private placement transaction pursuant to which it issued $150,000 of ten-year notes to two highly rated insurance companies at a fixed rate of 5.55%.  The Company used the proceeds to refinance existing debt of $150,000 drawn under a short term credit agreement with a bank in January 2006.

In January 2006, the Company closed a private placement transaction pursuant to which its Japanese subsidiary issued 34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance) to several highly rated insurance companies at a fixed rate of 1.70%.  The Company used the proceeds to refinance existing debt in Japan borrowed under the Company’s Amended and Restated Facility.

In January 2003, the Company closed a private placement transaction pursuant to which it issued $150,000 of five-year debt to several highly rated insurance companies at a fixed rate of 4.60%.  The Company used the proceeds to pay down short-term debt.  The Company also swapped $100,000 of its fixed rate debt to floating rate based on six-month LIBOR plus a margin of approximately 107 basis points.  The Company accounted for these swaps as fair value hedges under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The Company determined the fair values based on estimated prices quoted by financial institutions.  The fair values of these swaps were $(1,758) and $(2,819) as of March 31, 2007 and December 31, 2006, respectively.

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The Company’s financing arrangements provide for certain covenants and events of default customary for similar instruments, including in the case of its main bank arrangements, the  private placement transactions, and the term loan, covenants to maintain specific ratios of consolidated total indebtedness to EBITDA and of EBITDA to certain fixed charges.  At March 31, 2007, the Company was in compliance with these financial debt covenants.

Note 10.  Pension and Postretirement Benefits

The following table provides the Company’s expense associated with pension benefits that are accounted for under SFAS No. 87, “Employers’ Accounting for Pensions,” and postretirement benefits that are accounted for under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.”  For a complete description of the Company’s pension and postretirement benefits, refer to Note 11 of the Company’s 2006 Annual Report on Form 10-K as filed with the SEC.

Components of Net Periodic Benefit Cost for the		Pension Benefits						Other Benefits
Three Months Ended March 31,		2007			2006			2007			2006
Service cost		$	4,096		$	3,464		$	6		$	10
Interest cost		4,582			3,911			177			193
Expected return on plan assets		(7,280		)	(6,354		)	—			—
Amortization of prior service cost (credit)		4			(45		)	(9		)	(141		)
Amortization of transition obligation		(1		)	(1		)	—			—
Amortization of net loss		1,095			1,128			108			152
Net periodic benefit cost		$	2,496		$	2,103		$	282		$	214

 

Note 11.  Income Taxes

The Company operates in more than 100 countries around the world and its earnings are taxed at the applicable income tax rate in each of these countries.

The Company adopted the provisions of FIN 48 on January 1, 2007.  As a result of this adoption, the Company recognized an increase in liabilities for uncertain tax positions of approximately $51,800 and a corresponding reduction to the January 1, 2007 retained earnings balance. As of the adoption date, the Company had approximately $117,200 of gross unrecognized tax benefits, of which $107,600, if recognized would favorably affect the effective tax rate.  The Company recognizes interest expense and penalties related to unrecognized tax benefits in income tax expense.  As of the adoption date, the Company had accrued interest and penalties of approximately $13,500.

The Company files numerous consolidated and separate income tax returns in the U.S. federal and state and non-U.S. jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for the years before 2003 and is no longer subject to state and local income tax examination by tax authorities for years before 1997.  As well, with few exceptions, the Company is no longer subject to examination by tax authorities in its material non-U.S. jurisdictions prior to 2003. It is reasonably possible that within the next twelve months the Company could recognize approximately $1,000 of unrecognized tax benefits as a result of the expiration of certain statutes of limitation.

 

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The Internal Revenue Service (“IRS”) is currently auditing the 2004 and 2005 federal income tax returns of the Company.  It is reasonably possible that this audit may conclude within the next twelve months. To date, no material adjustments have been proposed as a result of this audit.  At this time, it is not reasonably possible to estimate the impact of the resolution of this audit on the financial statements of the Company.  The Company intends to file an amended 1997 federal income tax return related to a dispute with the IRS over the allocation of certain items of partnership income and expense to prevent further interest from accruing thereon (see Note 7).  The payment associated with the filing of this amended return will be approximately $20,600 (tax and interest, net of tax benefit).

For the three months ended March 31, 2007, the Company’s effective tax rate was reduced primarily due to a favorable non-U.S. audit settlement for tax years 1998 through 2002 (approximately $16,500) and a reorganization of certain non-U.S. subsidiaries  (approximately $4,400).  For the three months ended March 31, 2006, the Company’s effective tax rate was reduced primarily due to a favorable U.S. partnership audit settlement for tax years 1998 through 2003 (approximately $69,200) and a favorable U.S. audit settlement for tax years 2000 through 2003 (approximately $17,600).  Also in the first quarter of 2006, approximately $24,100 of tax expense was recorded related to disputes between the Company and NMR, on the one hand, and Donnelley and certain of its former affiliates on the other hand, as to proper interpretation of, and allocation of tax liabilities under, the 1996 Spin-Off agreements (see Note 7).

While the Company intends to continue to seek global tax planning initiatives, there can be no assurance that the Company will be able to successfully identify and implement such initiatives to reduce or maintain its overall tax rate.

Note 12.  IMS Health Capital Stock

The Company’s share repurchase program has been developed to buy opportunistically, when the Company believes that its share price provides it with an attractive use of its cash flow and debt capacity.

In January 2007, the Company repurchased approximately 6,135 shares of its outstanding Common Stock in a treasury stock transaction at an initial cost of approximately $170,000.  The shares were purchased from a bank pursuant to an accelerated share repurchase program (“ASR”) at an initial cost of $27.71 per share.  The purchase of these shares was made pursuant to the Company’s share repurchase programs previously authorized by the Company’s Board of Directors. As part of the ASR, the Company simultaneously entered into a forward contract for the final settlement of the ASR transaction which was indexed to the price of the Company’s Common Stock.  The ASR agreement provided for the final settlement amount to be in the Company’s Common Stock if the Company were to owe an amount to the bank, or in either cash or additional shares of the Company’s Common Stock, at the Company’s sole discretion, if the bank were to owe an amount to the Company.  As the agreement required the Company to deliver shares to the bank for final settlement, the forward contract element qualified for permanent equity classification and the fair value of the forward contract, which was zero at the contract’s inception, was recorded in equity in accordance with the provisions of EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock.”  Subsequent changes in the fair value of the forward contract were not recorded as the Company continued to classify the forward contract as equity.  Upon

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completion of the ASR in April 2007, the Company was required to pay approximately $6,000 in shares, and therefore issued 203 treasury shares, as full settlement of its obligation under the ASR.  The total cost of the ASR was approximately $176,000 or $28.68 per share.  The Company funded the ASR through its existing bank credit facilities (see Note 9).

On December 19, 2006, the Board of Directors authorized a stock repurchase program to buy up to 10,000 shares.  As of March 31, 2007, 10,000 shares remained available for repurchase under the December 2006 program.

On January 25, 2006, the Board of Directors authorized a stock repurchase program to buy up to 30,000 shares.  As of March 31, 2007, 309 shares remained available for repurchase under the January 2006 program.

On November 16, 2005, the Board of Directors authorized a stock repurchase program to buy up to 10,000 shares. This program was completed in February 2006 at a total cost of $251,619.

On December 14, 2004, the Board of Directors authorized a stock repurchase program to buy up to 10,000 shares. This program was completed in January 2006 at a total cost of $242,680.

During 2007, the Company repurchased approximately 6,135 shares of outstanding Common Stock under these programs at a total cost of approximately $176,000 pursuant to the ASR described above.  During 2006, the Company repurchased approximately 33,931 shares of outstanding Common Stock under these programs at a total cost of $880,407.  The 2006 repurchases include the repurchase of 25,000 shares at a total cost of approximately $645,000 or $25.82 per share in January 2006 pursuant to an ASR.  As the 2006 ASR provided for the final settlement of the contract in either cash or additional shares of the Company’s Common Stock at its sole discretion, the forward contract element of the 2006 ASR, which was indexed to the price of the Company’s Common Stock, was treated as permanent equity and subsequent changes in fair value were not recorded in accordance with the provisions of EITF 00-19.  Total share repurchases during the first quarter of 2007 benefited diluted earnings per share (“EPS”) by less than $0.01 per share.  Total share repurchases during the first quarter of 2006 benefited EPS by approximately $0.02 per share.

Shares acquired through the Company’s repurchase programs described above are open-market purchases or privately negotiated transactions in compliance with SEC Rule 10b-18, with the exception of purchases pursuant to the 2006 and 2007 ASR transactions.

Under the Company’s Restated Certificate of Incorporation as amended, the Company has authority to issue 820,000 shares with a par value of $.01 per share of which 800,000 represent shares of Common Stock, 10,000 represent shares of preferred stock and 10,000 represent shares of Series Common Stock. The preferred and series Common Stock can be issued with varying terms, as determined by the Board of Directors.

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Note 13.  Comprehensive Income

The following table sets forth the components of comprehensive income, net of income tax expense:

		Three Months Ended March 31,
		2007			2006
Net Income		$	85,569		$	118,097
Other comprehensive income, net of taxes:
Unrealized (losses) gains on:
Available-for-sale equity securities		(83		)	44
Tax benefit (expense) on above		29			(16		)
Change in unrealized (losses) gains on investments		(54		)	28
Foreign currency translation (losses) gains		(4,773		)	9,121
Changes in fair value of cash flow hedges		—			43
Amortization of SFAS 158 service cost		1,251			—
Total other comprehensive (loss) income		(3,576		)	9,192
Comprehensive Income		$	81,993		$	127,289

 

Note 14.  Severance, Impairment and Other Charges

During the fourth quarter of 2004, the Company recorded $36,890 of Severance, impairment and other charges as a component of operating income. As a result of leveraging prior investments in technology and process improvements, the Company committed to a plan to eliminate selected positions involved primarily in production and development. The plan resulted in a charge for one-time termination benefits relating to a headcount reduction of approximately 600 employees located primarily in EMEA and the U.S. These severance benefits were calculated pursuant to the terms of established employee protection plans, in accordance with local statutory minimum requirements or individual employee contracts, as applicable.

All of the charge was settled in cash. The Company paid $166 during 2007 and there was no remaining accrual balance at March 31, 2007. All termination actions under this plan were completed by the end of 2006.

 

During the three months ended March 31, 2003, the Company recorded $37,220 of Severance, impairment and other charges as a component of operating income. These charges were designed to further streamline operations and increase productivity through a worldwide reduction in headcount of approximately 80 employees and charges related to impaired contracts and assets. The contract-related charges were for impaired data supply and data processing contacts primarily in the Company’s U.S. and Japanese operations. The asset write-downs portion of the 2003 charge related

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to the Company’s decision to abandon certain products and as such, certain computer software primarily in the U.S., Japan and EMEA was written-down to its net realizable value.

		Severance			Contract			Asset
		related			related			write-
		reserves			reserves			downs			Total
Charge at March 31, 2003		$	9,958		$	22,307		$	4,955		$	37,220
2003 utilization		(6,197		)	(7,047		)	(6,634		)	(19,878		)
2004 utilization		(1,637		)	(3,614		)	—			(5,251		)
2005 utilization		(378		)	(6,747		)	—			(7,125		)
2006 utilization		—			(2,262		)	—			(2,262		)
2007 utilization		—			(124		)	—			(124		)
2007 Reversals		—			(2,249		)	—			(2,249		)
Adjustments		(1,746		)	67			1,679			—
Balance at March 31, 2007		$	—		$	331		$	—		$	331

 

Approximately $9,958 of the 2003 charge related to a worldwide reduction in headcount of approximately 80 employees. These severance benefits were calculated pursuant to the terms of established employee protection plans, in accordance with local statutory minimum requirements or individual employee contracts, as applicable.

The cash portion of the 2003 charge amounted to $30,586, of which the Company paid approximately $124, $2,262 and $7,125 during 2007, 2006 and 2005, respectively, related primarily to employee termination benefits and contract-related charges.  The remaining accrual of $331 at March 31, 2007 relates to a remaining lease obligation and will be utilized during 2007.

During the fourth quarter of 2001, the Company completed the assessment of its Competitive Fitness Program. This program was designed to streamline operations, increase productivity and improve client service. In connection with this program, the Company recorded $94,616 of Severance, impairment and other charges during the fourth quarter of 2001 as a component of operating income.  As of March 31, 2007, approximately $1,564 remains to be utilized from 2007 to 2013 related to severance payments.

In the first quarter of 2007, the Company reversed $2,889 of contract-related reserves from the 2001 and 2003 charges due primarily to the termination and settlement of exit related costs for an impaired lease.  These amounts were reversed against Selling and administrative expenses in the Condensed Consolidated Statements of Income (Unaudited).

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		Severance			Contract			Asset
		related			related			write-
		reserves			reserves			downs			Total
Charge at December 31, 2001		$	39,652		$	26,324		$	28,640		$	94,616
2001 utilization		(3,692		)	(6,663		)	(27,887		)	(38,242		)
2002 utilization		(26,277		)	(9,819		)	(1,474		)	(37,570		)
2003 utilization		(6,384		)	(2,720		)	(241		)	(9,345		)
2004 utilization		(455		)	(1,232		)	—			(1,687		)
2005 utilization		(262		)	(1,881		)	—			(2,143		)
2006 utilization		(264		)	(1,887		)	—			(2,151		)
2007 utilization		(66		)	(1,208		)	—			(1,274		)
2007 Reversal		—			(640		)	—			(640		)
Adjustments		(688		)	(274		)	962			—
Balance at March 31, 2007		$	1,564		$	—		$	—		$	1,564

 

The Company currently expects that the $1,564 balance remaining in the 2001 fourth quarter charge will be utilized as follows:

 

 

Note 15.  Operations by Business Segment

Operating segments are defined as components of an enterprise about which financial information is available that is evaluated on a regular basis by the chief operating decision-maker, or decision-making groups, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.  The Company operates a globally consistent business model, offering pharmaceutical business information and related services to its customers in more than 100 countries.  See Note 2.

The Company maintains regional geographic management to facilitate local execution of its global strategies.  However, the Company maintains global leaders for the majority of its critical business processes; and the most significant performance evaluations and resource allocations made by the Company’s chief operating decision makers are made on a global basis.  As such, the Company has concluded that it maintains one operating and reportable segment.

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Geographic Financial Information:

The following represents selected geographic information for the regions in which we operate for the three months ended March 31, 2007 and 2006:

 

		Americas (1)			EMEA (2)			Asia Pacific (3)			Corporate & Other			Total IMS
Three months ended March 31, 2007:
Operating Revenue (4)		$	231,276		$	210,346		$	68,727		—			$	510,349
Operating Income (Loss) (5)		$	75,985		$	23,430		$	26,278		$	(14,630	)	$	111,063
Three months ended March 31, 2006:
Operating Revenue (4)		$	207,218		$	174,713		$	64,223		—			$	446,154
Operating Income (Loss) (5)		$	71,122		$	15,398		$	26,766		$	(16,550	)	$	96,736

Notes to Geographic Financial Information:

(1)                               Americas includes the United States, Canada and Latin America.

(2)                               EMEA includes countries in Europe, the Middle East and Africa.

(3)                               Asia Pacific includes Japan, Australia and other countries in the Asia Pacific region.

(4)                               Operating Revenue relates to external customers and is primarily based on the location of the customer. The Operating Revenue for the geographic regions includes the impact of foreign exchange in converting results into U.S. dollars.

(5)                               Operating Income for the three geographic regions does not reflect the allocation of certain expenses that are maintained in Corporate and Other and as such, is not a true measure of the respective regions’ profitability.   The Operating Income for the geographic segments includes the impact of foreign exchange in converting results into U.S. dollars. $5,596 of Corporate and Other Operating Income (Loss) for the three months ended March 31, 2006 has been reclassified into the regions ($2,152, $2,611 and $833 in the Americas, EMEA and Asia Pacific, respectively)  to conform to the current year presentation.

A summary of the Company’s operating revenue by product line for the three months ended March 31, 2007 and 2006 is presented below:

 

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars and shares in thousands, except per share data)

This discussion and analysis should be read in conjunction with the accompanying Condensed Consolidated Financial Statements (Unaudited) and related notes.

Executive Summary

Our Business

IMS Health Incorporated (“we”, “us” or “our”) is the leading global provider of market intelligence to the pharmaceutical and healthcare industries. We offer leading-edge market intelligence products and services that are integral to our clients’ day-to-day operations, including portfolio optimization capabilities; launch and brand management solutions; sales force effectiveness innovations; managed care and consumer health offerings; and consulting and services solutions that improve ROI and the delivery of quality healthcare worldwide. Our information products are developed to meet our clients’ needs by using data secured from a worldwide network of suppliers in more than 100 countries. Our key information products include:

·                  Sales Force Effectiveness to optimize sales force productivity and territory management;

·                  Portfolio Optimization to provide clients with insights into market opportunity and business development assessment; and

·                  Launch, Brand Management and Other to support client needs relative to market segmentation and positioning, life cycle management for prescription and consumer health pharmaceutical products and health economics and outcomes research offerings.

Within these key information products, we provide consulting and services that use in-house capabilities and methodologies to assist pharmaceutical clients in analyzing and evaluating market trends, strategies and tactics, and to help in the development and implementation of customized software applications and data warehouse tools.

We operate in more than 100 countries.

We manage on a global business model with global leaders for the majority of our critical business processes and accordingly have one reportable segment.

We believe that important measures of our financial condition and results of operations include operating revenue, constant dollar revenue growth, operating income, constant dollar operating income growth, operating margin and cash flows.

Performance Overview

Our operating revenue grew 14.4% to $510,349 in the first quarter of 2007 as compared to $446,154 in the first quarter of 2006.  The operating revenue increase was a result of growth in all three of our business lines.  Our operating income grew 14.8% to $111,063 in the first quarter of 2007 as compared to $96,736 in the first quarter of 2006.  The operating income growth was a result of increased operating revenues offset by increases in operating costs, selling and administrative expenses and depreciation and amortization, as discussed below. Our net income was $85,569 for the first quarter of 2007 as compared to $118,097 for the first quarter of 2006, due to the Non-Operating Loss, net items discussed below and

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certain tax items as discussed in Note 11 of the Condensed Consolidated Financial Statements (Unaudited).  Our diluted earnings per share of Common Stock decreased to $0.43 for the first quarter of 2007 as compared to $0.56 for the first quarter of 2006.

Results of Operations

Reclassifications.  Certain prior-year amounts have been reclassified to conform to the 2007 presentation.

References to constant dollar results and results excluding the effect of foreign currency translations.  We report results in U.S. dollars, but we do business on a global basis.  Exchange rate fluctuations affect the rate at which we translate foreign revenues and expenses into U.S. dollars and have important effects on our results.  In order to illustrate these effects, the discussion of our business in this report sometimes describes the magnitude of changes in constant dollar terms or results excluding the effect of foreign currency translations.  We believe this information facilitates a comparative view of business growth.  In the first three months of 2007, the U.S. dollar was generally weaker against other currencies as compared to the first three months of 2006.  As a result, growth at constant dollar exchange rates was lower than growth at actual currency exchange rates.  See “How Exchange Rates Affect Our Results” below and the discussion of “Market Risk” in the Management Discussion and Analysis section of our annual report on Form 10-K for the year ended December 31, 2006 for a more complete discussion regarding the impact of foreign currency translation on our business.

Summary of Operating Results

								% Variance
		Three Months Ended March 31,						2007
		2007			2006			vs 2006
Operating revenue		$	510,349		$	446,154		14.4	%
Operating costs		229,249			197,718			15.9	%
External-use software amortization		11,245			10,292			9.3	%
Selling and administrative expenses		139,641			124,351			12.3	%
Depreciation and other amortization		19,151			17,057			12.3	%
Operating income		$	111,063		$	96,736		14.8	%

 

Operating Income

Our operating income for the first quarter of 2007 grew 14.8% to $111,063 from $96,736 in the first quarter of 2006.  This was due to the increase in our operating revenue, offset by increases in our operating costs and selling and administrative expenses driven by acquisitions, increased cost of data, and investments in consulting and services capabilities.  Our operating income increased 14.7% in constant dollar terms.

Operating Revenue

Our operating revenue for the first quarter of 2007 grew 14.4% to $510,349 from $446,154 in the first quarter of 2006. On a constant dollar basis our operating revenue growth was 10.8%.  On a constant dollar basis, acquisitions completed within the prior twelve months contributed approximately 1.9 percentage points to our operating revenue growth during 2007.  The increase in our operating revenue resulted from growth in revenue in all three of our business lines, together with the effect of

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approximately $16,000 of currency translation.  On a constant dollar basis, all business lines grew.

Summary of Operating Revenue

								% Variance
		Three months ended March 31,						2007 vs 2006
		2007			2006			Reported Rates		Constant Dollar
Sales Force Effectiveness		$	233,032		$	214,094		8.8	%	6.0	%
Portfolio Optimization		154,478			129,811			19.0	%	15.2	%
Launch, Brand and Other		122,839			102,249			20.1	%	15.3	%
Operating Revenue		$	510,349		$	446,154		14.4	%	10.8	%

 

·                  Sales Force Effectiveness: The Americas contributed more than one-half to the revenue growth for the first quarter of 2007.

·                  Portfolio Optimization: EMEA contributed more than one-half and the Americas contributed more than one-quarter to the growth during the first quarter of 2007.

·                  Launch, Brand Management and Other: The Americas contributed more than one-half and EMEA contributed more than one-quarter to the revenue growth for the first quarter of 2007.

Consulting and services revenue, as included in the business lines above, was $99,162 in the first quarter of 2007, up 43.7% from $69,019 in the first quarter of 2006 (up 38.5% on a constant dollar basis).  Approximately one-quarter of the consulting and services revenue growth for the first quarter of 2007 was attributable to acquisitions completed during the prior twelve months.

Operating Costs

Our operating costs include data processing costs, the costs of data collection and production, and costs attributable to personnel involved in production, data management and the processing and delivery of our consulting and services offerings.  Our operating costs grew 15.9% to $229,249 in the first quarter of 2007 from $197,718 in the first quarter of 2006.

·                  Foreign Currency Translation: The effect of foreign currency translation increased our operating costs by approximately $9,000 for the first quarter of 2007 as compared to the first quarter of 2006.

Excluding the effect of foreign currency translation, our operating costs grew 11.2% in the first quarter of 2007 as compared to the first quarter of 2006.

·                  Data: Data costs increased by approximately $5,000 in the first quarter of 2007 as compared to the first quarter of 2006.

·                  Consulting:  Consulting and services costs increased by approximately $15,000 in the first quarter of 2007 as compared to the first quarter of 2006.

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·                  Production, Client Services and Other: Production, client services and other costs increased by approximately $2,000 in the first quarter of 2007 as compared to the first quarter of 2006.

External-Use Software Amortization

Our external-use software amortization charges represent the amortization associated with software we capitalized under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Our external-use software amortization charges grew 9.3% in 2007 to $11,245 from $10,292 in 2006.

Selling and Administrative Expenses

Our selling and administrative expenses consist primarily of the expenses attributable to sales, marketing, and administration, including human resources, legal, management and finance.  Our selling and administrative expenses grew 12.3% in the first quarter of 2007, to $139,641 from $124,351 in the first quarter of 2006:

·                  Foreign Currency Translation: The effect of foreign currency translation increased our selling and administrative expenses by approximately $6,000 for the first quarter of 2007 as compared to the first quarter of 2006.

Excluding the effect of foreign currency translation, our selling and administrative expenses grew 7.7% in the first quarter of 2007 as compared to the first quarter of 2006 to support revenue growth.

·                  Sales and Marketing: Sales and marketing expense increased by approximately $3,000 in the first quarter of 2007 as compared to the first quarter of 2006.

·                  Consulting:  Consulting and services expenses increased by approximately $3,000 in the first quarter of 2007 as compared to the first quarter of 2006.

·                  Administrative and Other:  Other expenses increased by approximately $7,000 in the first quarter of 2007 as compared to the first quarter of 2006.  This was partially offset by a $2,900 reversal of restructuring reserves (see Note 14 of Notes to Condensed Consolidated Financial Statements (Unaudited)).

Depreciation and Other Amortization

Our depreciation and other amortization charges increased 12.3% to $19,151 in the first quarter of 2007 from $17,057 in the first quarter of 2006, resulting from higher amortization of intangible assets recorded from acquisitions made during 2006 and 2007, and increased internal-use software amortization.

Trends in our Operating Margins

Our operating margin for the first quarter of 2007 was 21.8%, as compared to 21.7% in the first quarter of 2006.

Recent acquisitions have also had an adverse effect on our operating margins due to the fact that some of the small businesses we have acquired have historically experienced lower operating margins than ours, and

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