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PRXL > SEC Filings for PRXL > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PAREXEL INTERNATIONAL CORP

Form 10-Q for PAREXEL INTERNATIONAL CORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The financial information discussed below is derived from the Condensed Consolidated Financial Statements included in this quarterly report on Form 10-Q. The financial information set forth and discussed below is unaudited but, in the opinion of management, includes all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation of such information. Our results of operations for a particular quarter may not be indicative of results expected during subsequent fiscal quarters or for the entire fiscal year.

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained in this report regarding our strategy, future operations, financial position, future revenue, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "appears," "intends," "may," "plans," "projects," "would," "could," "should," "targets," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors are described under the heading "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, filed with the Securities and Exchange Commission on August 27, 2012 (the "2012 10-K"), and under "Risk Factors" set forth in Part II, Item 1A below. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and our actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

OVERVIEW
We are a leading biopharmaceutical services company, providing a broad range of expertise in clinical research, clinical logistics, medical communications, consulting, commercialization and advanced technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. Our primary objective is to provide quality solutions for managing the biopharmaceutical product lifecycle with the goal of reducing the time, risk, and cost associated with the development and commercialization of new therapies. Since our incorporation in 1983, we have developed significant expertise in processes and technologies supporting this strategy. Our product and service offerings include: clinical trials management, observational studies and patient/disease registries, data management, biostatistical analysis, epidemiology, health economics / outcomes research, pharmacovigilance, medical communications, clinical pharmacology, patient recruitment, clinical supply and drug logistics, post-marketing surveillance, regulatory and product development and commercialization consulting, health policy and reimbursement consulting, performance improvement, medical imaging services, ClinPhone® randomization and trial supply management services ("RTSM"), DataLabs® electronic data capture ("EDC"), IMPACT® clinical trials management systems ("CTMS"), web-based portals, systems integration, patient diary applications, and other product development services. We believe that our comprehensive services, depth of therapeutic area expertise, global footprint and related access to patients, and sophisticated information technology, along with our experience in global drug development and product launch services, represent key competitive strengths.
We have three reporting segments: Clinical Research Services ("CRS"), PAREXEL Consulting and Medical Communications Services ("PCMS"), and Perceptive Informatics ("Perceptive").
• CRS constitutes our core business and includes all phases of clinical research from Early Phase (encompassing the early stages of clinical testing that range from first-in-man through proof-of-concept studies) to Phase II-III and Phase IV, which we call Peri-Approval Clinical Excellence ("PACE"). Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, clinical supply and drug logistics, pharmacovigilance, and investigator site services. We have aggregated Early Phase with Phase II-III/PACE due to economic similarities in these operating segments.

• PCMS provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PCMS consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.


• Perceptive provides information technology solutions designed to help improve clients' product development processes. Perceptive offers a portfolio of products and services that includes medical imaging services, ClinPhone® RTSM, IMPACT® CTMS, DataLabs® EDC, web-based portals, systems integration, and electronic patient reported outcomes ("ePRO"). These services are often bundled together and integrated with other applications to provide an eClinical solution for our clients.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and other financial information. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
For further information on our other critical accounting policies, please refer to the consolidated financial statements and footnotes thereto included in the 2012 10-K.

RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
We evaluate our segment performance and allocate resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are allocated and evaluated on a geographic basis. Accordingly, we do not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other charges, interest income (expense), miscellaneous income (expense), and income tax expense (benefit) in segment profitability. We attribute revenue to individual countries based upon external and internal contractual arrangements. Inter-segment transactions are not included in service revenue. Furthermore, we have a global infrastructure supporting our business segments, and therefore, we do not identify assets by reportable segment. Service revenue, direct costs and gross profit on service revenue for the three months ended September 30, 2012 and 2011 were as follows:

(in thousands)                                 Three Months Ended
                                  September 30, 2012       September 30, 2011       Increase $       Increase %
Service revenue
CRS                              $           297,167     $            235,409     $     61,758          26.2 %
PCMS                                          48,351                   35,648           12,703          35.6 %
Perceptive                                    49,235                   43,678            5,557          12.7 %
Total service revenue            $           394,753     $            314,735     $     80,018          25.4 %
Direct costs
CRS                              $           220,166     $            172,750     $     47,416          27.4 %
PCMS                                          29,685                   20,978            8,707          41.5 %
Perceptive                                    29,553                   28,446            1,107           3.9 %
Total direct costs               $           279,404     $            222,174     $     57,230          25.8 %
Gross profit
CRS                              $            77,001     $             62,659     $     14,342          22.9 %
PCMS                                          18,666                   14,670            3,996          27.2 %
Perceptive                                    19,682                   15,232            4,450          29.2 %
Total gross profit               $           115,349     $             92,561     $     22,788          24.6 %


Three Months Ended September 30, 2012 Compared With Three Months Ended
September 30, 2011:
Revenue
Service revenue increased by $80.0 million, or 25.4%, to $394.8 million for the
three months ended September 30, 2012 from $314.7 million for the three months
ended September 30, 2011. On a geographic basis, service revenue was distributed
as follows (in millions):
                                            Three Months Ended                  Three Months Ended
                                            September 30, 2012                  September 30, 2011
Region                                Service Revenue      % of Total     Service Revenue      % of Total
The Americas                         $     191.2               48.4 %    $     140.0               44.5 %
Europe, Middle East & Africa         $     144.5               36.6 %    $     123.2               39.1 %
Asia/Pacific                         $      59.1               15.0 %    $      51.5               16.4 %

For the three months ended September 30, 2012 compared with the same period in 2011, service revenue in the Americas increased by $51.2 million, or 36.6%; Europe, Middle East & Africa service revenue increased by $21.3 million, or 17.3%; and Asia/Pacific service revenue increased by $7.6 million, or 14.8%. Revenue growth in all regions was attributable to higher demand for services in all of our reporting segments and the impact of our strategic partnership wins. The higher levels of revenue growth in the Americas region was due to increased activity in the Phase II-III/PACE portion of the CRS business.
On a segment basis, CRS service revenue increased by $61.8 million, or 26.2%, to $297.2 million for the three months ended September 30, 2012 from $235.4 million for the three months ended September 30, 2011. The increase was primarily attributable to a $63.1 million increase in Phase II-III/PACE and a $4.2 million increase in our Early Phase business; offset in part by a $5.6 million negative impact from foreign currency exchange movements. The increase in Phase II-III/PACE was due to our success in winning new business awards and the continued positive impact of strategic partnerships as backlog is converted into revenue through the efforts of a larger employee base. The increase in Early Phase was due to improvements in our win rate among small clients combined with success in winning additional strategic partner relationships.
PCMS service revenue increased by $12.7 million, or 35.6%, to $48.4 million for the three months ended September 30, 2012 from $35.6 million for the same period in 2011. Higher service revenue was due primarily to a $15.0 million increase in consulting services associated with growth in start-up Phase II-III activities and increased strategic compliance work. These increases were partly offset by a $0.8 million decrease in our medical communications business due to lower demand and a $0.8 million negative impact from foreign currency exchange movements. Perceptive service revenue increased by $5.6 million, or 12.7%, to $49.2 million for the three months ended September 30, 2012 from $43.7 million for the three months ended September 30, 2011. The continued growth in Perceptive service revenue was due to higher demand for technology usage in clinical trials. Service revenue increases of $2.5 million in Medical Imaging, $2.0 million in our ClinPhone® RTSM services, and $1.7 million in other eClinical services were partially offset by a $1.2 million impact of foreign exchange movements. Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred on behalf of and reimbursable by clients. Reimbursement revenue does not yield any gross profit to us, nor does it have an impact on net income. Direct Costs
Direct costs increased by $57.2 million, or 25.8%, to $279.4 million for the three months ended September 30, 2012 from $222.2 million for the three months ended September 30, 2011. As a percentage of total service revenue, direct costs increased to 70.8% from 70.6% for the respective periods.
On a segment basis, CRS direct costs increased by $47.4 million, or 27.4%, to $220.2 million for the three months ended September 30, 2012 from $172.8 million for the three months ended September 30, 2011. This increase resulted primarily from higher levels of clinical trial activity and increased labor costs, associated, in part, with headcount growth in CRS. Increased labor costs include both upward pressure on rates in certain markets due to labor shortages and staff hired in advance of the revenue producing activities. As a percentage of CRS service revenue, CRS direct costs increased to 74.1% for the three months ended September 30, 2012 from 73.4% for the three months ended September 30, 2011 due primarily to higher staffing levels in advance of the revenue curve in response to recent strength in new business wins.
PCMS direct costs increased by $8.7 million, or 41.5%, to $29.7 million for the three months ended September 30, 2012 from $21.0 million for the three months ended September 30, 2011. This increase was primarily due to increased headcount and labor costs in our consulting business due to increased demand for these services. This increase was offset in part by a $0.7 million decline in the medical communications business due to lower demand. As a percentage of PCMS service revenue, PCMS direct costs increased to 61.4% from 58.8% for the respective periods as a result of higher labor costs associated with consulting services, the impact of seasonality, and short-term investments directed at better positioning the business for continued growth.


Perceptive direct costs increased by $1.1 million, or 3.9%, to $29.6 million for the three months ended September 30, 2012 from $28.4 million for the three months ended September 30, 2011 due primarily to an increase in labor costs and medical imaging "read" expenses associated with higher volume. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 60.0% for the three months ended September 30, 2012 from 65.1% for the three months ended September 30, 2011. This decrease was due to the impact of shifting resources to low cost countries and better revenue mix. Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased to $70.0 million for the three months ended September 30, 2012 from $61.0 million for the three months ended September 30, 2011. This $9.0 million increase was due primarily to a $4.9 million increase in payroll-related costs associated with overall compensation increases including the cost of additional staff needed to support business growth and a $3.9 million increase in rent and other office-related expenses. As a percentage of service revenue, SG&A decreased to 17.7% of service revenue for the three months ended September 30, 2012 compared with 19.4% of service revenue for the three months ended September 30, 2011. This decrease was due to leveraging of our revenue growth, effective cost management, and the benefits of past restructuring activities. Depreciation and Amortization
Depreciation and amortization expense decreased by $0.5 million, or 3.0%, to $15.9 million for the three months ended September 30, 2012 from $16.4 million for the three months ended September 30, 2011. As a percentage of service revenue, depreciation and amortization expense was 4.0% for the three months ended September 30, 2012 versus 5.2% for the same period in 2011. This decreased percentage of depreciation and amortization expense was mainly due to revenue growth.
Restructuring Charge
During the three months ended September 30, 2012, we recorded a $0.3 million net reduction in restructuring charges for adjustments to facility-related charges under our previously announced restructuring plans. For the three months ended September 30, 2011, we recorded $2.7 million in restructuring charges, including $1.7 million in employee separation benefits associated with the elimination of 50 managerial and staff positions, $0.7 million in costs related to the abandonment of certain property leases, and $0.3 million in other charges. Income from Operations
Income from operations increased to $29.8 million for the three months ended September 30, 2012 from $12.5 million for the same period in 2011. Income from operations as a percentage of service revenue, or operating margin, increased to 7.5% from 4.0% for the respective periods. This increase in operating margin was due primarily to better management of our SG&A expenses during the quarter and lower restructuring charges.
Other Expense
We recorded net other expense of $2.4 million for the three months ended September 30, 2012 compared with net other income of $1.6 million for the three months ended September 30, 2011. The $4.0 million change was primarily due to miscellaneous expenses of $1.0 million for the three months ended September 30, 2012 as compared to miscellaneous income of $4.2 million for the three months ended September 30, 2011; offset by a $1.2 million reduction in interest expense, net of interest income. The lower interest expense was due primarily to lower average debt levels for the three months ended September 30, 2012 as compared with the same period in 2011.
Miscellaneous expense for the three months ended September 30, 2012 of $1.0 million consisted primarily of foreign exchange losses.
Miscellaneous income for the three months ended September 30, 2011 of $4.2 million consisted primarily of a $10.4 million gain related to the revaluation of foreign denominated assets, partly offset by a $5.7 million loss related to derivative contracts.
Taxes
For the three months ended September 30, 2012 and 2011, we had effective income tax rates of 44.9% and 32.1%, respectively. The increase in the tax rate was primarily attributable to $2.0 million of quarter-specific expense associated with the limitation of certain compensation-related deductions and the effect of a higher projected annual effective tax rate for our fiscal year ending June 30, 2013 ("Fiscal Year 2013"). The higher effective tax rate mainly results from a projected increase in income that is subject to tax in the United States as compared to lower rate foreign jurisdictions. The increase in income subject to United States taxation is due in part to the expiration of of certain Internal Revenue Code provisions.

LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and growth with cash flow from operations, proceeds from the sale of equity securities, and credit facilities to fund business acquisitions and working capital. Investing activities primarily reflect the


costs of capital expenditures for computer hardware, software, and leasehold improvements. As of September 30, 2012, we had cash and cash equivalents and marketable securities of approximately $249.1 million, of which the majority is held in foreign countries since excess cash generated in the U.S. is primarily used to repay our debt obligations. Foreign cash balances include unremitted foreign earnings, which are invested indefinitely outside of the U.S. Our cash and cash equivalents are held in deposit accounts and money market funds, which provide us with immediate and unlimited access to the funds. Repatriation of funds to the U.S. from non-U.S. entities may be subject to taxation or certain legal restrictions. Nevertheless, most of our cash resides in countries with little or no such legal restrictions.
DAYS SALES OUTSTANDING
Our operating cash flow is heavily influenced by changes in the levels of billed and unbilled receivables and deferred revenue. These account balances as well as days sales outstanding ("DSO") in accounts receivable, net of deferred revenue, can vary based on contractual milestones and the timing and size of cash receipts. We calculate DSO by adding the end-of-period balances for billed and unbilled account receivables, net of deferred revenue (short-term and long-term) and the provision for losses on receivables, then dividing the resulting amount by the sum of total revenue plus investigator fees billed for the most recent quarter, and multiplying the resulting fraction by the number of days in the quarter. The following table presents the DSO, accounts receivable balances, and deferred revenue as of September 30, 2012 and June 30, 2012.

(in millions)                      September 30, 2012     June 30, 2012
Billed accounts receivable, net   $             339.7    $         397.4
Unbilled accounts receivable, net               270.8              251.8
Total accounts receivable                       610.5              649.2
Deferred revenue                                341.4              359.7
Net receivables                   $             269.1    $         289.5

DSO (in days)                                      45                 49

The decrease in DSO for the three months ended September 30, 2012 compared with the three months ended June 30, 2012, was primarily due to ongoing improvements in billing and collections.

CASH FLOWS
Net cash provided by operating activities was $36.0 million for the three months ended September 30, 2012 compared with net cash provided by operating activities of $49.7 million for the three months ended September 30, 2011. The $13.7 million decrease in operating cash flows was primarily due to higher payments related to year end accrued balances during the three months ended September 30, 2012.
Net cash used in investing activities was $37.3 million for the three months ended September 30, 2012 compared with $32.3 million for the three months ended September 30, 2011. The increase of $5.0 million was due primarily to higher purchases of marketable securities.
Net cash provided by financing activities was $4.9 million for the three months ended September 30, 2012 compared with $23.6 million for the three months ended September 30, 2011. The $18.7 million decrease was primarily due to the payments of $50.0 million for share repurchases, offset in part by a $30.0 million increase in net borrowings.

LINES OF CREDIT
2011 Credit Agreement
On June 30, 2011, we entered into an unsecured senior credit facility (the "2011 Credit Agreement") providing for a five-year term loan of $100.0 million and a revolving credit facility in the principal amount of up to $300.0 million. The borrowings all carry a variable interest rate based on LIBOR, prime, or a similar index, plus a margin (margin not to exceed a per annum rate of 1.75%). Loans outstanding under the 2011 Credit Agreement may be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any. The 2011 Credit Agreement terminates and any outstanding loans under it mature on June 30, 2016. Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on June 30, 2016. Repayment of principal borrowed under the term loan facility is due in equal quarterly installments for the amounts due in annual periods that coincide with our fiscal year end date of June 30. Specifically, 5%, 10%, 20%, and 60%


of principal borrowed must be repaid during our fiscal years ended 2013, 2014, 2015, and 2016, respectively. The final payment of all amounts outstanding, plus accrued interest, being due on June 30, 2016.
We agreed to pay a commitment fee on the revolving loan commitment calculated as a percentage of the unused amount of the revolving loan commitments at a per annum rate of up to 0.4%. We also paid various customary fees to secure this arrangement, which are being amortized using the effective interest method over the life of the debt.
Our obligations under the 2011 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2011 Credit Agreement, which include customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to material indebtedness, defaults relating to such matters as ERISA and judgments, and a change of control default. The 2011 Credit Agreement contains negative covenants applicable to us and our subsidiaries, including financial covenants requiring us to comply with maximum leverage ratios and minimum interest coverage ratios, as well as restrictions on liens, investments, indebtedness, fundamental changes, acquisitions, dispositions of property, making specified restricted payments (including stock repurchases exceeding an agreed to percentage of consolidated net income), and transactions with affiliates. As of September 30, 2012, we were in compliance with all covenants under the 2011 Credit Agreement.
As of September 30, 2012, we had $180.0 million of principal borrowed under the revolving credit facility, $93.8 million of principal borrowed under the term loan, and borrowing availability of $120.0 million under the revolving credit facility.
In September 2011, we entered into a new interest rate swap and an interest rate cap agreement. These interest rate hedges were deemed to be fully effective in accordance with ASC 815, "Derivatives and Hedging," and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income. Principal in the amount of $100.0 million under the 2011 Credit Agreement has been hedged with an interest rate swap agreement and carries a fixed interest rate of 1.3% plus an applicable margin. Principal in the amount of $50.0 million has been hedged with an interest rate cap arrangement with an interest rate cap of 2.0% plus an applicable margin. As of September 30, 2012, our debt under the 2011 Credit Agreement, including the $100.0 million of principal hedged with an interest swap agreement, carried an . . .

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