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PRXL > SEC Filings for PRXL > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for PAREXEL INTERNATIONAL CORP


6-May-2013

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 and regulatory submission 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, electronic patient reported outcomes ("ePRO") and Liquent InSight® Regulatory Information Management (RIM) platform. 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.
BUSINESS COMBINATIONS
Business combinations are accounted for under the acquisition method of accounting. Allocating the purchase price requires us to estimate the fair value of various assets acquired and liabilities assumed, including contingent consideration to be paid if specific financial targets are achieved. We are responsible for determining the appropriate valuation model and estimated fair values, and in doing so, we consider a number of factors, including information provided by an outside valuation advisor. We primarily establish fair value using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. 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 and nine months ended March 31, 2013 and 2012 were as follows:

(in thousands)                 Three Months Ended
                       March 31, 2013      March 31, 2012      Increase $       Increase %
Service revenue
CRS                   $        342,387    $        263,372    $     79,015         30.0 %
PCMS                            50,611              43,301           7,310         16.9 %
Perceptive                      61,495              49,319          12,176         24.7 %
Total service revenue $        454,493    $        355,992    $     98,501         27.7 %
Direct costs
CRS                   $        246,882    $        188,520    $     58,362         31.0 %
PCMS                            30,424              25,101           5,323         21.2 %
Perceptive                      34,611              27,824           6,787         24.4 %
Total direct costs    $        311,917    $        241,445    $     70,472         29.2 %
Gross profit
CRS                   $         95,505    $         74,852    $     20,653         27.6 %
PCMS                            20,187              18,200           1,987         10.9 %
Perceptive                      26,884              21,495           5,389         25.1 %
Total gross profit    $        142,576    $        114,547    $     28,029         24.5 %


(in thousands)                  Nine Months Ended
                       March 31, 2013      March 31, 2012      Increase $       Increase %
Service revenue
CRS                   $        960,134    $        746,652    $    213,482         28.6 %
PCMS                           148,236             117,404          30,832         26.3 %
Perceptive                     162,944             139,841          23,103         16.5 %
Total service revenue $      1,271,314    $      1,003,897    $    267,417         26.6 %
Direct costs
CRS                   $        709,463    $        539,111    $    170,352         31.6 %
PCMS                            88,563              68,663          19,900         29.0 %
Perceptive                      94,620              83,944          10,676         12.7 %
Total direct costs    $        892,646    $        691,718    $    200,928         29.0 %
Gross profit
CRS                   $        250,671    $        207,541    $     43,130         20.8 %
PCMS                            59,673              48,741          10,932         22.4 %
Perceptive                      68,324              55,897          12,427         22.2 %
Total gross profit    $        378,668    $        312,179    $     66,489         21.3 %


Three Months Ended March 31, 2013 Compared With Three Months Ended March 31, 2012:
Revenue
Service revenue increased by $98.5 million, or 27.7%, to $454.5 million for the three months ended March 31, 2013 from $356.0 million for the same period in 2012. On a geographic basis, service revenue (in millions) was distributed as follows:

                                            Three Months Ended                  Three Months Ended
                                              March 31, 2013                      March 31, 2012
Region                                Service Revenue      % of Total     Service Revenue      % of Total
The Americas                         $     231.1               50.8 %    $     165.7               46.5 %
Europe, Middle East & Africa         $     161.8               35.6 %    $     140.3               39.4 %
Asia/Pacific                         $      61.6               13.6 %    $      50.0               14.1 %

For the three months ended March 31, 2013 compared with the same period in 2012, service revenue in the Americas increased by $65.4 million, or 39.5%; Europe, Middle East & Africa service revenue increased by $21.5 million, or 15.3%; and Asia/Pacific service revenue increased by $11.6 million, or 23.2%. 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 conversion of backlog to revenue has increased as projects have matured and moved from the startup phases to ongoing monitoring activities. The higher levels of service revenue growth in the Americas region was primarily due to increased activity in the Phase II-III/PACE business and revenue from our acquisition of Liquent, Inc. ("Liquent") On a segment basis, CRS service revenue increased by $79.0 million, or 30.0%, to $342.4 million for the three months ended March 31, 2013 from $263.4 million for the three months ended March 31, 2012. The increase was primarily attributable to a $75.0 million increase in Phase II-III/PACE business and a $4.0 million increase in our Early Phase business; offset in part by a $2.2 million negative impact from foreign currency exchange rate movements. The Phase II-III/PACE increases were due to our past success in winning new business awards, the formation of strategic partnership relationships, and acceleration of backlog conversion into revenue through the efforts of a larger and more productive 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 $7.3 million, or 16.9%, to $50.6 million for the three months ended March 31, 2013 from $43.3 million for the same period in 2012. Higher service revenue was due to an increase in Consulting Services associated with growth in start-up Phase II-III activities and increased strategic compliance work. Service revenue from our medical communications business declined by $1.2 million compared with the same period in 2012. Perceptive service revenue increased by $12.2 million, or 24.7%, to $61.5 million for the three months ended March 31, 2013 from $49.3 million for the three months ended March 31, 2012. The continued growth in Perceptive service revenue was primarily due to $9.3 million of revenue from the acquisition of Liquent. Service revenue for the quarter ended March 31, 2013 also benefited from increased services provided to some of our strategic partners. 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 our net income. Direct Costs
Direct costs increased by $70.5 million, or 29.2%, to $311.9 million for the three months ended March 31, 2013 from $241.4 million for the three months ended March 31, 2012. As a percentage of total service revenue, direct costs increased to 68.6% from 67.8% for the respective periods.
On a segment basis, CRS direct costs increased by $58.4 million, or 31.0%, to $246.9 million for the three months ended March 31, 2013 from $188.5 million for the three months ended March 31, 2012. This increase resulted primarily from higher levels of clinical trial activity and increased labor costs associated with headcount growth and higher overall compensation levels. As a percentage of CRS service revenue, CRS direct costs increased to 72.1% for the three months ended March 31, 2013 from 71.6% for the same period in 2012 due primarily to ongoing integration of more than 1,900 new employees since March 31, 2012 in response to new business wins. The initial productivity levels of new employees are generally lower than experienced staff.
PCMS direct costs increased by $5.3 million, or 21.2%, to $30.4 million for the three months ended March 31, 2013 from $25.1 million for the three months ended March 31, 2012. This increase was primarily due to increased headcount and labor costs in our consulting business due to increased demand for these services. As a percentage of PCMS service revenue, PCMS direct costs increased to 60.1% from 58.0% for the respective periods as a result of higher labor costs associated with consulting services and short-term investments directed at better positioning the business for continued growth.


Perceptive direct costs increased by $6.8 million, or 24.4%, to $34.6 million for the three months ended March 31, 2013 from $27.8 million for the three months ended March 31, 2012 due primarily to the inclusion of Liquent direct costs and an increase in medical imaging "read" expenses associated with higher volume. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 56.3% for the three months ended March 31, 2013 from 56.4% for the same period in 2012.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased to $88.0 million for the three months ended March 31, 2013 from $67.2 million for the three months ended March 31, 2012. This $20.8 million increase was due to the inclusion of Liquent SG&A costs (approximately $5.0 million), an increase in legal charges related to disputes (approximately $1.1 million), with the remaining increase primarily due to an increase in fixed and variable compensation costs attributable to the larger employee base needed to support business growth. As a percentage of service revenue, SG&A expense increased to 19.4% of service revenue for the three months ended March 31, 2013 compared with 18.9% of service revenue for the three months ended March 31, 2012. Depreciation and Amortization
Depreciation and amortization expense increased by $1.3 million, or 7.5%, to $18.7 million for the three months ended March 31, 2013 from $17.4 million for the three months ended March 31, 2012 primarily due to the increase in amortization expense from the increase in intangible assets from the Liquent acquisition. As a percentage of service revenue, depreciation and amortization expense was 4.1% for the three months ended March 31, 2013 compared with 4.9% for the same period in 2012. This lower percentage of depreciation and amortization expense was mainly due to revenue growth. Restructuring Charge
Our restructuring plans were substantially completed by the end of the third quarter of our Fiscal Year 2012. During the three months ended March 31, 2013, we recorded a $0.7 million benefit in restructuring charges for adjustments to facility-related charges due to a favorable lease breakage settlement. Income from Operations
Income from operations increased to $36.6 million for the three months ended March 31, 2013 from $28.2 million for the same period in 2012. Income from operations as a percentage of service revenue, or operating margin, increased to 8.1% from 7.9% for the respective periods. This increase in operating margin was due primarily to lower depreciation expense and restructuring charges as a percentage of service revenue growth.
Other Expense
We recorded net other expense of $0.8 million for the three months ended March 31, 2013 compared with $6.3 million for the three months ended March 31, 2012. The $5.5 million reduction in net other expense was primarily due to a $6.2 million increase in miscellaneous income, mainly as a result of unrealized foreign currency exchange gains recorded for the three months ended March 31, 2013 compared with unrealized foreign currency exchange losses recorded for the three months ended March 31, 2012. The increase in miscellaneous income was partly offset by higher interest expense due to higher net borrowings. Taxes
For the three months ended March 31, 2013 and 2012, we had effective income tax rates of 17.6% and (4.2)%, respectively. The tax rate for the three months ended March 31, 2013 benefited from the effect of the reinstatement of the "look-through" provisions of the U.S. tax code on the projected annual effective tax rate, a reduction in accrued interest and penalties on income tax exposures as a result of the expiration of statutes of limitation in Europe and Africa, a reduction in U.S. state deferred tax valuation allowances and a favorable distribution of taxable income among lower tax rate foreign jurisdictions and the United States.
The tax benefit for the three months ended March 31, 2012 was primarily the result of a release of income tax reserves and associated reserves for interest and penalties resulting from settlements with tax authorities and the expiration of statutes of limitation in Europe.


Nine Months Ended March 31, 2013 Compared With Nine Months Ended March 31, 2012:
Revenue
Service revenue increased by $267.4 million, or 26.6%, to $1,271.3 million for
the nine months ended March 31, 2013 from $1,003.9 million for the same period
in 2012. On a geographic basis, service revenue was distributed as follows (in
millions):
                                            Nine Months Ended                  Nine Months Ended
                                              March 31, 2013                     March 31, 2012
Region                                Service Revenue     % of Total     Service Revenue     % of Total
The Americas                         $     638.6              50.2 %    $     443.9              44.2 %
Europe, Middle East & Africa         $     450.1              35.4 %    $     408.3              40.7 %
Asia/Pacific                         $     182.6              14.4 %    $     151.7              15.1 %

For the nine months ended March 31, 2013 compared with the same period in 2012, service revenue in the Americas increased by $194.7 million, or 43.9%; Europe, Middle East & Africa service revenue increased by $41.8 million, or 10.2%; and Asia/Pacific service revenue increased by $30.9 million, or 20.4%. 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 conversion of backlog to revenue has increased as projects have matured and moved from the startup phases to ongoing monitoring activities. The higher levels of service revenue growth in the Americas region was due to increased activity in the Phase II-III/PACE business and revenue from our acquisition of Liquent.
On a segment basis, CRS service revenue increased by $213.5 million, or 28.6%, to $960.1 million for the nine months ended March 31, 2013 from $746.7 million for the same period in 2012. The increase was primarily attributable to a $205.1 million increase in Phase II-III/PACE business and an $8.4 million increase in our Early Phase business. These increases were partly offset by a $9.9 million negative impact from foreign currency exchange rate movements. The Phase II-III/PACE increases were due to our past success in winning new business awards, the formation of strategic partnership relationships, and acceleration of backlog conversion into revenue through the efforts of a larger and more productive employee base. The revenue increase in our Early Phase business 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 $30.8 million, or 26.3%, to $148.2 million for the nine months ended March 31, 2013 from $117.4 million for the same period in 2012. Higher service revenue was due primarily to a $35.4 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 $4.6 million decrease in our medical communications and commercialization service revenue.
Perceptive service revenue increased by $23.1 million, or 16.5%, to $162.9 million for the nine months ended March 31, 2013 from $139.8 million for the same period in 2012. The continued growth in Perceptive service revenue was due to higher demand for technology usage in clinical trials and service revenue increased across all departments and $9.7 million in revenue from the operations of Liquent from the acquisition date of December 21, 2012. Service revenue for the nine months ended March 31, 2013 benefited from increased services provided to some of our strategic partners.
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 $200.9 million, or 29.0%, to $892.6 million for the nine months ended March 31, 2013 from $691.7 million for the same period in 2012. As a percentage of total service revenue, direct costs increased to 70.2% from 68.9% for the respective periods.
On a segment basis, CRS direct costs increased by $170.4 million, or 31.6%, to $709.5 million for the nine months ended March 31, 2013 from $539.1 million for the same period in 2012. This increase resulted primarily from higher levels of clinical trial activity and increased labor costs associated with headcount growth in CRS. Increased labor costs were also affected by upward pressure on wage rates in certain markets due to labor shortages and an increase in the number of contracted staff needed for projects, in response to recent new business wins. As a percentage of CRS service revenue, CRS direct costs increased to 73.9% from 72.2% for the respective periods.
PCMS direct costs increased by $19.9 million, or 29.0%, to $88.6 million for the nine months ended March 31, 2013 from $68.7 million for the same period in 2012. This increase was primarily due to higher headcount levels and related labor costs in our consulting business due to increased demand for services. The increase was offset in part by a $2.0 million decline of direct costs in the medical communications business due to lower demand. As a percentage of PCMS service revenue, PCMS direct costs increased to 59.7% from 58.5% for the respective periods as a result of higher labor costs associated with consulting services and short-term investments directed at better positioning the business for continued growth.


Perceptive direct costs increased by $10.7 million, or 12.7%, to $94.6 million for the nine months ended March 31, 2013 from $83.9 million for the same period in 2012 due primarily to the inclusion of Liquent direct costs, an increase in labor costs in existing businesses, and medical imaging "read" expenses associated with higher volume. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 58.1% from 60.0% for the respective periods due to the impact of shifting resources to low cost countries and better revenue mix.
Selling, General and Administrative
SG&A expense increased to $230.0 million for the nine months ended March 31, 2013 from $192.5 million for the same period in 2012. This $37.5 million . . .

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