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PRXL > SEC Filings for PRXL > Form 10-K on 22-Aug-2013All Recent SEC Filings

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Form 10-K for PAREXEL INTERNATIONAL CORP


22-Aug-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW
We are a leading biopharmaceutical outsourcing 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 and market access consulting, medical imaging services, regulatory information management ("RIM") solutions, ClinPhone randomization and trial supply management services ("RTSM"), electronic data capture systems ("EDC"), clinical trial management systems ("CTMS"), web-based portals, systems integration, patient diary applications, and other product development tools and 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, pharmacovigilance, and investigator site services. CRS also includes our clinical supply and drug logistics business. 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.

We conduct a significant portion of our operations in foreign countries. Approximately 54.0% and 58.4% of our consolidated service revenue for the fiscal years ended June 30, 2013 and June 30, 2012, respectively, were from non-U.S. operations. Because our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates can have a significant effect on our operating results. For the Fiscal Year 2013, approximately 13.0% of total consolidated service revenue was from Euro-denominated contracts and approximately 2.6% of total consolidated service revenue was from pound sterling-denominated contracts. For the Fiscal Year 2012, approximately 19.5% of total consolidated service revenue was from Euro-denominated contracts and approximately 3.9% of total consolidated service revenue was from pounds sterling-denominated contracts.
Approximately 90% of our contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flows from these contracts typically consist of a down payment required at the time of contract execution with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is recognized generally as work is performed. As a result, the timing of client billing and cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts.
Generally, our clients can either terminate their contracts with us upon thirty to sixty days notice or delay execution of services. Clients may terminate or delay contracts for a variety of reasons, including: merger or potential merger-related activities


involving the client, the failure of products being tested to satisfy safety requirements or efficacy criteria, unexpected or undesired clinical results of the product, client cost reductions as a result of budgetary limits or changing priorities, the client's decision to forego a particular study, insufficient patient enrollment or investigator recruitment, or clinical drug manufacturing problems resulting in shortages of the product.

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.
We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the nature of the estimate or assumption is material due to the level of subjectivity and judgment involved, or the susceptibility of such matter to change, and if the impact of the estimate or assumption on financial condition or operating performance is material. We believe that the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results:
REVENUE RECOGNITION
We derive revenue from the delivery of services or software solutions to clients in the worldwide pharmaceutical, biotechnology, and medical device industries. We recognize revenue as services are performed when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement;
(2) the service offering has been delivered to the client; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the client is fixed or determinable. Our client arrangements in CRS generally involve multiple service deliverables, where bundled service deliverables are accounted for in accordance with Accounting Standards Codification ("ASC") 605-25, "Multiple-Element Arrangements." We determined that each of our service deliverables has standalone value and base the selling price upon third-party evidence (TPE). TPE is established for each of our arrangement deliverables based on the price we charge for equivalent services when sold to other similar customers as well as our knowledge of market-pricing from the competitive bidding process for customer contracts offering similar services to comparably situated customers. Within Perceptive's Clinphone® RTSM business, we offer selected software solutions through a hosted application delivered through a standard web-browser. We recognize revenue from application hosting services in accordance with ASC 985-605, "Revenue Recognition in the Software Industry" and ASC 605-25 as our customers do not have the right to take possession of the software. Revenue resulting from these hosting services is recognized over the service period. Critical management estimates may be involved in the determination of the customer relationship period, and other revenue elements. Changes to these elements could affect the amount and timing of revenue recognition.
BILLED AND UNBILLED ACCOUNTS RECEIVABLE
Billed accounts receivable represent amounts for which invoices have been sent to clients based upon contract terms. Unbilled accounts receivable represent amounts recognized as revenue for which invoices have not yet been sent to clients due to contract terms. We maintain a provision for losses on receivables based on historical collectability and specific identification of potential problem accounts. Critical management estimates may be involved in the determination of "collectability" and the amounts required to be recorded as provisions for losses on receivables.
INCOME TAXES
Our global provision for corporate income taxes is determined in accordance with ASC 740, "Income Taxes," which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. A valuation allowance is established if it is more likely than not that future tax benefits from the deferred tax assets will not be realized. Income tax expense is based on the distribution of profit before tax among the various taxing jurisdictions in which we operate, adjusted as required by the tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective tax rate.
We account for uncertain tax positions in accordance with the provisions of ASC 740, which requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances. In addition, ASC 740 requires financial statement disclosure about uncertainty in income tax reporting positions.


We are subject to ongoing audits by federal, state and foreign tax authorities that may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is based on judgment. We believe we have adequately provided for any uncertain tax positions. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period assessments are made or resolved or when statutes of limitation on potential assessments expire.
GOODWILL AND INDEFINITE-LIVED INTANGIBLES Goodwill represents the excess of the cost of an acquired business over the fair value of the related net assets at the date of acquisition and is subject to annual impairment testing or more frequent testing if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value. Our impairment testing for goodwill and an indefinite-lived intangible, the ClinPhone RTSM tradename, involves assessment of qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit or the fair value of the indefinite-lived intangibles is less than its carrying amount, including goodwill. This assessment requires management judgment on the potential impact of each qualitative factor. Based on our Fiscal Year 2013 qualitative assessment of impairment for goodwill and our tradename, we concluded that neither were impaired.
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.


RESULTS OF OPERATIONS
Note 18 to our consolidated financial statements included in this annual report
provides a summary of our unaudited quarterly results of operations for the years ended June 30, 2013 and 2012.
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, interest income (expense), other income
(loss), and income tax expense (benefit) in segment profitability. We attribute revenue to individual countries based upon the cost of services performed in the respective countries and inter-segment transactions are not included in service revenue. Furthermore, we have a global infrastructure supporting our business segments and therefore, assets are not identified by reportable segment. Service revenue, direct costs, and gross profit on service revenue for Fiscal Years 2013, 2012, and 2011 were as follows:

(in thousands)                      Years Ended
                         June 30, 2013      June 30, 2012       Increase        %
Service revenue
CRS                     $     1,303,569    $     1,038,705    $  264,864     25.5  %
PCMS                            202,524            167,125        35,399     21.2  %
Perceptive                      228,349            190,678        37,671     19.8  %
Total service revenue   $     1,734,442    $     1,396,508    $  337,934     24.2  %
Direct costs
CRS                     $       956,513    $       759,539    $  196,974     25.9  %
PCMS                            120,954             97,560        23,394     24.0  %
Perceptive                      130,069            114,730        15,339     13.4  %
Total direct costs      $     1,207,536    $       971,829    $  235,707     24.3  %
Gross profit
CRS                     $       347,056    $       279,166    $   67,890     24.3  %
PCMS                             81,570             69,565        12,005     17.3  %
Perceptive                       98,280             75,948        22,332     29.4  %
Total gross profit      $       526,906    $       424,679    $  102,227     24.1  %

(in thousands)                      Years Ended                 Increase
                         June 30, 2012      June 30, 2011      (Decrease)       %
Service revenue
CRS                     $     1,038,705    $       922,827    $  115,878     12.6  %
PCMS                            167,125            129,728        37,397     28.8  %
Perceptive                      190,678            159,544        31,134     19.5  %
Total service revenue   $     1,396,508    $     1,212,099    $  184,409     15.2  %
Direct costs
CRS                     $       759,539    $       628,627    $  130,912     20.8  %
PCMS                             97,560             77,679        19,881     25.6  %
Perceptive                      114,730             91,478        23,252     25.4  %
Total direct costs      $       971,829    $       797,784    $  174,045     21.8  %
Gross profit
CRS                     $       279,166    $       294,200    $  (15,034 )   (5.1 )%
PCMS                             69,565             52,049        17,516     33.7  %
Perceptive                       75,948             68,066         7,882     11.6  %
Total gross profit      $       424,679    $       414,315    $   10,364      2.5  %


FISCAL YEAR ENDED JUNE 30, 2013 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2012
Revenue
Service revenue increased by $337.9 million, or 24.2%, to $1,734.4 million for
Fiscal Year 2013 from $1,396.5 million for Fiscal Year 2012. On a geographic
basis, service revenue was distributed as follows (in millions):
                                             Fiscal Year 2013                       Fiscal Year 2012
Region                                Service Revenue       % of Total       Service Revenue       % of Total
The Americas                       $             867.0           50.0 %   $             635.3           45.5 %
Europe, Middle East & Africa       $             624.0           36.0 %   $             555.4           39.8 %
Asia/Pacific                       $             243.4           14.0 %   $             205.8           14.7 %
Total                              $           1,734.4          100.0 %   $           1,396.5          100.0 %

For Fiscal Year 2013 compared with Fiscal Year 2012, service revenue in The Americas increased by $231.7 million, or 36.5%; Europe, Middle East & Africa service revenue increased by $68.6 million, or 12.4%; and Asia/Pacific service revenue increased by $37.6 million, or 18.3%. 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 increased as projects matured and moved from 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. Service revenue growth was negatively impacted by foreign currency exchange rate fluctuations of approximately $15.1 million.
On a segment basis, CRS service revenue increased by $264.9 million, or 25.5%, to $1,303.6 million for Fiscal Year 2013 from $1,038.7 million for Fiscal Year 2012. The increase was attributable to a $265.5 million improvement in our Phase II-III/PACE business and a $11.8 million increase in our Early Phase business. These increases were partly offset by a $12.4 million negative impact from foreign currency exchange rate movements. The Phase II-III/PACE increases were due to our success in forging strategic partnership relationships which has benefited our pipeline of work. Higher levels of new business awards won in prior periods across our entire customer base have resulted in more active projects and, coupled with the efforts of a larger and more productive employee base, have caused the conversion of backlog into revenue to accelerate. The revenue increase in our Early Phase business was due to improvements in our win rate among emerging clients combined with success in winning additional strategic partner relationships.
PCMS service revenue increased by $35.4 million, or 21.2%, to $202.5 million for Fiscal Year 2013 from $167.1 million for Fiscal Year 2012. The increase was due primarily to a $38.2 million increase in consulting services associated with growth in strategic compliance work due to higher levels of regulatory activity. These increases were partly offset by a $2.8 million decrease in our medical communications and commercialization service revenue.
Perceptive service revenue increased by $37.7 million, or 19.8%, to $228.3 million for Fiscal Year 2013 from $190.7 million for Fiscal Year 2012. The growth was due primarily to $20.2 million in revenue from the LIQUENT acquisition and a $17.5 million increase in eClinical and medical imaging services. Excluding the impact from the LIQUENT acquisition, the continued growth in Perceptive service revenue was due to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships. 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 $235.7 million, or 24.3%, to $1,207.5 million for Fiscal Year 2013 from $971.8 million for Fiscal Year 2012. As a percentage of total service revenue, direct costs remained consistent at 69.6% for both periods.
On a segment basis, CRS direct costs increased by $197.0 million, or 25.9%, to $956.5 million for Fiscal Year 2013 from $759.5 million for Fiscal Year 2012. This increase resulted primarily from increased labor costs associated with headcount growth in CRS to match the demand of higher levels of clinical trial activity. 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 the higher number of studies that were initiated in Fiscal Year 2012 and the beginning of Fiscal Year 2013. The use of contracted staff declined in the latter half of Fiscal Year 2013 as full-time employees were hired to replace them, and as the CRS employee base increased its productivity and efficiency. As a percentage of service revenue, CRS direct costs increased slightly to 73.4% for Fiscal Year 2013 from 73.1% for Fiscal Year 2012.
PCMS direct costs increased by $23.4 million, or 24.0%, to $121.0 million for Fiscal Year 2013 from $97.6 million for Fiscal Year 2012. This increase resulted primarily from higher labor costs in our consulting services unit due to increased demand related to strategic compliance work. Offsetting this increase was a $4.1 million decline in labor costs within the medical


communications business. As a percentage of service revenue, PCMS direct costs increased to 59.7% from 58.4% 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 $15.3 million, or 13.4%, to $130.1 million for Fiscal Year 2013 from $114.7 million for Fiscal Year 2012. This increase was due primarily to the impact of the LIQUENT acquisition, an increase in labor costs in existing businesses, and higher medical imaging "read" expenses associated with greater volume. As a percentage of service revenue, Perceptive direct costs decreased to 57.0% for Fiscal Year 2013 from 60.2% for Fiscal Year 2012 due to the impact of shifting resources to low cost countries and a better revenue mix.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased by $55.3 million, or 21.0%, to $318.8 million for Fiscal Year 2013 from $263.5 million for Fiscal Year 2012. This increase was primarily due to the addition of LIQUENT and HERON SG&A costs, an increase in fixed and variable compensation costs attributable to the larger employee base needed to support business growth, and an increase in rent and other office-related expenses. As a percentage of service revenue, SG&A decreased to 18.4% in Fiscal Year 2013 from 18.9% in Fiscal Year 2012 due to leveraging of our revenue growth, effective cost management, and the benefits of past restructuring activities.
Depreciation and Amortization
Depreciation and amortization ("D&A") expense increased by $7.0 million, or 10.6%, to $73.2 million for Fiscal Year 2013 from $66.2 million for Fiscal Year 2012, primarily due to additional depreciation expense from increased capital expenditures in both Fiscal Year 2013 and Fiscal Year 2012 and higher amortization expense from the intangibles assets acquired in conjunction with the LIQUENT and HERON acquisitions. As a percentage of service revenue, D&A decreased to 4.2% for Fiscal Year 2013 from 4.7% for Fiscal Year 2012 mainly due to revenue growth.
Restructuring Charge
Our restructuring plans were substantially completed by March 2012. For Fiscal Year 2013, we recorded a $1.2 million net reduction in restructuring charges for adjustments to facility-related charges under our previously announced restructuring plans.
For Fiscal Year 2012, we recorded $6.2 million in restructuring charges under our restructuring plans, including $4.3 million in employee separation benefits and $1.9 million of facility-related costs. Income from Operations
Income from operations increased to $136.1 million for Fiscal Year 2013 from $88.8 million for Fiscal Year 2012 due to the factors described above. Income from operations as a percentage of service revenue ("operating margin") increased to 7.8% from 6.4% for the respective periods for the reasons discussed above.
Other Expense, Net
We recorded net other expense of $3.0 million for Fiscal Year 2013 compared with $9.1 million for Fiscal Year 2012. The $6.1 million decrease was due primarily to lower miscellaneous expense, partially offset by $0.3 million increase in net interest expense.
Miscellaneous income for Fiscal Year 2013 of $4.3 million was driven by $4.1 million in foreign exchange gains from certain foreign-denominated assets and liabilities.
Miscellaneous expense for Fiscal Year 2012 of $2.1 million was primarily attributable to $6.3 million of unrealized losses related to derivatives contracts and $2.4 million of losses from asset disposals and loan write-offs, partly offset by $6.6 million in foreign exchange gains from certain foreign-denominated assets and liabilities. Taxes
For Fiscal Year 2013 and Fiscal Year 2012, we had effective income tax rates of 27.9% and 20.8%, respectively. The increase in the Fiscal Year 2013 tax rate was primarily attributable to a lower level of income tax reserve releases and a shift in the geographic distribution of income which increased income subject to taxation in the United States relative to lower tax rate jurisdictions (primarily EU countries and the UK), net of reductions in valuation allowances resulting from improved profitability in the United States. The lower tax rate for Fiscal Year 2012 was primarily the result of the release of income tax reserves and associated accruals for interest and penalties resulting from settlements with tax authorities and the expiration of statutes of limitations in Europe.


FISCAL YEAR ENDED JUNE 30, 2012 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2011
Revenue
Service revenue increased by $184.4 million, or 15.2%, to $1,396.5 million for
Fiscal Year 2012 from $1,212.1 million for Fiscal Year 2011. On a geographic
basis, service revenue was distributed as follows (in millions):
                                             Fiscal Year 2012                       Fiscal Year 2011
Region                                Service Revenue       % of Total       Service Revenue       % of Total
The Americas                       $             635.3           45.5 %   $             484.7           40.0 %
. . .
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