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PRXL > SEC Filings for PRXL > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for PAREXEL INTERNATIONAL CORP

Form 10-Q for PAREXEL INTERNATIONAL CORP


4-Nov-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, 2013, filed with the Securities and Exchange Commission on August 22, 2013 (the "2013 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 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.

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.
For further information on our other critical accounting policies, please refer to the consolidated financial statements and footnotes thereto included in the 2013 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, 2013 and 2012 were as follows:

(in thousands)                              Three Months Ended
                               September 30, 2013       September 30, 2012       Increase $       Increase %
Service revenue
CRS                           $           332,592     $            297,167     $     35,425           11.9 %
PCMS                                       53,537                   48,351            5,186           10.7 %
Perceptive                                 63,116                   49,235           13,881           28.2 %
Total service revenue         $           449,245     $            394,753     $     54,492           13.8 %
Direct costs
CRS                           $           238,188     $            220,166     $     18,022            8.2 %
PCMS                                       31,266                   29,685            1,581            5.3 %
Perceptive                                 33,740                   29,553            4,187           14.2 %
Total direct costs            $           303,194     $            279,404     $     23,790            8.5 %
Gross profit
CRS                           $            94,404     $             77,001     $     17,403           22.6 %
PCMS                                       22,271                   18,666            3,605           19.3 %
Perceptive                                 29,376                   19,682            9,694           49.3 %
Total gross profit            $           146,051     $            115,349     $     30,702           26.6 %

Three Months Ended September 30, 2013 Compared With Three Months Ended
September 30, 2012:
Revenue
Service revenue increased by $54.5 million, or 13.8%, to $449.2 million for the
three months ended September 30, 2013 from $394.8 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
                                            September 30, 2013                  September 30, 2012
Region                                Service Revenue      % of Total     Service Revenue      % of Total
The Americas                         $     224.4               50.0 %    $     197.4               50.0 %
Europe, Middle East & Africa         $     158.5               35.3 %    $     138.3               35.0 %
Asia/Pacific                         $      66.3               14.7 %    $      59.1               15.0 %

For the three months ended September 30, 2013 compared with the same period in 2012, service revenue in the Americas increased by $27.0 million, or 13.7%; Europe, Middle East & Africa service revenue increased by $20.2 million, or 14.6%; and Asia/Pacific service revenue increased by $7.2 million, or 12.2%. 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 on a year-over-year basis as projects have matured and moved from the startup phases to ongoing monitoring activities. The higher levels of service revenue 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 $35.4 million, or 11.9%, to $332.6 million for the three months ended September 30, 2013 from $297.2 million for the same period in 2012. The increase was primarily attributable to a $28.0 million increase in Phase II-III/PACE business and a $7.4 million increase in our Early Phase business. 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 a greater number of active projects and, coupled with the efforts of a larger and more productive employee base, have caused the conversion rate of


backlog into revenue to accelerate. The revenue increase in our Early Phase business was due to improvements in our win rate among small and emerging clients combined with success in winning additional strategic partner relationships.
PCMS service revenue increased by $5.2 million, or 10.7%, to $53.5 million for the three months ended September 30, 2013 from $48.4 million for the same period in 2012. Higher service revenue was primarily attributable to a $3.2 million increase in consulting services associated with growth in strategic compliance work due to higher levels of regulatory activity, and a $2.0 million increase in our commercialization service revenue benefited from our acquisition of HERON Group Ltd ("HERON").
Perceptive service revenue increased by $13.9 million, or 28.2%, to $63.1 million for the three months ended September 30, 2013 from $49.2 million for the three months ended September 30, 2012. The growth was primarily due to $9.1 million of revenue from the LIQUENT acquisition and a $4.8 million increase in our platform solution and eClinical data services businesses related 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 our net income. Direct Costs
Direct costs increased by $23.8 million, or 8.5%, to $303.2 million for the three months ended September 30, 2013 from $279.4 million for the same period in 2012. As a percentage of total service revenue, direct costs decreased to 67.5% from 70.8% for the respective periods. The gross margin improvement mainly related to the impact of various productivity and efficiency initiatives coupled with continued focus on the reduction of costs.
On a segment basis, CRS direct costs increased by $18.0 million, or 8.2%, to $238.2 million for the three months ended September 30, 2013 from $220.2 million for the three months ended September 30, 2012. This increase resulted primarily from increased labor costs associated with headcount growth in CRS to match the demand resulting from higher levels of clinical trial activity. As a percentage of CRS service revenue, CRS direct costs decreased to 71.6% for the three months ended September 30, 2013 from 74.1% for the same period in 2012. The gross margin expansion was driven by a reduction in the use of contract staff, increased productivity of the employees who joined us during our fiscal year ended June 30, 2013 ("Fiscal 2013"), and the results of our operational efficiency programs.
PCMS direct costs increased by $1.6 million, or 5.3%, to $31.3 million for the three months ended September 30, 2013 from $29.7 million for the three months ended September 30, 2012. This increase resulted primarily from the addition of HERON direct costs. As a percentage of PCMS service revenue, direct costs decreased to 58.4% from 61.4% for the respective periods largely due to a better client and business mix.
Perceptive direct costs increased by $4.2 million, or 14.2%, to $33.7 million for the three months ended September 30, 2013 from $29.6 million for the three months ended September 30, 2012 due primarily to the addition of LIQUENT direct costs. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 53.5% for the three months ended September 30, 2013 from 60.0% for the same period in 2012 due to the impact of shifting resources to low cost countries and lower medical imaging "read" expenses associated with smaller volume of reads.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased to $84.9 million for the three months ended September 30, 2013 from $70.0 million for the three months ended September 30, 2012. This $14.9 million increase was primarily due to costs incurred to support our information technology infrastructure and facility expansion to better accommodate our growth, particularly in Asia, and the inclusion of approximately $6.2 million of SG&A costs related to LIQUENT and HERON. As a percentage of service revenue, SG&A expense increased to 18.9% of service revenue for the three months ended September 30, 2013 compared with 17.7% of service revenue for the three months ended September 30, 2012. Depreciation and Amortization
Depreciation and amortization expense increased by $3.4 million, or 21.3%, to $19.3 million for the three months ended September 30, 2013 from $15.9 million for the three months ended September 30, 2012 primarily due to the increase in amortization expense from the increase in intangible assets from LIQUENT and HERON. As a percentage of service revenue, depreciation and amortization expense was 4.3% for the three months ended September 30, 2013 compared with 4.0% for the same period in 2012.
Restructuring Charge
Our restructuring plans were substantially completed by the end of the third quarter of our fiscal year ended June 30, 2012 ("Fiscal Year 2012"). During the three months ended September 30, 2013 there were no adjustments in restructuring charges. During the three months ended September 30, 2012, we recorded a $0.3 million net reduction in restructuring charges for changes in estimated facility costs under our previously announced restructuring plans.


Income from Operations
Income from operations increased to $41.9 million for the three months ended September 30, 2013 from $29.8 million for the same period in 2012. Income from operations as a percentage of service revenue, or operating margin, increased to 9.3% from 7.5% for the respective periods. This increase in operating margin was due primarily to higher gross margin, partially offset by higher SG&A and depreciation and amortization expenses.
Other Expense
We recorded net other expense of $3.0 million for the three months ended September 30, 2013 compared with $2.4 million for the three months ended September 30, 2012. The $0.6 million increase in net other expense was primarily due to an increase in net interest expense resulting from higher average debt balances, partially offset by lower foreign currency exchange losses. Taxes
For the three months ended September 30 2013 and 2012, we had effective income tax rates of 33.3% and 44.9%, respectively. The higher tax rate for the three months ended September 30, 2012, 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 annual effective tax rate for Fiscal Year 2013 as projected at September 30, 2012. The higher projected annual effective tax rate for Fiscal Year 2013 mainly resulted from a projected increase in income subject to tax in the United States as compared to lower rate foreign jurisdictions due in part to the expiration of certain United States Internal Revenue Code provisions which were subsequently reinstated in January 2013.


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. Investing activities primarily reflect the costs of capital expenditures for property and equipment as well as the funding of business acquisitions and the purchases of marketable securities. As of September 30, 2013, we had cash and cash equivalents and marketable securities of approximately $304.6 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 few 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 and for the three months ended September 30, 2013 and June 30, 2013:

(in millions)                      September 30, 2013     June 30, 2013
Billed accounts receivable, net   $             526.6    $         457.2
Unbilled accounts receivable, net               224.6              248.2
Total accounts receivable                       751.2              705.4
Deferred revenue                                418.0              408.3
Net receivables                   $             333.2    $         297.1

DSO (in days)                                      46                 42

The increase in DSO for the three months ended September 30, 2013 compared with the three months ended June 30, 2013, was largely due to client and revenue mix.
CASH FLOWS
Net cash used in operating activities was $37.1 million for the three months ended September 30, 2013 compared with net cash provided by operating activities of $36.0 million for the three months ended September 30, 2012. The $73.1 million decrease in operating cash flows resulted primarily from an increase in net accounts receivable during the three months ended September 30, 2013 compared to a decrease in net accounts receivable during the same period in 2012.
Net cash provided by investing activities was $19.5 million for the three months ended September 30, 2013 compared with net $37.3 million net cash used in investing activities for the three months ended September 30, 2012. The increase in cash provided by investing activities of $56.8 million was primarily due to decreased investments in marketable securities of $59.5 million, offset by $2.7 million increase in capital expenditures.
Net cash provided by financing activities was $64.2 million for the three months ended September 30, 2013 compared with net cash provided by financing activities of $4.9 million for the three months ended September 30, 2012. The $59.3 million increase in net cash provided by financing activities was primarily due to additional debt borrowings and the completion of our share repurchases activities during the three months ended September 30, 2013. These increases were partially offset by higher payments relating to amounts borrowed under the revolving credit facility portion of the 2013 Credit Agreement.
CREDIT AGREEMENTS
Note Purchase Agreement
On July 25, 2013, we issued $100.0 million principal amount of 3.11% senior notes due July 25, 2020 (the "Notes") for aggregate gross proceeds of $100.0 million in a private placement solely to accredited investors. The Notes were issued pursuant to a Note Purchase Agreement entered into by us with certain institutional investors on June 25, 2013 (the "Note Purchase Agreement"). Proceeds from the Notes were used to pay down $100.0 million of principal borrowed under the


revolving credit facility of the 2013 Credit Agreement, as described below. We will pay interest on the outstanding balance of the Notes at a rate of 3.11% per annum, payable semi-annually on January 25 and July 25 of each year until the principal on the Notes shall have become due and payable. We may, at our option, upon notice and subject to the terms of the Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding, plus a Make-Whole Amount (as defined in the Note Purchase Agreement). The Notes become due and payable on July 25, 2020, unless payment is required to be made earlier under the terms of the Note Purchase Agreement.
The Note Purchase Agreement includes operational and financial covenants, with which we are required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions.
In connection with the Note Purchase Agreement, certain of our subsidiaries entered into a Subsidiary Guaranty, pursuant to which such subsidiaries guaranteed our obligations under the Notes and the Note Purchase Agreement. In April and May 2013, we entered into three treasury lock agreements each with a notional amount of $25.0 million in connection with the planned issuance of the Notes. The three treasury locks were used to minimize our interest rate exposure prior to locking in the fixed interest rate on the Notes. The treasury locks matured in May 2013 when the interest rate on our Notes was fixed. The treasury locks were deemed to be fully effective in accordance with ASC 815, "Derivatives and Hedging" ("ASC 815") and as such, the unrealized gains related to these derivatives were initially recorded as other comprehensive income in our consolidated balance sheets and are amortized into net income over the life of the Notes.
As of September 30, 2013, we had $100.0 million of principal borrowed under the Note Purchase Agreement. The outstanding amounts are presented net of debt issuance cost of approximately $0.4 million in our consolidated balance sheets. 2013 Credit Agreement
On March 22, 2013, we, certain of our subsidiaries, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swingline Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS"), J.P. Morgan Securities LLC ("JPM Securities"), HSBC Bank USA, National Association ("HSBC") and U.S. Bank, National Association ("US Bank"), as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank N.A. ("JPMorgan"), HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto entered into an amended and restated credit agreement (the "2013 Credit Agreement") providing for a five-year term loan of $200.0 million and a revolving credit facility in the amount of up to $300.0 million, plus additional amounts of up to $200.0 million of loans to be made available upon our request subject to specified terms and conditions. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $75.0 million and for the issuance of . . .

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