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PRXL > SEC Filings for PRXL > Form 10-Q on 31-Jan-2014All Recent SEC Filings

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Form 10-Q for PAREXEL INTERNATIONAL CORP


31-Jan-2014

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 Quarterly Report on Form 10-Q 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 (the "SEC") 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, 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® 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 and six months ended December 31, 2013 and 2012 were as follows:

(in thousands)                             Three Months Ended
                                December 31, 2013       December 31, 2012       Increase $       Increase %
Service revenue
CRS                           $           363,867     $           320,580     $     43,287           13.5 %
PCMS                                       55,532                  49,274            6,258           12.7 %
Perceptive                                 67,746                  52,214           15,532           29.7 %
Total service revenue         $           487,145     $           422,068     $     65,077           15.4 %
Direct costs
CRS                           $           255,231     $           242,415     $     12,816            5.3 %
PCMS                                       33,223                  28,454            4,769           16.8 %
Perceptive                                 36,053                  30,456            5,597           18.4 %
Total direct costs            $           324,507     $           301,325     $     23,182            7.7 %
Gross profit
CRS                           $           108,636     $            78,165     $     30,471           39.0 %
PCMS                                       22,309                  20,820            1,489            7.2 %
Perceptive                                 31,693                  21,758            9,935           45.7 %
Total gross profit            $           162,638     $           120,743     $     41,895           34.7 %


(in thousands)                              Six Months Ended
                                December 31, 2013       December 31, 2012       Increase $       Increase %
Service revenue
CRS                           $           696,459     $           617,747     $     78,712           12.7 %
PCMS                                      109,069                  97,625           11,444           11.7 %
Perceptive                                130,862                 101,449           29,413           29.0 %
Total service revenue         $           936,390     $           816,821     $    119,569           14.6 %
Direct costs
CRS                           $           493,419     $           462,581     $     30,838            6.7 %
PCMS                                         64,489                58,139            6,350           10.9 %
Perceptive                                   69,793                60,009            9,784           16.3 %
Total direct costs            $           627,701     $           580,729     $     46,972            8.1 %
Gross profit
CRS                           $           203,040     $           155,166     $     47,874           30.9 %
PCMS                                         44,580                  39,486          5,094           12.9 %
Perceptive                                   61,069                  41,440         19,629           47.4 %
Total gross profit            $           308,689     $           236,092     $     72,597           30.7 %


Three Months Ended December 31, 2013 Compared With Three Months Ended
December 31, 2012:
Revenue
Service revenue increased by $65.1 million, or 15.4%, to $487.1 million for the
three months ended December 31, 2013 from $422.1 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
                                             December 31, 2013                   December 31, 2012
Region                                Service Revenue      % of Total     Service Revenue      % of Total
The Americas                         $     240.9               49.5 %    $     210.1               49.8 %
Europe, Middle East & Africa         $     180.7               37.1 %    $     150.1               35.6 %
Asia/Pacific                         $      65.5               13.4 %    $      61.9               14.6 %

For the three months ended December 31, 2013 compared with the same period in 2012, service revenue in the Americas increased by $30.8 million, or 14.7%; Europe, Middle East & Africa service revenue increased by $30.6 million, or 20.4%; and Asia/Pacific service revenue increased by $3.6 million, or 5.8%. Revenue growth in all regions was attributable to higher demand for services in all of our reporting segments, the impact of strategic partnerships and the revenue from our recently acquired LIQUENT Inc. ("LIQUENT") and HERON Group Ltd ("HERON") businesses. The conversion rate 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.
On a segment basis, CRS service revenue increased by $43.3 million, or 13.5%, to $363.9 million for the three months ended December 31, 2013 from $320.6 million for the same period in 2012. Approximately 80% of the increase was attributable to growth in the Phase II-III/PACE business. The Phase II-III/PACE increases were due to the success of our strategic partnership relationships and growth from small and emerging companies, both of which have 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 increase.
PCMS service revenue increased by $6.3 million, or 12.7%, to $55.5 million for the three months ended December 31, 2013 from $49.3 million for the same period in 2012. Higher service revenue was primarily attributable to the increase in consulting services associated with growth in strategic compliance work due to higher levels of regulatory activity, and $3.2 million of revenue from HERON. Perceptive service revenue increased by $15.5 million, or 29.7%, to $67.7 million for the three months ended December 31, 2013 from $52.2 million for the three months ended December 31, 2012. The growth was primarily due to $10.4 million of revenue from LIQUENT along with growth in our medical imaging business 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 $23.2 million, or 7.7%, to $324.5 million for the three months ended December 31, 2013 from $301.3 million for the same period in 2012. As a percentage of total service revenue, direct costs decreased to 66.6% from 71.4% for the respective periods. The gross margin improvement primarily 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 $12.8 million, or 5.3%, to $255.2 million for the three months ended December 31, 2013 from $242.4 million for the three months ended December 31, 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 70.1% for the three months ended December 31, 2013 from 75.6% for the same period in 2012. The gross margin improvement was driven by increased productivity of the employees who joined us during recent periods, the results of our operational efficiency programs and a reduction in the use of contract staff.
PCMS direct costs increased by $4.8 million, or 16.8%, to $33.2 million for the three months ended December 31, 2013 from $28.5 million for the three months ended December 31, 2012. This increase resulted primarily from the addition of HERON direct costs. As a percentage of PCMS service revenue, direct costs increased to 59.8% from 57.7% for the respective periods was largely related to a less favorable revenue mix and overall lower utilization of resources in December 2013.
Perceptive direct costs increased by $5.6 million, or 18.4%, to $36.1 million for the three months ended December 31, 2013 from $30.5 million for the three months ended December 31, 2012 due primarily to the addition of LIQUENT direct costs for


the full quarter. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 53.2% for the three months ended December 31, 2013 from 58.3% for the same period in 2012 primarily due to revenue growth and the impact of shifting resources to low cost countries. Selling, General and Administrative
Selling, general and administrative ("SG&A") expense increased to $95.5 million for the three months ended December 31, 2013 from $71.9 million for the three months ended December 31, 2012. This $23.6 million increase was primarily due to an increase in costs driven by additional staff needed to support business growth, costs incurred to support our information technology infrastructure and facility expansion to better accommodate our growth (particularly in Asia), and the inclusion of approximately $5.4 million of SG&A costs related to LIQUENT and HERON. As a percentage of service revenue, SG&A expense increased to 19.6% of service revenue for the three months ended December 31, 2013 compared with 17.0% of service revenue for the three months ended December 31, 2012. Depreciation and Amortization
Depreciation and amortization expense increased by $2.9 million, or 16.8%, to $20.4 million for the three months ended December 31, 2013 from $17.5 million for the three months ended December 31, 2012 primarily due to higher amortization expense from the increase in intangible assets driven by the LIQUENT and HERON acquisitions. As a percentage of service revenue, depreciation and amortization expense was 4.2% for the three months ended December 31, 2013 compared with 4.1% 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 December 31, 2013 there were no adjustments in restructuring charges. During the three months ended December 31, 2012, we recorded a $0.1 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 $46.7 million for the three months ended December 31, 2013 from $31.4 million for the same period in 2012. Income from operations as a percentage of service revenue, or operating margin, increased to 9.6% from 7.4% 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 $3.7 million for the three months ended December 31, 2013 compared with $0.2 million for the three months ended December 31, 2012. The $3.5 million increase in net other expense was primarily due to an increase in net interest expense resulting from higher average debt balances and higher foreign currency exchange losses. Taxes
For the three months ended December 31, 2013 and 2012, we had effective income tax rates of 34.1% and 31.7%, respectively. The lower tax rate for the three months ended December 31, 2012 resulted from the benefit of a release of reserves for interest and penalties following the expiration of statutes of limitations in a European legal entity and a more favorable effect of statutory rates applicable to income earned outside the United States on the projected annual effective tax rate, net of an increase in valuation allowances associated with net operating losses in Europe.
Six Months Ended December 31, 2013 Compared With Six Months Ended December 31, 2012:
Revenue
Service revenue increased by $119.6 million, or 14.6%, to $936.4 million for the six months ended December 31, 2013 from $816.8 million for the same period in 2012. On a geographic basis, service revenue was distributed as follows (in millions):

                                             Six Months Ended                    Six Months Ended
                                             December 31, 2013                   December 31, 2012
Region                                Service Revenue      % of Total     Service Revenue      % of Total
The Americas                         $       465.3             49.7 %    $       407.5             49.9 %
Europe, Middle East & Africa         $       339.2             36.2 %    $       288.4             35.3 %
Asia/Pacific                         $       131.9             14.1 %    $       120.9             14.8 %

For the six months ended December 31, 2013 compared with the same period in 2012, service revenue in the Americas increased by $57.8 million, or 14.2%; Europe, Middle East & Africa service revenue increased by $50.8 million, or 17.6%; and Asia/Pacific service revenue increased by $11.0 million, or 9.1%. Revenue growth in all regions was attributable to higher


demand for services in all of our reporting segments, the impact of our strategic partnership wins and additional revenue from our recently acquired LIQUENT and HERON businesses. The conversion of backlog to revenue has increased as projects have matured and moved from the startup phases to ongoing monitoring activities.
On a segment basis, CRS service revenue increased by $78.7 million, or 12.7%, to $696.5 million for the six months ended December 31, 2013 from $617.7 million for the same period in 2012. Approximately 80% of the increase was attributable to growth in the Phase II-III/PACE business. The Phase II-III/PACE increases were due to the success of our strategic partnership relationships and growth from small and emerging companies, both of which have 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 increase.
PCMS service revenue increased by $11.4 million, or 11.7%, to $109.1 million for the six months ended December 31, 2013 from $97.6 million for the same period in 2012. Higher service revenue was due primarily to the increase in consulting services associated with growth in strategic compliance work due to higher levels of regulatory activity, and $5.4 million of revenue from HERON. Perceptive service revenue increased by $29.4 million, or 29.0%, to $130.9 million for the six months ended December 31, 2013 from $101.4 million for the same period in 2012. The increase was primarily due to $19.5 million of revenue from LIQUENT along with growth across other service lines 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 $47.0 million, or 8.1%, to $627.7 million for the six months ended December 31, 2013 from $580.7 million for the same period in 2012. As a percentage of total service revenue, direct costs decreased to 67.0% from 71.1% for the respective periods. The gross margin improvement primarily 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 $30.8 million, or 6.7%, to $493.4 million for the six months ended December 31, 2013 from $462.6 million for the same period in 2012. This increase resulted primarily from increased labor costs associated with headcount growth in CRS needed to match the demand resulting from higher levels of clinical trial activity. As a percentage of CRS service revenue, CRS direct costs decreased to 70.8% from 74.9% for the respective periods. The gross margin improvement was driven by increased productivity of the employees who joined us during recent periods, the results of our operational efficiency programs and a reduction in the use of contract staff.
PCMS direct costs increased by $6.4 million, or 10.9%, to $64.5 million for the six months ended December 31, 2013 from $58.1 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. As a percentage of PCMS service revenue, PCMS direct costs decreased to 59.1% from 59.6% due to a better client and revenue mix.
Perceptive direct costs increased by $9.8 million, or 16.3%, to $69.8 million for the six months ended December 31, 2013 from $60.0 million for the same period in 2012 due primarily to the inclusion of LIQUENT direct costs. As a percentage of Perceptive service revenue, Perceptive direct costs decreased to 53.3% from 59.2% for the respective periods due to revenue growth and the impact of shifting resources to low cost countries. Selling, General and Administrative
SG&A expense increased to $180.4 million for the six months ended December 31, 2013 from $141.9 million for the same period in 2012. This $38.5 million increase was due primarily to inclusion of $11.5 million in costs related to LIQUENT and HERON, an increase in fixed and variable compensation costs attributable to the larger employee base needed to support business growth, and an increase in costs incurred to support our information technology infrastructure and facility expansion to better accommodate our growth. As a percentage of service revenue, SG&A expense increased to 19.3% of service revenue for the six months ended December 31, 2013 compared with 17.4% of service revenue for the six months ended December 31, 2012. Depreciation and Amortization
Depreciation and amortization expense increased to $39.7 million for the six months ended December 31, 2013 from $33.4 million for the same period in 2012 primarily due to higher amortization expense from the increase in intangible assets driven by LIQUENT and HERON. As a percentage of service revenue, depreciation and amortization expense was 4.2% and 4.1% for the six months ended December 31, 2013 and 2012, respectively.


Restructuring Charge
Our restructuring plans were substantially completed by the end of the third quarter of Fiscal Year 2012. During the six months ended December 31, 2013 there were no adjustments in restructuring charges. During the six months ended December 31, 2012, we recorded a $0.4 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 $88.5 million for the six months ended December 31, 2013 from $61.2 million for the same period in 2012. Income from . . .

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