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PRXL > SEC Filings for PRXL > Form 10-K on 20-Aug-2014All Recent SEC Filings

Show all filings for PAREXEL INTERNATIONAL CORP

Form 10-K for PAREXEL INTERNATIONAL CORP


20-Aug-2014

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 Services ("PC"), formerly known as PAREXEL Consulting and Medical Communication Services, and PAREXEL Informatics, Inc. ("PI"), formerly known as Perceptive Informatics, Inc.
• 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/Post-Approval Services, formerly known as Peri-Approval Clinical Excellence. 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 and Peri/Post-Approval Services due to economic similarities in these operating segments.

• PC 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 PC consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.

• PI provides information technology solutions designed to help improve clients' product development and regulatory submission processes. PI 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.

In February 2014, we announced the launch of PAREXEL Regulatory Outsourcing Services ("PROS"), which was designed to provide a focused, market-driven approach to regulatory outsourcing services in the life science industry, with a primary emphasis on post-approval regulatory activities. Effective July 1, 2014, the operating results of PROS are included in the PC segment. This service line offering was previously included within LIQUENT RIM solutions and reported within the PI segment. For interim and annual periods beginning July 1, 2014, we will disclose the reportable segment on this new basis and prior periods will be retroactively restated to reflect the change.
We conduct a significant portion of our operations in countries which are outside of the United States. Approximately 53.0% and 54.0% of our consolidated service revenue for the fiscal year 2014 and 2013 ended June 30, 2014 ("Fiscal Year 2014") and the fiscal year ended June 30, 2013 ("Fiscal Year 2013"), 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 Fiscal Year 2014, approximately 13.7% of total consolidated service revenue was from euro-denominated contracts and approximately 2.9% of total consolidated service revenue was from pound sterling-denominated contracts. For 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 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. In the cases where the contracts are canceled, services delivered through the cancellation date are due and payable by the client, including certain costs to conclude the trial or study.
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 standalone value exists for each of our service deliverables and we 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 PI'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 2014 qualitative assessment of impairment for goodwill and our ClinPhone RTSM 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. Contingent consideration liabilities are remeasured to fair value each reporting period using projected financial targets, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Increases or decreases in projected financial targets and probabilities of payment may result in significant changes in the fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.


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 Fiscal Years 2014 and 2013.
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 2014, 2013, and the fiscal year ended June 30, 2012 ("Fiscal Year 2012") were as follows:

(in thousands)                      Years Ended
                         June 30, 2014      June 30, 2013      Increase $     Increase %
Service revenue
CRS                     $     1,455,279    $     1,303,569    $    151,710        11.6 %
PC                              216,184            202,524          13,660         6.7 %
PI                              267,897            228,349          39,548        17.3 %
Total service revenue   $     1,939,360    $     1,734,442    $    204,918        11.8 %
Direct costs
CRS                     $     1,010,069    $       956,513    $     53,556         5.6 %
PC                              124,686            120,954           3,732         3.1 %
PI                              144,423            130,069          14,354        11.0 %
Total direct costs      $     1,279,178    $     1,207,536    $     71,642         5.9 %
Gross profit
CRS                     $       445,210    $       347,056    $     98,154        28.3 %
PC                               91,498             81,570           9,928        12.2 %
PI                              123,474             98,280          25,194        25.6 %
Total gross profit      $       660,182    $       526,906    $    133,276        25.3 %

(in thousands)                      Years Ended
                         June 30, 2013      June 30, 2012      Increase $     Increase %
Service revenue
CRS                     $     1,303,569    $     1,038,705    $    264,864        25.5 %
PC                              202,524            167,125          35,399        21.2 %
PI                              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 %
PC                              120,954             97,560          23,394        24.0 %
PI                              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 %
PC                               81,570             69,565          12,005        17.3 %
PI                               98,280             75,948          22,332        29.4 %
Total gross profit      $       526,906    $       424,679    $    102,227        24.1 %


FISCAL YEAR ENDED JUNE 30, 2014 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30,
2013
Revenue
Service revenue increased by $205.0 million, or 11.8%, to $1,939.4 million for
Fiscal Year 2014 from $1,734.4 million for Fiscal Year 2013. On a geographic
basis, service revenue was distributed as follows (in millions):
                                             Fiscal Year 2014                       Fiscal Year 2013
Region                                Service Revenue       % of Total       Service Revenue       % of Total
The Americas                       $             970.9           50.1 %   $             867.0           50.0 %
Europe, Middle East & Africa       $             709.2           36.6 %   $             624.0           36.0 %
Asia/Pacific                       $             259.3           13.3 %   $             243.4           14.0 %
Total                              $           1,939.4          100.0 %   $           1,734.4          100.0 %

For Fiscal Year 2014 compared with Fiscal Year 2013, service revenue in The Americas increased by $103.9 million, or 12.0%; Europe, Middle East & Africa service revenue increased by $85.2 million, or 13.7%; and Asia/Pacific service revenue increased by $15.9 million, or 6.5%. 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 LIQUENT Inc.("LIQUENT") and HERON Group LTD ("HERON") businesses, which we acquired in December 2012 and April 2013, respectively.
On a segment basis, CRS service revenue increased by $151.7 million, or 11.6%, to $1,455.3 million for Fiscal Year 2014 from $1,303.6 million for Fiscal Year 2013. The increase was attributable to growth in both the Phase II-III and Peri/Post Approval Service and the Early Phase businesses. Within the Phase II-III and Peri/Post Approval Service businesses, the efforts of a more productive employee base and the growth of backlog with a higher conversion rate caused revenue to increase across all of our client segments. The Early Phase business increases were due to increased demand for study services with patients.
PC service revenue increased by $13.7 million, or 6.7%, to $216.2 million for Fiscal Year 2014 from $202.5 million for Fiscal Year 2013. Higher service revenue was due primarily to $9.7 million of revenue from HERON, and the increase in consulting services associated with growth in the integrated product development consulting service line.
PI service revenue increased by $39.5 million, or 17.3%, to $267.9 million for Fiscal Year 2014 from $228.3 million for Fiscal Year 2013. The increase was primarily due to growth across all PI service lines due to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships, along with $17.5 million of revenue from LIQUENT.
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 $71.6 million, or 5.9%, to $1,279.2 million for Fiscal Year 2014 from $1,207.5 million for Fiscal Year 2013. As a percentage of total service revenue, direct costs decreased to 66.0% from 69.6% for the respective periods. The gross margin improvement primarily related to the impact of various productivity and efficiency initiatives, changes in the revenue mix, and the increased sourcing of operations to low-cost countries.
On a segment basis, CRS direct costs increased by $53.6 million, or 5.6%, to $1,010.1 million for Fiscal Year 2014 from $956.5 million for Fiscal Year 2013. 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. As a percentage of service revenue, CRS direct costs decreased to 69.4% for Fiscal Year 2014 from 73.4% for Fiscal Year 2013. The decrease as a percentage of service revenue was related to the results of our operational efficiency programs, the reduction in contract staff usage, and the impact of shifting activities to low-cost countries.
PC direct costs increased by $3.7 million, or 3.1%, to $124.7 million for Fiscal Year 2014 from $121.0 million for Fiscal Year 2013. This increase was primarily due to higher headcount levels and direct costs from HERON. As a percentage of service revenue, PC direct costs decreased to 57.7% from 59.7% for the respective periods as a result of a more favorable revenue mix. PI direct costs increased by $14.4 million, or 11.0%, to $144.4 million for Fiscal Year 2014 from $130.1 million for Fiscal Year 2013. This increase was due primarily to the inclusion of LIQUENT direct costs. As a percentage of service revenue, Perceptive direct costs decreased to 53.9% for Fiscal Year 2014 from 57.0% for Fiscal Year 2013 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 by $61.0 million, or 19.1%, to $379.8 million for Fiscal Year 2014 from $318.8 million for Fiscal Year 2013. This increase was due primarily to an increase in fixed and variable


compensation costs attributable to the larger employee base needed to support business growth, an increase in costs incurred to support our information technology infrastructure and facility expansion to better accommodate our growth, and an inclusion of $12.2 million in costs related to LIQUENT and HERON. As a percentage of service revenue, SG&A increased to 19.6% in Fiscal Year 2014 from 18.4% in Fiscal Year 2013.
Depreciation and Amortization
Depreciation and amortization ("D&A") expense increased by $8.1 million, or 11.1%, to $81.3 million for Fiscal Year 2014 from $73.2 million for Fiscal Year 2013, due to higher amortization expense from the increase in intangible assets driven by the LIQUENT and HERON acquisitions and higher depreciation expense from the increasing capital expenditures from Fiscal Year 2011 to Fiscal Year 2013 to support business growth. As a percentage of service revenue, D&A was 4.2% for both Fiscal Year 2014 and Fiscal Year 2013 . Restructuring Charge
Our restructuring plans were substantially completed by March 2012. For Fiscal Year 2014 and Fiscal Year 2013, respectively, we recorded a $0.4 million and $1.2 million net reduction in restructuring charges for adjustments to facility-related charges under our previously announced restructuring plans. Income from Operations
Income from operations increased to $199.5 million for Fiscal Year 2014 from $136.1 million for Fiscal Year 2013. Income from operations as a percentage of service revenue ("operating margin") increased to 10.3% from 7.8% 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, Net
We recorded net other expense of $11.6 million for Fiscal Year 2014 compared with $3.0 million for Fiscal Year 2013. The $8.66 million increase was driven primarily by a $6.8 million increase in miscellaneous expenses, largely due to net foreign currency exchange losses recorded during Fiscal Year 2014 compared to the net foreign currency exchange gains recorded during Fiscal Year 2013. Additionally, the increase is attributable a $1.9 million increase in net interest expense related to a higher average debt balance in Fiscal Year 2014. Taxes
For Fiscal Year 2014 and Fiscal Year 2013, we had effective income tax rates of 31.3% and 27.9%, respectively. The increase in Fiscal Year 2014 tax rate was primarily attributable to 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 U.K.).


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 %

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