UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 000-21244
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
200 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (781) 487-9900
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 7, 2005, there
were 26,614,438 shares of common stock outstanding.
PAREXEL INTERNATIONAL CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - September 30
and June 30, 2005 3
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosure About Market
Risk 26
Item 4 Controls and Procedures 27
PART II. OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds 27
Item 6 Exhibits 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, JUNE 30,
2005 2005
(UNAUDITED)
------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 87,973 $ 84,622
Marketable securities -- 4,000
Billed and unbilled accounts receivable, net 220,069 217,887
Prepaid expenses 11,348 12,086
Deferred tax assets 18,806 18,811
Income tax receivable 371 3,605
Other current assets 5,147 3,580
-------- --------
Total current assets 343,714 344,591
Property and equipment, net 71,791 71,865
Goodwill 47,290 42,815
Other intangible assets, net 8,729 9,228
Non-current deferred tax assets 2,126 2,137
Other assets 5,067 5,100
-------- --------
Total assets $478,717 $475,736
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 469 $ 507
Accounts payable 11,150 14,424
Deferred revenue 134,745 132,241
Accrued expenses 15,898 13,858
Accrued restructuring charges 7,399 13,231
Accrued employee benefits and withholdings 31,856 28,747
Deferred tax liabilities 16,924 16,928
Other current liabilities 3,860 4,354
-------- --------
Total current liabilities 222,301 224,290
Long-term debt, net of current portion 1,127 1,115
Non-current deferred tax liabilities 17,829 17,853
Long-term accrued restructuring charges 17,867 17,773
Other liabilities 5,116 5,188
-------- --------
Total liabilities 264,240 266,219
-------- --------
Minority interest in subsidiary 3,302 3,946
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized:
5,000,000; Series A junior participating preferred
stock - 50,000 shares designated, none issued
and outstanding
Common stock--$.01 par value; shares authorized:
50,000,000; shares issued and outstanding:
26,444,934 at September 30, 2005 and 26,153,334 at
June 30, 2005 279 275
Additional paid-in capital 167,234 163,921
Retained earnings 45,049 41,731
Accumulated other comprehensive income (loss) (1,387) (356)
-------- --------
Total stockholders' equity 211,175 205,571
-------- --------
Total liabilities and stockholders' equity $478,717 $475,736
======== ========
See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
-------- --------
Service revenue $138,380 $130,422
Reimbursement revenue 31,188 27,175
-------- --------
Total revenue 169,568 157,597
Costs and expenses:
Direct costs 93,623 83,690
Reimbursable out-of-pocket expenses 31,188 27,175
Selling, general and administrative 34,051 31,841
Depreciation and amortization 6,370 6,410
Restructuring expense (benefit) (679) --
-------- --------
Total costs and expenses 164,553 149,116
-------- --------
Income from operations 5,015 8,481
Other income 1,037 653
-------- --------
Income before provision for income taxes
and minority interest 6,052 9,134
Provision for income taxes 3,078 3,535
Minority interest expense (benefit) (344) (57)
-------- --------
Net income $ 3,318 $ 5,656
======== ========
Earnings per share:
Basic $ 0.13 $ 0.22
Diluted $ 0.13 $ 0.21
Weighted average shares:
Basic 26,419 26,027
Diluted 26,529 26,583
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
-------- -------
Cash flow from operating activities:
Net income $ 3,318 $ 5,656
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest expense (benefit) in net income of
consolidated subsidiary (344) (57)
Depreciation and amortization 6,370 6,410
Changes in operating assets/liabilities (1,149) (6,696)
------- -------
Net cash provided by operating activities 8,195 5,313
------- -------
Cash flow from investing activities:
Purchases of marketable securities -- (1,131)
Proceeds from sale of marketable securities 4,000 991
Acquisition of business (5,479) --
Purchases of property and equipment (6,081) (5,765)
Proceeds from sale of assets 6 567
------- -------
Net cash used in investing activities (7,554) (5,338)
------- -------
Cash flow from financing activities:
Proceeds from issuance of common stock 4,708 974
Payments to repurchase common stock (2,000) (3,742)
Repayments under lines of credit and long-term debt (26) (573)
------- -------
Net cash provided (used) by financing activities 2,682 (3,341)
------- -------
Effect of exchange rate changes on cash and cash equivalents 28 1,010
------- -------
Net increase (decrease) in cash and cash equivalents 3,351 (2,356)
Cash and cash equivalents at beginning of period 84,622 60,686
------- -------
Cash and cash equivalents at end of period $87,973 $58,330
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the year for:
Interest $ 1,416 $ 940
Income taxes $ 4,193 $ (782)
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 6,274 --
Liabilities assumed (795) --
------- -------
Cash paid for acquisition $ 5,479 --
======= =======
See notes to condensed consolidated financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
PAREXEL International Corporation ("PAREXEL" or "the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (primarily
consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2005, are not necessarily indicative of the results that may be
expected for other quarters or the entire fiscal year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended June 30, 2005.
Certain fiscal year 2005 amounts have been reclassified to conform to the fiscal
year 2006 presentation. Specifically, an accounting reclassification in the
amount of $1.1 million for the quarter ended September 30, 2004 has been made
from Service Revenue to Other Income to reflect a change in the accounting
treatment with respect to the impact of foreign exchange rates on certain
contracts denominated in a currency other than the prime contract holder's
functional currency. The change had no impact to expenses, net income, or
earnings per share, but did impact gross margin and operating income. See Note 2
to the Consolidated Financial Statements of the 2005 Form 10-K for additional
information.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the Company's employee stock purchase plan.
Outstanding options to purchase approximately 1.4 million and 0.6 million shares
of common stock were excluded from the calculation of diluted earnings per share
for the three months ended September 30, 2005 and 2004, respectively, because
they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
-----------------
2005 2004
------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income attributable to common shares $ 3,318 $ 5,656
======= =======
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 26,419 26,027
======= =======
Basic earnings per common share $ 0.13 $ 0.22
======= =======
DILUTED EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 26,419 26,027
Shares attributable to common stock options 110 556
------- -------
26,529 26,583
======= =======
Diluted earnings per common share $ 0.13 $ 0.21
======= =======
6
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income has been calculated by the Company in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive
income for the three months ended September 30, 2005 and 2004 were as follows:
FOR THE THREE
MONTHS ENDED
SEPTEMBER 30,
----------------
2005 2004
------- ------
($ IN THOUSANDS)
Net income $ 3,318 $5,656
Add: Foreign currency translation adjustments (1,177) 1,218
Unrealized gain on investment 146 44
------- ------
Comprehensive income $ 2,287 $6,918
======= ======
NOTE 4 - ACQUISITIONS
Effective July 1, 2005, the Company acquired the assets of Qdot PHARMA (Qdot"),
a leading Phase I and IIa Proof of Concept clinical pharmacology business
located in George, South Africa for approximately $2.7 million. Under the
agreement, the Company agreed to make additional payments of up to approximately
$3.0 million in contingent purchase price if Qdot achieves certain established
financial targets through September 28, 2008. In connection with this
transaction, the Company recorded approximately $2.0 million of excess cost over
the fair value of the interest in the net assets acquired as goodwill. Purchase
accounting has not been finalized as of September 30, 2005. Pro forma results of
Qdot operations have not been presented because the effect of this acquisition
is not material.
On August 22, 2005, the Company acquired all of the equity interests held by
minority stockholders of Perceptive Informatics, Inc., and now owns all of the
outstanding common stock of Perceptive. This acquisition was effected through a
"short-form" merger of Perceptive with PIC Acquisition, Inc., an indirect
subsidiary of PAREXEL and, prior to the merger, the owner of 97.8% of the
outstanding common stock of Perceptive. Under the terms of the merger, PAREXEL
agreed to pay an aggregate of approximately $3.2 million in cash to the minority
stockholders (including option holders upon exercise of stock options) for their
shares of common stock of Perceptive. Certain executive officers and directors
of PAREXEL held shares of Perceptive common stock prior to the merger.
In addition, under the terms of the merger, PAREXEL assumed all outstanding
stock options under Perceptive's stock incentive plan. As a result, the holders
of in-the-money Perceptive stock options are entitled to receive upon exercise
of such options $1.65 in cash, without interest, for each share of Perceptive
common stock that was subject to such options immediately prior to the merger.
None of the other terms and conditions of the Perceptive stock options have
changed. The stock options will continue to be exercisable only upon payment of
the exercise price of such options and to be subject to the vesting schedule to
which such stock options were subject immediately prior to the merger. Certain
executive officers and directors of PAREXEL held stock options to purchase
Perceptive common stock prior to the merger.
Additionally, PAREXEL has also agreed to make payments totaling $1.6 million to
certain employees of Perceptive on the first anniversary of the effective date
of the merger, including $500,000 to an executive officer. These payments are
not conditioned on these employees remaining as employees of Perceptive on the
first anniversary of the effective date of the merger.
The terms and conditions of the merger were established and approved by a
special committee of the Board of Directors of PAREXEL consisting of two
independent directors of PAREXEL having no interests in Perceptive.
NOTE 5 - STOCK-BASED COMPENSATION
At June 30, 2005, PAREXEL had three stock-based employee compensation plans. All
three of the plans are employee stock option plans. Prior to July 1, 2005, the
Company accounted for employee stock-based compensation using the intrinsic
value based method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", as described by FASB Interpretation
No. 44. Accordingly, no compensation expense is recognized if the exercise price
of the Company's stock options was equal to the market price of the underlying
stock on the date of grant.
7
Effective July 1, 2005, the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 123(R) "Share-Based Payment" under the modified
prospective method as described in SFAS No. 123(R). Under this transition
method, compensation expense recognized in the three months ended September 30,
2005 includes compensation expense for all stock-based payments granted during
the quarter and for all stock-based payments granted prior to, but not yet
vested as of July 1, 2005, based on the grant date fair value estimated in
accordance with the original provision of SFAS No. 123. Accordingly, prior
period financials have not been restated. The total amount of compensation
expense recognized in the three months ended September 30, 2005 was $0.6
million, of which, $0.2 million was recorded in direct costs and $0.4 million
was recorded in selling, general and administrative expense in the condensed
consolidated statement of operations. The adoption of SFAS No. 123 had no effect
on cash flow for the three months ended September 30, 2005.
The net impact of adopting the new accounting guidance for the quarter ended
September 30, 2005 was as follows:
UPON ADOPTION SFAS NO. IF SFAS NO.123(R) HAD
123(R) NOT BEEN ADOPTED
---------------------- ---------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Income from continuing operations before income taxes
and minority interest $6,052 $6,660
Net income $3,318 $3,617
Basic earnings per share $ 0.13 $ 0.14
Diluted earnings per share $ 0.13 $ 0.14
No compensation expense related to stock-based grants has been recorded in the
consolidated statement of operations for the three months ended September 30,
2004, as all of the shares granted have an exercise price equal to the market
value of the underlying stock on the date of grant. Prior period results have
not been restated with the adoption of SFAS No. 123(R).
The following table illustrates the effect on net income and earnings per share
if PAREXEL had applied the fair-value recognition provisions required by SFAS
No. 123(R) for the quarter ended September 30, 2004:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
--------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported $5,656
Deduct total stock-based compensation, net of tax (979)
------
Pro forma net income $4,677
======
Basic net income per share - as reported $ 0.22
Basic net income per share - pro forma $ 0.18
Diluted net income per share - as reported $ 0.21
Diluted net income per share - pro forma $ 0.18
The stock option compensation cost calculated under the fair value approach is
recognized on a pro rata basis over the vesting period of the stock options
(averaged over four years). All stock option grants are subject to graded
vesting as services are rendered. The fair value for granted options was
estimated at the time of the grant using the Black-Scholes option-pricing model.
Expected volatilities are based on implied and historical volatilities and
PAREXEL uses historical data to estimate option exercise behavior.
8
The following assumptions were used in PAREXEL's Black-Scholes option-pricing
model for awards issued during the respective periods:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
----- -----
Dividend yield 0.00% 0.00%
Expected volatility 40.58% 36.80%
Risk-free interest rate 3.96% 3.36%
Expected terms in years 4.77 5.00
The following table summarizes information related to stock option activity for
the respective periods:
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
------ -----
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Weighted-average fair value of options
granted per share $ 8.13 $7.39
Intrinsic value of options exercised $3,045 $ 781
Cash received from options exercised $4,708 $ 974
Actual tax benefit realized for tax deductions
from option exercises $ 0 $ 0
Stock option activity for the three months ended September 30, 2005:
WEIGHTED- AGGREGATE
WEIGHTED- AVERAGE INTRINSIC
AVERAGE REMAINING VALUE
NUMBER OF EXERCISE CONTRACTUAL (IN
OPTIONS PRICE LIFE IN YEARS THOUSANDS)
--------- --------- ------------- ----------
Outstanding at beginning of quarter 3,093,194 $16.53 -- --
Granted 713,500 $20.14 -- --
Exercised 391,000 $12.04 -- --
Cancelled 164,615 $28.82 -- --
Outstanding at end of quarter 3,251,079 $17.26 4.75 $8,932
Exercisable at end of quarter 2,112,943 $16.46 3.43 $7,483
NOTE 6 - SEGMENT INFORMATION
The Company is managed through three business segments, namely, Clinical
Research Services ("CRS"), PAREXEL Consulting and Marketing Services ("PCMS"),
and Perceptive Informatics, Inc. ("Perceptive"). CRS constitutes the Company's
core business and includes clinical trials management and biostatistics, data
management and clinical pharmacology, as well as related medical advisory and
investigator site services. PCMS provides technical expertise in such
disciplines as regulatory affairs, industry training, publishing, product
development, management consulting, registration, commercialization issues,
market development, targeted communications services in support of product
launch, as well as health policy consulting and strategic reimbursement
services. Perceptive provides information technology solutions designed to
improve clients' product development processes. Perceptive offers a portfolio of
products and services that includes medical imaging services, interactive voice
response systems ("IVRS"), clinical trials management systems ("CTMS"),
web-based portals, systems integration, and patient diary applications.
The Company evaluates its segment performance and allocates 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, the Company does not include selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income tax expense in segment profitability. The Company attributes revenue to
individual countries based upon the number of hours of services performed in the
respective countries and inter-segment transactions are not included in service
revenue. Furthermore, PAREXEL has a global infrastructure supporting its
business segments, and therefore, assets are not identified by reportable
segment.
9
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2005 2004
-------- --------
($ IN THOUSANDS)
Service revenue:
Clinical Research Services $ 99,348 $ 88,837
PAREXEL Consulting and
Marketing Services 26,745 32,356
Perceptive Informatics, Inc. 12,287 9,229
-------- --------
$138,380 $130,422
======== ========
Gross profit on service revenue:
Clinical Research Services $ 32,226 $ 31,698
PAREXEL Consulting and
Marketing Services 7,979 10,891
Perceptive Informatics, Inc. 4,552 4,143
-------- --------
$ 44,757 $ 46,732
======== ========
NOTE 7 - RESTRUCTURING CHARGES
During the quarter ended September 30, 2005, the Company recorded a $1.2 million
reduction to the existing restructuring reserve as a result of changes in
assumptions primarily related to facilities sub-leases, which was partially
offset by $0.5 million in new severance-related restructuring activity.
Current activity charged against the restructuring accrual in the quarter ended
September 30, 2005 (which is included in "Current Liabilities - Accrued
Restructuring Charges" and "Long-term Accrued Restructuring Charges" in the
Condensed Consolidated Balance Sheet) was as follows:
BALANCE AS OF BALANCE AS OF
JUNE 30, PROVISION/ SEPTEMBER 30,
2005 ADJUSTMENTS PAYMENTS 2005
------------- ----------- -------- -------------
($ IN THOUSANDS)
Employee severance costs $ 3,694 $ 728 $(2,143) $ 2,279
Facilities-related charges 27,310 (1,407) (2,916) 22,987
------- ------- ------- -------
$31,004 $ (679) $(5,059) $25,266
======= ======= ======= =======
NOTE 8 - STOCKHOLDERS' EQUITY
On September 9, 2004, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20.0 million of the Company's common stock to
be repurchased in the open market subject to market conditions. Unless
terminated earlier by resolution of the Company's Board of Directors, the Plan
will expire when the entire amount authorized has been fully utilized. Through
September 30, 2005, the Company had acquired 375,244 shares at a total cost of
$8.0 million under this program. See Part II, Item 2 of this quarterly report on
Form 10-Q for further detail. During the period from October 1, 2005 to November
4, 2005, the Company acquired an additional 26,433 shares at a total cost of
$556,000, leaving a remaining balance on the authorization of $11.4 million.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which changes the requirements for the accounting and reporting of
a change in accounting principle. SFAS No. 154 applies to all voluntary changes
in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154
requires that changes in accounting principle be retrospectively applied. SFAS
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not believe
adoption of this statement will have a material impact on the Company's
financial statements.
10
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 herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation of such information. The Company's
results of operations for a particular quarter may not be indicative of results
expected during subsequent fiscal quarters or for the entire 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,
and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained in this report regarding the Company's 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", "intends", "may", "plans", "projects", "will", "would",
"targets", and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. The Company cannot guarantee that they actually will achieve
the plans, intentions or expectations expressed or implied in its
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 the
Company makes. These important factors are described under "Critical Accounting
Policies and Estimates" and the Risk Factors set forth below. Although the
Company may elect to update forward-looking statements in the future, it
specifically disclaims any obligation to do so, even if its estimates change,
and readers should not rely on those forward-looking statements as representing
the Company's views as of any date subsequent to the date of this quarterly
report.
OVERVIEW
The Company is a leading bio/pharmaceutical services company, providing a broad
range of expertise in clinical research, medical marketing, consulting and
informatics and advanced technology products and services to the worldwide
pharmaceutical, biotechnology, and medical device industries. The Company's
primary objective is to provide solutions for managing the bio/pharmaceutical
product lifecycle with the goal of reducing the time, risk and cost associated
with the development and commercialization of new therapies. Since its founding
in 1983, PAREXEL has developed significant expertise in processes and
technologies supporting this strategy. The Company's product and service
offerings include: clinical trials management, data management, biostatistical
analysis, medical marketing, clinical pharmacology, patient recruitment,
regulatory and medical consulting, health policy and reimbursement, performance
improvement, industry training and publishing, medical imaging services, IVRS,
CTMS, web-based portals, systems integration, patient diary application, and
other drug development consulting services. The Company believes that its
comprehensive services, depth of therapeutic area expertise, global footprint
and related access to patients, and sophisticated information technology, along
with its experience in global drug development and product launch services,
represent key competitive strengths.
The Company is managed through three business segments, namely, CRS, PCMS and
Perceptive.
- CRS constitutes the Company's core business and includes clinical
trials management and biostatistics, data management and clinical
pharmacology, as well as related medical advisory and investigator
site services.
- PCMS provides technical expertise and advice in such areas as drug
development, regulatory affairs, and bio/pharmaceutical process and
management consulting; and provides a full spectrum of market
development, product development, and targeted communications services
in support of product launch. PCMS consultants identify alternatives
and propose solutions to address clients' product development,
registration, and commercialization issues. PCMS also provides health
policy consulting and strategic reimbursement services.
- Perceptive provides information technology solutions designed to
improve clients' product development processes. Perceptive offers a
portfolio of services that include medical imaging services, IVRS,
CTMS, web-based portals, systems integration, and patient diary
applications.
11
The Company conducts a significant portion of its operations in foreign
countries. Approximately 63.5% of the Company's consolidated service revenue for
the three months ended September 30, 2005 and 60.8% of the Company's
consolidated service revenue for the three months ended September 30, 2004, were
from non-U.S. operations. Over recent quarters, the Company has noticed a
growing trend toward winning new business awards in the U.S. for projects to be
completed outside of the U.S.
Because the Company's financial statements are denominated in U.S. dollars,
changes in foreign currency exchange rates can have a significant effect on its
operating results. For the three months ended September 30, 2005, approximately
18.4% of total consolidated service revenue was denominated in British pounds
and approximately 35.5% of total consolidated service revenue was denominated in
Euros. For the three months ended September 30, 2004, approximately 22.6% of
total consolidated service revenue was denominated in British pounds and
approximately 29.6% of total consolidated service revenue was denominated in
Euros.
Approximately 85.0% of the Company's contracts are fixed rate, 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 to
be paid 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 generally recognized as work is performed. As a result,
cash receipts do not necessarily correspond to costs incurred and revenue
recognized on contracts.
Generally, the Company's clients can terminate their contracts with the Company
upon 30 to 60 days' notice or can delay execution of services. Clients may
terminate or delay contracts for a variety of reasons, including, among others:
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
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's 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 the Company
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, the Company evaluates its estimates and judgments. The Company
bases its estimates on historical experience and on various other factors that
it believes to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The Company regards an accounting estimate underlying its financial statements
as a "critical accounting estimate" if the nature of the estimate or assumption
is material due to 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. The
Company believes that the following accounting policies are most critical to aid
in fully understanding and evaluating its reported financial results:
REVENUE RECOGNITION
Service revenue on fixed-price contracts is recognized as services are
performed. The Company measures progress for fixed-price contracts using the
concept of proportional performance based upon a unit based output method. This
method requires the Company to estimate total expected units, as well as the
costs and revenue per unit. Generally, the assigned financial manager or
financial analyst reviews contract estimates on a monthly basis. Adjustments to
contract estimates are made in the periods in which the facts that require the
revisions become known. Historically, there have not been any significant
variations between contract estimates and the actual cost incurred that were not
recovered from clients. In the event that future estimates are materially
incorrect, they could materially impact the Company's consolidated results of
operations and financial position.
12
BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Billed accounts receivable represent amounts for which invoices have been sent
to clients. Unbilled accounts receivable represent amounts recognized as revenue
for which invoices have not yet been sent to clients. Deferred revenue
represents amounts billed or payments received for which revenue has not yet
been earned. The Company maintains an allowance for doubtful accounts based on
historical collectability and specific identification of potential problem
accounts. In the event the Company is unable to collect portions of its
outstanding billed or unbilled receivables, there may be a material impact to
the Company's consolidated results of operations and financial position.
INCOME TAXES
The Company's global provision for corporate income taxes is determined in
accordance with SFAS No. 109, "Accounting for Income Taxes", which requires that
deferred tax assets and liabilities be recognized for the effect of temporary
differences between the book and tax bases 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 the Company operates, adjusted as required by the tax
laws of each taxing jurisdictions. Changes in the distribution of profits and
losses among taxing jurisdictions may have a significant impact on the Company's
effective tax rate.
Interim tax provision calculations are prepared during the year. Differences
between these interim estimates and the final results for the year could
materially impact the Company's effective tax rate and its consolidated results
of operations and financial position. The Company is required under Financial
Interpretation No. 18, "Accounting for Income Taxes in Interim Periods - an
interpretation of APB Opinion No. 28" to exclude from its quarterly worldwide
effective income tax rate calculation losses in jurisdictions where no tax
benefit can be recognized. As a result, the Company's effective tax rate may
fluctuate significantly on a quarterly basis.
The amount of income taxes the Company pays is subject to ongoing audits by
federal, state and foreign tax authorities, which may result in proposed
assessments. The Company's estimate for the potential outcome for any uncertain
tax issue is based on judgment. The Company believes it has adequately provided
for any reasonably foreseeable outcome related to these matters. However, future
results may include favorable or unfavorable adjustments to the Company's
estimated tax liabilities in the period assessments are made or resolved or when
statutes of limitation on potential assessments expire.
GOODWILL
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. Under SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill 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 carrying value of the reporting unit below
its fair value. The Company has assessed the impairment of goodwill under SFAS
No. 142 in fiscal years 2005 and 2004. The impairment testing involves
determining the fair market value of each of the reporting units with which the
goodwill was associated and comparing the value with the reporting unit's
carrying value. Based on this assessment, there was no impairment identified at
June 30, 2005 and 2004. Any future impairment of goodwill could have a material
impact to the Company's financial position or its results of operations.
RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include the impact of selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income taxes in segment profitability. Service revenue, direct costs and gross
profit on service revenue for the three months ended September 30, 2005 and 2004
were as follows:
13
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
INCREASE
2005 2004 (DECREASE) %
-------- -------- ---------- -----
($ IN THOUSANDS)
Service revenue:
CRS $ 99,348 $ 88,837 $10,511 11.8%
PCMS 26,745 32,356 (5,611) -17.3%
Perceptive 12,287 9,229 3,058 33.1%
-------- -------- -------
$138,380 $130,422 $ 7,958 6.1%
======== ======== =======
Direct costs:
CRS $ 67,122 $ 57,139 $ 9,983 17.5%
PCMS 18,766 21,465 (2,699) -12.6%
Perceptive 7,735 5,086 2,649 52.1%
-------- -------- -------
$ 93,623 $ 83,690 $ 9,933 11.9%
======== ======== =======
Gross profit on
service revenue:
CRS $ 32,226 $ 31,698 $ 528 1.7%
PCMS 7,979 10,891 (2,912) -26.7%
Perceptive 4,552 4,143 409 9.9%
-------- -------- -------
$ 44,757 $ 46,732 $(1,975) -4.2%
======== ======== =======
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2004:
Service revenue increased $8.0 million, or 6.1%, to $138.4 million for the three
months ended September 30, 2005 from $130.4 million for the three months ended
September 30, 2004. On a geographic basis, service revenue for the three months
ended September 30, 2005 was distributed as follows: United States - $50.4
million (36.5%), Europe - $80.7 million (58.3%), and Asia & Other - $7.3 million
(5.2%). For the three months ended September 30, 2004, service revenue was
distributed as follows: United States - $51.1 million (39.2%), Europe - $72.3
million (55.4%), and Asia & Other - $7.0 million (5.4%). The year-over-year
shift of revenue from the United States to Europe was primarily attributed to
U.S. revenue weakness in the PCMS segment and an increasing proportion of
clinical business awards being won in the U.S. for work to be conducted outside
of the U.S.
On a segment basis, CRS service revenue increased by $10.5 million, or 11.8%, to
$99.3 million in the three months ended September 30, 2005 from $88.8 million in
the three months ended September 30, 2004. Of the total $10.5 million increase,
$9.1 million was attributed to business growth in activities related to Phases
II-III clinical trials and $1.1 million was attributed to incremental revenue
from the Qdot acquisition completed in July 2005. PCMS service revenue decreased
by $5.6 million, or 17.3%, to $26.7 million in the three months ended September
30, 2005 from $32.3 million in the three months ended September 30, 2004. The
year-over-year decrease was primarily caused by a decline in work being
performed for one major client within the medical marketing services business
and a lower level of business activity in consulting services caused in part by
exiting low margin portions of the business. Perceptive service revenue
increased by $3.1 million, or 33.1%, to $12.3 million for the three months ended
September 30, 2005 from $9.2 million in the three months ended September 30,
2004. Of the total $3.1 million increase, $1.6 million was attributed to the
CTMS business, $1.1 million was attributed to medical imaging, with the
remaining $0.4 million increase primarily from the IVRS business.
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 the Company, nor does it have an impact on net income.
14
Direct costs increased by $9.9 million, or 11.9%, to $93.6 million for the
three months ended September 30, 2005 from $83.7 million in the three months
ended September 30, 2004. On a segment basis, CRS direct costs increased by
$10.0 million, or 17.5%, to $67.1 million for the three months ended September
30, 2005 from $57.1 million in the three months ended September 30, 2004. The
year-over-year increase in CRS direct costs was primarily due to costs incurred
to support higher revenue levels. As a percentage of service revenue, CRS direct
costs increased by 3.3 points to 67.6% for the three months ended September 30,
2005 from 64.3% for the three months ended September 30, 2004 driven, in part,
by increased hiring and training costs (mainly in the U.S.) and a lower level of
profitability associated with U.S. operations. PCMS direct costs decreased by
$2.7 million, or 12.6%, to $18.8 million in the three months ended September 30,
2005 from $21.5 million in the three months ended September 30, 2004. The
year-over-year decrease in PCMS direct costs was primarily due to lower labor
costs associated with lower revenue levels. As a percentage of service revenue,
PCMS direct costs increased by 3.9 points to 70.2% for the three months ended
September 30, 2005 from 66.3% for the three months ended September 30, 2004 due
to a less favorable revenue mix. Perceptive direct costs increased $2.6 million,
or 52.1%, to $7.7 million in the three months ended September 30, 2005 from $5.1
million in the three months ended September 30, 2004. The year-over-year
increase in Perceptive direct costs is primarily due to higher labor costs
associated with increased staffing needs to support business growth and $0.5
million of costs deemed to be compensation expense in conjunction with PAREXEL's
purchase of the minority interest in Perceptive. As a percentage of service
revenue, Perceptive's direct costs increased by 7.9 points to 63.0% in the three
months ended September 30, 2005 from 55.1% in the three months ended September
30, 2004 as a result of the impact of recording compensation expense in
conjunction with the buyback of the minority interest in Perceptive and a less
favorable revenue mix.
Selling, general and administrative ("SG&A") expenses increased by $2.2 million,
or 6.9%, to $34.0 million in the three-month period ended September 30, 2005
from $31.8 million in the three months ended September 30, 2004. Of the total
$2.2 million increase, $1.1 million was related to costs deemed to be
compensation expense in conjunction with PAREXEL's purchase of the minority
interest in Perceptive, $0.4 million was attributed to stock-based compensation
expense related to the implementation of FAS 123(R), $0.4 million was related to
Sarbanes-Oxley compliance expense, and $0.2 million was incremental expense
associated with the Qdot acquisition. As a percentage of service revenue, SG&A
increased by 0.2 points to 24.6% in the three months ended September 30, 2005
from 24.4% in the three months ended September 30, 2004, with the benefits of
the June 2005 restructuring charge being more than offset by the amounts
described above.
Depreciation and amortization ("D&A") expense was $6.4 million for the three
months ended September 30, 2005 and 2004. As a percentage of service revenue,
D&A decreased by 0.3 points to 4.6% in the three months ended September 30, 2005
from 4.9% in the three months ended September 30, 2004.
During the three months ended September 30, 2005, the Company recorded a $1.2
million reduction to the existing restructuring reserve as a result of changes
in assumptions primarily related to facilities sub-leases, which was partially
offset by $0.5 million in new severance-related restructuring activity. There
were no restructuring charges recorded during the three months ended September
30, 2004.
Other income increased by $0.4 million, or 58.8% to $1.0 million in the three
months ended September 30, 2005 from $0.7 million in the three months ended
September 30, 2004. The change was due primarily to higher interest income and
increased foreign exchange gains.
The Company had an effective income tax rate of 50.9% for the three months ended
September 30, 2005 and 38.7% for the three months ended September 30, 2004. The
swing in the tax rate was primarily attributable to the impact of applying the
requirements of Financial Interpretation No. 18, which provides guidance on
accounting for income taxes during interim periods and is directly related to
the quarterly profile of the Company's losses in jurisdictions (mainly in the
U.S.) where no tax benefit could be recognized. These losses are projected to
decline over the course of the fiscal year. Management expects the full-year tax
rate to be approximately 42.0%.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth,
including acquisitions, with cash flow from operations and proceeds from the
sale of equity securities. Investing activities primarily reflect acquisition
costs and capital expenditures for information systems enhancements and
leasehold improvements.
15
DAYS SALES OUTSTANDING
The Company's 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. DSO was 42 days at September 30, 2005, 39 days at June
30, 2005, and 41 days at September 30, 2004. Accounts receivable, net of the
allowance for doubtful accounts was $220.1 million ($130.1 million in billed
accounts receivable and $90.0 million in unbilled accounts receivable) at
September 30, 2005 and $217.9 million ($123.8 million in billed accounts
receivable and $94.1 million in unbilled accounts receivable) at June 30, 2005.
Deferred revenue was $134.7 million at September 30, 2005 and $132.2 million at
June 30, 2005. DSO is calculated by adding the end-of-period balances for billed
and unbilled account receivables, net of deferred revenue and the allowance for
doubtful accounts, 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.
CASH FLOWS
Net cash provided by operating activities for the three months ended September
30, 2005 totaled $8.2 million and was generated from $6.4 million related to
non-cash charges for depreciation and amortization expense, $3.3 million of net
income, a $1.5 million decrease in accounts receivable (net of allowance for
doubtful accounts and deferred revenue), and a $1.1 million increase in
liabilities, offset by a $3.4 million decrease in accounts payable, a $0.4
million increase in prepaids and other assets, and a $0.3 million decrease in
other sources. Net cash provided by operating activities for the three months
ended September 30, 2004 totaled $5.3 million and was generated from $6.4
million related to non-cash charges for depreciation and amortization expense,
$5.7 million of net income, and a $1.1 million increase in liabilities, offset
by a $7.0 million decrease in accounts payable and $0.9 million utilized for
other needs.
Net cash used in investing activities for the three months ended September 30,
2005 totaled $7.6 million and consisted of $6.1 million used for capital
expenditures (primarily analytical equipment and computer software and
hardware), $5.5 million used for the acquisition of Qdot and the acquisition of
the equity interest of minority stockholders in Perceptive as discussed in Note
4 to the Condensed Consolidated Financial Statements included in Item 1 of this
quarterly report, offset by $4.0 million of proceeds from the sale of marketable
securities. Net cash used in investing activities for the three months ended
September 30, 2004 totaled $5.3 million and consisted of $5.8 million used for
capital expenditures (primarily computer software and hardware), offset by
approximately $0.5 million of proceeds from the sale of fixed assets.
Net cash provided by financing activities for the three months ended September
30, 2005 totaled $2.7 million, and was generated from $4.7 million in proceeds
related to the issuance of common stock in conjunction with the Company's stock
option plan, offset by $2.0 million used to repurchase the Company's common
stock pursuant to its stock repurchase program. Net cash used in financing
activities for the three months ended September 30, 2004 totaled $3.3 million,
and was generated from $3.7 million used to repurchase the Company's common
stock pursuant to its stock repurchase program and $0.6 million for repayments
under lines-of-credit and long-term debt, offset by $1.0 million in proceeds
related to the issuance of common stock in conjunction with the Company's stock
option plan.
LINES OF CREDIT
The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro
12.0 million. This line of credit is not collateralized, is payable on demand,
and bears interest at a rate ranging between 3% and 5%. The line of credit may
be revoked or canceled by the bank at any time at its discretion. The Company
primarily entered into this line of credit to facilitate business transactions
with the bank. At September 30, 2005, the Company had approximately Euro 12.0
million available under this line of credit.
The Company has other foreign lines of credit with banks totaling approximately
$1.8 million. These lines of credit are used as overdraft protection and bear
interest at rates ranging from 4% to 6%. The lines of credit are payable on
demand and are supported by PAREXEL International Corporation. At September 30,
2005, the Company had approximately $1.8 million available under these
arrangements.
16
The Company has a cash pooling arrangement with ABN AMRO Bank. Pooling occurs
when debit balances are offset against credit balances and the net position is
used as a basis by the bank for calculating interest. Each legal entity owned by
the Company and party to this arrangement remains the owner of either a credit
or debit balance. Therefore, interest income is earned in legal entities with
credit balances, while interest expense is charged to legal entities with debit
balances. Based on the pool's overall balance, the Bank then (1) recalculates
the overall interest to be charged or earned, (2) compares this amount with the
sum of previously charged/earned interest amounts per account and (3)
additionally pays/charges the difference. Interest income and interest expense
are included in "other income (expense), net" in the Company's condensed
consolidated statements of operations.
FINANCING NEEDS
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company's principal source of cash is from contracts with clients. If the
Company were unable to generate new contracts with existing and new clients or
if the level of contract cancellations increased, the Company's revenue and cash
flow would be adversely affected (see "Risk Factors" for further detail). Absent
a material adverse change in the level of the Company's new business bookings or
contract cancellations, PAREXEL believes that its existing capital resources
together with cash flow from operations and borrowing capacity under existing
lines of credit will be sufficient to meet its foreseeable cash needs over the
next twelve months and on a longer term basis.
In the future, the Company expects to acquire businesses to enhance its service
offerings, expand its therapeutic expertise, and/or increase its global
presence. Any such acquisitions may require additional external financing, and
the Company may from time to time seek to obtain funds from public or private
issuances of equity or debt securities. The Company may be unable to secure such
financing on terms acceptable to the Company.
The Company expects capital expenditures to total approximately $31.0 million in
fiscal year 2006. As of September 30, 2005, the Company had spent $6.1 million
and expects to spend an additional $24.9 million primarily for computer software
and hardware during the remainder of the fiscal year.
CONTINGENT LIABILITIES AND GUARANTEES
In connection with the acquisition of Integrated Marketing Concepts ("IMC")
during fiscal year 2005, the Company is obligated to make a minimum payment of
$0.6 million and up to a maximum of $3.2 million in contingent purchase price if
IMC achieves certain established financial targets through September 30, 2007.
In connection with the Qdot acquisition as discussed in Note 4 to the Condensed
Consolidated Financial Statements included in Item 1 of this quarterly report,
the Company is obligated to make maximum additional payments of approximately
$3.0 million in contingent purchase price if Qdot achieves certain established
financial targets through September 28, 2008.
The Company has letter-of-credit agreements with banks totaling approximately
$4.3 million guaranteeing performance under various operating leases and vendor
agreements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to the
Company.
FOREIGN CURRENCY EXCHANGE RATES
The Company derived approximately 63.5% of its service revenue for the
three-month period ended September 30, 2005 and 60.8% of its service revenue for
the three months ended September 30, 2004 from operations outside of the U.S.
The Company does not have significant operations in countries in which the
economy is considered to be highly inflationary. The Company's financial
statements are denominated in U.S. dollars. Accordingly, changes in exchange
rates between foreign currencies and the U.S. dollar will affect the translation
of financial results into U.S. dollars for purposes of reporting the Company's
consolidated financial results.
17
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in a currency
other than the foreign subsidiary's functional (local) currency. To the extent
the Company is unable to shift the effects of currency fluctuations to its
clients, foreign exchange fluctuations as a result of currency exchange losses
could have a material effect on the Company's results of operations. The Company
has a derivative hedging policy to hedge certain foreign denominated accounts
receivable and intercompany payables. Under this policy, derivatives are
accounted for in accordance with SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133").
Occasionally, the Company enters into other currency exchange contracts to
offset the impact of currency fluctuations. These currency exchange contracts
are entered into as economic hedges, but are not designated as hedges for
accounting purposes as defined under SFAS 133. The Company does not expect gains
or losses on these contracts to have a material impact on its financial results.
During the three-month periods ended September 30, 2005 and 2004, the Company
recorded foreign-exchange gains of $0.5 million and $0.3 million, respectively.
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
At June 30, 2005, PAREXEL had three stock-based employee compensation plans. All
three of the plans are employee stock option plans. Prior to July 1, 2005, the
Company accounted for employee stock-based compensation using the intrinsic
value based method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", as described by FASB Interpretation
No. 44. Accordingly, no compensation expense is recognized if the exercise price
of the Company's stock options was equal to the market price of the underlying
stock on the date of grant.
Effective July 1, 2005, the Company adopted SFAS No. 123(R) "Share-Based
Payment" under the modified prospective method as described in SFAS No. 123(R).
Under this transition method, compensation expense recognized in the three
months ended September 30, 2005 includes compensation expense for all
stock-based payments granted during the quarter and for all stock-based payments
granted prior to, but not yet vested as of July 1, 2005, based on the grant date
fair value estimated in accordance with the original provision of SFAS No. 123.
Accordingly, prior period financials have not been restated. The total amount of
compensation expense recognized in the three months ended September 30, 2005 was
$0.6 million, of which, $0.2 million was recorded in direct costs and $0.4
million was recorded in selling, general and administrative expense in the
condensed consolidated statement of operations. Based on unvested options
outstanding as of September 30, 2005, PAREXEL expects to record compensation
expense of approximately $6.5 million over the next 15 quarters. The adoption of
SFAS No. 123 had no effect on cash flow for the three months ended September 30,
2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", which changes the requirements for the accounting and reporting of
a change in accounting principle. SFAS No. 154 applies to all voluntary changes
in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS No. 154
requires that changes in accounting principle be retrospectively applied. SFAS
No. 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not believe
adoption of this statement will have a material impact on the Company's
financial statements.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business. These
risk factors could cause actual results to differ from those indicated by
forward-looking statements made in this report, including in the section of this
report entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other forward-looking statements that the Company may
make from time to time. If any of the following risks occur, the Company's
business, financial condition, or results of operations would likely suffer.
18
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY
IMPACT THE COMPANY'S FINANCIAL PERFORMANCE
The Company's clients generally can terminate their contracts with the Company
upon 30 to 60 days notice or can delay the execution of services. The loss or
delay of a large contract or the loss or delay of multiple contracts could
adversely affect the Company's operating results, possibly materially. The
Company has in the past experienced contract cancellations, which have adversely
affected its operating results, including a major Phase III cancellation during
the first quarter of this fiscal year.
Clients terminate or delay their contracts for a variety of reasons, including,
but not limited to:
- merger or potential merger related activities;
- failure of products being tested to satisfy safety requirements;
- failure of products being tested to prove effective;
- products having unexpected or undesired clinical results;
- client decisions to forego a particular study, perhaps for economic
reasons;
- insufficient patient enrollment in a study;
- insufficient investigator recruitment;
- production problems which cause shortages of the product;
- product withdrawal following market launch; and
- manufacturing facility shut down.
In addition, the Company believes that companies regulated by the Food and Drug
Administration ("FDA") may proceed with fewer clinical trials or conduct them
without the assistance of bio/pharmaceutical services companies if they are
trying to reduce costs as a result of budgetary limits or changing priorities.
These factors may cause such companies to cancel contracts with
bio/pharmaceutical services companies such as the Company.
THE COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE
COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED
The bio/pharmaceutical services industry is highly competitive and the Company
faces numerous competitors in many areas of its business. If the Company fails
to compete effectively it may lose clients, which would cause its business to
suffer.
CRS primarily competes against in-house departments of pharmaceutical companies,
other full service clinical research organizations ("CROs"), small specialty
CROs, and to a lesser extent, universities, teaching hospitals, and other site
organizations. Some of the larger CROs against which the Company competes
include Quintiles Transnational Corporation, Covance, Inc. and Pharmaceutical
Product Development Inc. In addition, PAREXEL's PCMS business also competes with
a large and fragmented group of specialty service providers, including
advertising/promotional companies, major consulting firms with pharmaceutical
industry groups and smaller companies with pharmaceutical industry focus.
Perceptive competes primarily with CROs, information technology companies and
other software companies. Some of these competitors, including the in-house
departments of pharmaceutical companies, have greater capital, technical and
other resources than the Company. In addition, those of the Company's
competitors that are smaller specialized companies may compete effectively
against the Company because of their concentrated size and focus.
THE FIXED RATE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
Approximately 85.0% of the Company's contracts are fixed rate. If the Company
fails to adequately price its contracts or if the Company experiences
significant cost overruns, its gross margins on the contract would be reduced
and the Company could lose money on contracts. In the past, the Company has had
to commit unanticipated resources to complete projects, resulting in lower gross
margins on those projects. The Company might experience similar situations in
the future.
19
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY
INDUSTRY CHANGES, THE NEED FOR THE COMPANY'S SERVICES COULD DECREASE
Governmental regulation of the drug, medical device and biotechnology product
development process is complicated, extensive, and demanding. A large part of
the Company's business involves assisting pharmaceutical and biotechnology
companies through the regulatory approval process. Changes in regulations, that,
for example, streamline procedures or relax approval standards, could eliminate
or reduce the need for the Company's services. If companies regulated by the FDA
or similar foreign regulatory authorities needed fewer of the Company's
services, the Company would have fewer business opportunities and its revenues
would decrease, possibly materially.
In the U.S., the FDA and the Congress have attempted to streamline the
regulatory process by providing for industry user fees that fund the hiring of
additional reviewer hires and better management of the regulatory review
process. In Europe, governmental authorities have approved common standards for
clinical testing of new drugs throughout the European Union by adopting
standards for good clinical practice ("GCP") and by making the clinical trial
application and approval process more uniform across member states starting in
May 2004. The FDA has had GCP in place as a regulatory standard and requirement
for new drug approval for many years and Japan adopted GCP in 1998. The U.S.,
Europe and Japan have also collaborated in the 15-year-long International
Conference on Harmonisation ("ICH"), the purpose of which is to eliminate
duplicative or conflicting regulations in the three regions. The ICH partners
have agreed upon a common format (the Common Technical Document) for marketing
applications that eliminates the need to tailor the format to each region. Such
efforts and similar efforts in the future that streamline the regulatory process
may reduce the demand for the Company's services.
Parts of PAREXEL's PCMS business advises clients on how to satisfy regulatory
standards for manufacturing processes and on other matters related to the
enforcement of government regulations by the FDA and other regulatory bodies.
Any reduction in levels of review of manufacturing processes or levels of
regulatory enforcement, generally, would result in fewer business opportunities
for the PCMS business in this area. As a result of lower level of FDA
enforcement activities over the last two years, PCMS experienced a decline in
the group's good manufacturing practice ("GMP") consulting business, which
adversely affected the business unit.
IF THE COMPANY FAILS TO COMPLY WITH EXISTING REGULATIONS, ITS REPUTATION AND
OPERATING RESULTS WOULD BE HARMED
The Company's business is subject to numerous governmental regulations,
primarily relating to pharmaceutical product development and the conduct of
clinical trials. If the Company fails to comply with these governmental
regulations, it could result in the termination of the Company's ongoing
research, development or sales and marketing projects, or the disqualification
of data for submission to regulatory authorities. The Company also could be
barred from providing clinical trial services in the future or could be
subjected to fines. Any of these consequences would harm the Company's
reputation, its prospects for future work and its operating results. In
addition, the Company may have to repeat research or redo trials. The Company
may be contractually required to take such action at no further cost to the
customer, but at substantial cost to the Company.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS
Numerous governments, including the U.S. government and governments outside of
the U.S., have undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
drug companies. If these efforts are successful, pharmaceutical, medical device
and biotechnology companies may react by spending less on research and
development. If this were to occur, the Company would have fewer business
opportunities and its revenues could decrease, possibly materially.
For instance, in the past the U.S. Congress has entertained several
comprehensive health care reform proposals. The proposals were generally
intended to expand health care coverage for the uninsured and reduce the growth
of total health care expenditures. While the U.S. Congress has not yet adopted
any comprehensive reform proposals, members of Congress may raise similar
proposals in the future. The Company is unable to predict the likelihood that
health care reform proposals will be enacted into law.
In addition to health care reform proposals, the expansion of managed care
organizations in the healthcare market may result in reduced spending on
research and development. Managed care organizations' efforts to cut costs by
limiting expenditures on pharmaceuticals and medical devices could result in
pharmaceutical, biotechnology and medical device companies spending less on
research and development. If this were to occur, the Company would have fewer
business opportunities and its revenues could decrease, possibly materially.
20
NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT
INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY OR INCREASED COSTS TO
THE COMPANY, OR COULD LIMIT THE COMPANY'S SERVICE OFFERINGS
The confidentiality and release of patient-specific information are subject to
government regulation. Under the Health Insurance Portability and Accountability
Act of 1996, the U.S. Department of Health and Human Services has issued
regulations mandating heightened privacy and confidentiality protections. The
federal government and state governments have proposed or adopted additional
legislation governing the possession, use and dissemination of medical record
information and other personal health information. Proposals being considered by
state governments may contain privacy and security provisions that are more
burdensome than the federal regulations. In order to comply with these
regulations, the Company may need to implement new security measures, which may
require the Company to make substantial expenditures or cause the Company to
limit the products and services it offers. In addition, if the Company violates
applicable laws, regulations or duties relating to the use, privacy or security
of health information, it could be subject to civil or criminal liability.
IF THE COMPANY DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS
AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN THE
COMPANY'S PERCEPTIVE INFORMATICS BUSINESS
The biotechnology, pharmaceutical and medical device industries generally, and
clinical research specifically, are subject to increasingly rapid technological
changes. The Company's competitors or others might develop technologies,
products or services that are more effective or commercially attractive than the
Company's current or future technologies, products or services, or render its
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and the Company cannot
make enhancements to its technologies, products and services necessary to remain
competitive, its competitive position will be harmed. If the Company is unable
to compete successfully, it may lose customers or be unable to attract new
customers, which could lead to a decrease in revenue.
BECAUSE THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL
OF ITS BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM ITS
BUSINESS, REVENUE, AND FINANCIAL CONDITION
The loss of, or a material reduction in the business of, a significant client
could cause a substantial decrease in the Company's revenue and adversely affect
its business and financial condition, possibly materially. In the fiscal year
ended June 30, 2005, the Company's five largest clients accounted for 25% of its
consolidated service revenue, although no single client accounted for 10% or
more of consolidated service revenue. In the fiscal year ended June 30, 2004,
the Company's five largest clients accounted for 30% of its consolidated service
revenue, although no single client accounted for 10% or more of consolidated
service revenue. The Company expects that a small number of clients will
continue to represent a significant part of its revenue. The Company's contracts
with these clients generally can be terminated on short notice. The Company has
in the past experienced contract cancellations with significant clients.
IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN
CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE,
SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS
WILL BE HARMED
The Company's Perceptive Informatics business involves collecting, managing,
manipulating and analyzing large amounts of data, and communicating data via the
Internet. The Perceptive business depends on the continuous, effective, reliable
and secure operation of its computer hardware, software, networks,
telecommunication networks, Internet servers and related infrastructure. If the
Perceptive hardware or software malfunctions or access to the Perceptive data by
internal research personnel or customers through the Internet is interrupted,
the Perceptive business could suffer. In addition, any sustained disruption in
Internet access provided by third parties could adversely impact Perceptive's
business.
Although Perceptive's computer and communications hardware is protected through
physical and software safeguards, it is still vulnerable to fire, storm, flood,
power loss, earthquakes, telecommunications failures, physical or software
break-ins, and similar events. In addition, Perceptive's software products are
complex and sophisticated, and could contain data, design or software errors
that could be difficult to detect and correct. If Perceptive fails to maintain
and further develop the necessary computer capacity and data to support its
customers' needs, it could result in loss of or delay in revenue and market
acceptance.
21
IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL
TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MAY SUFFER
One of the factors on which the Company's CRS business competes is the ability
to recruit patients for the clinical studies the Company is managing. These
clinical trials rely upon the ready accessibility and willing participation of
volunteer subjects. These subjects generally include volunteers from the
communities in which the studies are conducted. Although to date these
communities have provided a substantial pool of potential subjects for research
studies, there may not be enough patients available with the traits necessary to
conduct the studies. For example, if the Company manages a study for a treatment
of a particular type of cancer, its ability to conduct the study may be limited
by the number of patients that it can recruit that have that form of cancer. If
multiple organizations are conducting similar studies and competing for
patients, it could also make the Company's recruitment efforts more difficult.
If the Company were unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by
its CRS business, which could have a material adverse effect on its CRS
business.
IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of its Chairman and Chief Executive Officer,
Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and
expensive to find a qualified replacement with the level of specialized
knowledge of the Company's products and services and the bio/pharmaceutical
services industry. The Company is a party to an employment agreement with Mr.
von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach
upon notice to the other party.
In addition, in order to compete effectively, the Company must attract and
maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees, is intense. The Company may not
be successful in attracting or retaining key personnel.
THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS
AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS
The Company's CRS business primarily involves the testing of experimental drugs
and medical devices on consenting human volunteers pursuant to a study protocol.
Clinical research involves a risk of liability for personal injury or death to
patients who participate in the study or who use a product approved by
regulatory authorities after the clinical research has concluded, due to, among
other reasons, possible unforeseen adverse side effects or improper
administration of the drug or device by physicians. In some cases, these
patients are already seriously ill and are at risk of further illness or death.
In order to mitigate the risk of liability, the Company seeks to include
indemnity provisions in its Clinical Research Services contracts with clients
and with investigators. However, the Company is not able to include indemnity
provisions in all of its contracts. The indemnity provisions the Company
includes in these contracts would not cover its exposure if:
- the Company had to pay damages or incur defense costs in connection
with a claim that is outside the scope of an indemnity; or
- a client failed to indemnify the Company in accordance with the terms
of an indemnity agreement because it did not have the financial
ability to fulfill its indemnification obligation or for any other
reason.
The Company also carries insurance to cover its risk of liability. However, the
Company's insurance is subject to deductibles and coverage limits and may not be
adequate to cover claims. In addition, liability coverage is expensive. In the
future, the Company may not be able to maintain or obtain liability insurance on
reasonable terms, at a reasonable cost or in sufficient amounts to protect it
against losses due to claims.
22
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS OR FINANCIAL
POSITION
The Company provides most of its services on a worldwide basis. The Company's
service revenue from non-U.S. operations represented approximately 63.5% of
total consolidated service revenue for the three months ended September 30, 2005
and approximately 60.8% of total consolidated service revenue for the three
months ended, September 30, 2004. In addition, the Company's service revenue
from operations in the United Kingdom represented approximately 18.4% of total
consolidated service revenue for the three months ended September 30, 2005 and
approximately 22.6% of total consolidated service revenue for the three months
ended September 30, 2004. The Company's service revenue from operations in
Germany represented approximately 18.8% of total consolidated service revenue
for the three months ended September 30, 2005 and approximately 15.9% of total
consolidated service revenue for the three months ended September 30, 2004.
Accordingly, the Company's business is subject to risks associated with doing
business internationally, including:
- changes in a specific country's or region's political or economic
conditions, including Western Europe, in particular;
- potential negative consequences from changes in tax laws affecting its
ability to repatriate profits;
- difficulty in staffing and managing widespread operations;
- unfavorable labor regulations applicable to its European operations;
- changes in foreign currency exchange rates; and
- longer payment cycles of foreign customers and difficulty of
collecting receivables in foreign jurisdictions.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF ITS
COMMON STOCK
The Company's quarterly and annual operating results have varied and will
continue to vary in the future as a result of a variety of factors. For example,
the Company's income (loss) from operations was $7.5 million for the quarter
ended December 31, 2004, $7.5 million for the quarter ended March 31, 2005,
$(23.7) million for the quarter ended June 30, 2005, and $5.0 million for the
quarter ended September 30, 2005. Factors that cause these variations include:
- the level of new business authorizations in a particular quarter or
year;
- the timing of the initiation, progress, or cancellation of significant
projects;
- exchange rate fluctuations between quarters or years;
- restructuring charges;
- the mix of services offered in a particular quarter or year;
- the timing of the opening of new offices;
- costs and the related financial impact of acquisitions;
- the timing of internal expansion;
- the timing and amount of costs associated with integrating
acquisitions; and
- the timing and amount of startup costs incurred in connection with the
introduction of new products, services or subsidiaries;
Many of these factors, such as the timing of cancellations of significant
projects and exchange rate fluctuations between quarters or years, are beyond
the Company's control.
Approximately 65-70% of the Company's operating costs are fixed in the short
term. In particular, a significant portion of the Company's operating costs
relate to personnel, which are estimated to have accounted for 75-80% of the
Company's total operating costs in fiscal year 2005. As a result, the effect on
the Company's revenues of the timing of the completion, delay or loss of
contracts, or the progress of client projects, could cause its operating results
to vary substantially between reporting periods.
If the Company's operating results do not match the expectations of securities
analysts and investors, the trading price of its common stock will likely
decrease.
23
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 63.5% of the Company's total consolidated service revenue for the
three months ended September 30, 2005 and approximately 60.8% of the Company's
total consolidated service revenue for the three months ended September 30, 2004
were from non-U.S. operations. The Company's financial statements are
denominated in U.S. dollars. As a result, changes in foreign currency exchange
rate, could have and have had a significant effect on the Company's operating
results. Exchange rate fluctuations between local currencies and the U.S. dollar
create risk in several ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of the
Company's foreign operations are generally denominated in local
currencies, primarily the British pound and the Euro, and then are
translated into U.S. dollars for financial reporting purposes. For the
three months ended September 30, 2005, approximately 18.4% of total
consolidated service revenue was denominated in British pounds and
approximately 35.5% of total consolidated service revenue was
denominated in Euros. For the three months ended September 30, 2004,
approximately 22.6% of total consolidated service revenue was
denominated in British pounds and approximately 29.6% of total
consolidated service revenue was denominated in Euros.
- Foreign Currency Transaction Risk. The Company's service contracts may
be denominated in a currency other than the functional currency in
which it performs the service related to such contracts.
Although the Company tries to limit these risks through exchange rate
fluctuation provisions stated in its service contracts, or by hedging
transaction risk with foreign currency exchange contracts, it may still
experience fluctuations in financial results from its operations outside of the
U.S., and may not be able to favorably reduce the currency transaction risk
associated with its service contracts.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND
SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN ITS RESOURCES IF NOT
PROPERLY MANAGED
The Company has expanded its business substantially in the past. Future rapid
expansion could strain the Company's operational, human and financial resources.
In order to manage expansion, the Company must:
- continue to improve operating, administrative and information systems;
- accurately predict future personnel and resource needs to meet client
contract commitments;
- track the progress of ongoing client projects; and
- attract and retain qualified management, sales, professional,
scientific and technical operating personnel.
If the Company does not take these actions and is not able to manage the
expanded business, the expanded business may be less successful than
anticipated, and the Company may be required to allocate additional resources to
the expanded business, which it would have otherwise allocated to another part
of its business.
The Company may face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
- assimilate differences in foreign business practices, exchange rates
and regulatory requirements;
- operate amid political and economic instability;
- hire and retain qualified personnel; and
- overcome language, tariff and other barriers.
THE COMPANY MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS
TO ITS ONGOING BUSINESS
The Company has made a number of acquisitions and will continue to review new
acquisition opportunities. If the Company is unable to successfully integrate an
acquired company, the acquisition could lead to disruptions to the business. The
success of an acquisition will depend upon, among other things, the Company's
ability to:
24
- assimilate the operations and services or products of the acquired
company;
- integrate acquired personnel;
- retain and motivate key employees;
- retain customers; and
- minimize the diversion of management's attention from other business
concerns.
Acquisitions of foreign companies may also involve additional risks, including
assimilating differences in foreign business practices and overcoming language
and cultural barriers.
In the event that the operations of an acquired business do not meet the
Company's performance expectations, the Company may have to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business.
THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS
ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND
MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT
STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of the Company's articles of organization, by-laws and its
shareholder rights plan, as well as provisions of Massachusetts law, may enable
the Company's management to resist acquisition of the Company by a third party,
or may discourage a third party from acquiring the Company. These provisions
include the following:
- the Company has divided its board of directors into three classes that
serve staggered three-year terms;
- the Company is subject to Section 8.06 of the Massachusetts Business
Corporation Law which provides that directors may only be removed by
stockholders for cause, vacancies in the Company's board of directors
may only be filled by a vote of the Company's board of directors and
the number of directors may be fixed only by the Company's board of
directors;
- the Company is subject to Chapter 110F of the Massachusetts General
Laws which limits its ability to engage in business combinations with
certain interested stockholders;
- the Company's stockholders are limited in their ability to call or
introduce proposals at stockholder meetings; and
- the Company's shareholder rights plan would cause a proposed acquirer
of 20% or more of the Company's outstanding shares of common stock to
suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a
change in control of the Company or a change in the Company's management that
stockholders may consider favorable or beneficial. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of the
Company's stock. In addition, the Company's Board of Directors may issue
preferred stock in the future without stockholder approval. If the Company's
Board of Directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. The Company's Board
of Directors' ability to issue the preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the Company's stock.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH
COULD LEAD TO LOSSES BY INVESTORS
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future. On November 7, 2005, the closing sale
price of the Company's common stock on the NASDAQ National Market was $21.40 per
share. During the period from October 1, 2003 to September 30, 2005, the price
of the Company's common stock ranged from a high of $25.04 per share to a low of
$15.28 per share. Investors in the Company's common stock must be willing to
bear the risk of such fluctuations in stock price and the risk that the value of
an investment in the Company's stock could decline.
25
The Company's stock price can be affected by quarter-to-quarter variations in a
number of factors including:
- operating results;
- earnings estimates by analysts;
- market conditions in the industry;
- prospects of health care reform;
- changes in government regulations;
- general economic conditions, and
- the Company's effective income tax rate.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations.
THE COMPANY'S EFFECTIVE INCOME TAX RATE MAY FLUCTUATE FROM QUARTER-TO-QUARTER,
WHICH MAY AFFECT EARNINGS AND EARNINGS PER SHARE
The Company's quarterly effective income tax rate is influenced by the Company's
projected profitability in the various taxing jurisdictions in which the Company
operates. Changes in the distribution of profits and losses among taxing
jurisdictions may have a significant impact on the Company's effective income
tax rate, which in turn could have a material adverse effect on the Company's
net income and earnings per share. Factors that affect the effective income tax
rate include:
- the requirement to exclude from its quarterly worldwide effective
income tax calculations losses in jurisdictions where no tax benefit
can be recognized,
- actual and projected full year pretax income,
- changes in tax laws in the various taxing jurisdictions,
- audits by the taxing authorities, and
- the establishment of valuation allowances against deferred tax assets
if it is established that it is more likely than not that future tax
benefits will not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency rates, interest rates, and other relevant
market rates or price changes. In the ordinary course of business, the Company
is exposed to market risk resulting from changes in foreign currency exchange
rates, and the Company regularly evaluates its exposure to such changes. The
Company's overall risk management strategy seeks to balance the magnitude of the
exposure and the costs and availability of appropriate financial instruments.
FOREIGN CURRENCY EXCHANGE RATES
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts or incur liabilities
denominated in a currency other than the foreign subsidiary's functional
currency. For the three months ended September 30, 2005, approximately 18.4% of
total consolidated service revenue was denominated in British pounds and
approximately 35.5% of total consolidated service revenue was denominated in
Euros. The Company has a derivative policy to hedge certain foreign denominated
accounts receivable and intercompany payables. Under this policy, derivatives
are accounted for in accordance with SFAS 133.
Occasionally, the Company enters into other foreign currency exchange contracts
to offset the impact of currency fluctuations. These currency exchange contracts
are entered into as economic hedges, but are not designated as hedges for
accounting purposes as defined under SFAS 133. The notional contract amount of
these outstanding currency exchange contracts was approximately $18.6 million at
September 30, 2005. The potential change in the fair value of these currency
exchange contracts that would result from a hypothetical change of 10% in
exchange rates would be approximately $1.8 million. The Company acknowledges its
exposure to additional foreign exchange risk as it relates to assets and
liabilities that are not part of the economic hedge program, but quantification
of this risk is very difficult to assess at any given point in time.
26
INTEREST RATE
The Company's exposure to interest rate changes is currently minimal as the
level of long-term debt the Company has is minimal. Long-term debt was
approximately $1.1 million as of September 30, 2005 and June 30, 2005.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of September 30, 2005. The
term "disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating costs
and benefits when implementing possible controls and procedures. Based on the
evaluation of the Company's disclosure controls and procedures as of September
30, 2005, the Company's chief executive officer and chief financial officer
concluded that, as of such date, the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
CHANGES IN INTERNAL CONTROLS
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
three months ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases of equity
securities by the Company and its affiliated purchasers during the
quarter ended September 30, 2005.
Total Number of Maximum Appropriate
Shares Purchased as Dollar Value of Shares
Part of Publicly that May Yet Be
Total Number of Average Price Announced Plans or Purchased Under the
Period Shares Purchased Paid per Share Programs Plans or Programs (1)
------ ---------------- -------------- ------------------- ----------------------
07/01/05 - 07/30/05 -- -- -- $14.0 million
08/01/05 - 08/31/05 99,400 $20.12 99,400 $12.0 million
09/01/05 - 09/30/05 -- -- -- $12.0 million
------ ------
Total 99,400 99,400
====== ======
(1) On September 9, 2004, the Board of Directors of the Company approved a
stock repurchase program authorizing the purchase of up to $20.0 million of
the Company's common stock to be repurchased in the open market subject to
market conditions, which was announced on September 10, 2004. Unless
terminated earlier by resolution of the Company's Board of Directors, the
Plan will expire when the entire amount authorized has been fully utilized.
27
ITEM 6. EXHIBITS
See the Exhibit Index on the page immediately preceding the exhibits for a
list of exhibits filed as part of this quarterly report, which Exhibit
Index is incorporated by this reference.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAREXEL International Corporation
Date: November 9, 2005 By: /s/ Josef H. von Rickenbach
------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
Date: November 9, 2005 By: /s/ James F. Winschel, Jr.
------------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
29
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
31.1 Principal executive officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Principal financial officer certification pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Principal executive officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Principal financial officer certification pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
30