e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2006
OR
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o |
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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)
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Massachusetts
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04-2776269 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number) |
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200 West Street |
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Waltham, Massachusetts
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02451 |
(Address of principal executive offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act (Check One):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: As of May 5, 2006, there were 27,157,335 shares of common stock
outstanding.
PAREXEL INTERNATIONAL CORPORATION
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, |
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2006 |
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June 30, |
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(Unaudited) |
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2005 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
73,833 |
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$ |
84,622 |
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Marketable securities |
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25,450 |
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4,000 |
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Billed and unbilled accounts receivable, net |
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|
232,705 |
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|
217,887 |
|
Prepaid expenses |
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|
10,880 |
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|
12,086 |
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Deferred tax assets |
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|
18,773 |
|
|
|
18,811 |
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Income tax receivable |
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|
|
|
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3,605 |
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Other current assets |
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6,797 |
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|
3,580 |
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|
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Total current assets |
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368,438 |
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|
344,591 |
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Property and equipment, net |
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74,687 |
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71,865 |
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Goodwill |
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48,382 |
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|
42,815 |
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Other intangible assets, net |
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7,891 |
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|
|
9,228 |
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Non-current deferred tax assets |
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|
2,110 |
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2,137 |
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Other assets |
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4,949 |
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|
5,100 |
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Total assets |
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$ |
506,457 |
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$ |
475,736 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Notes payable and current portion of long-term debt |
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$ |
541 |
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$ |
507 |
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Accounts payable |
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12,587 |
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14,424 |
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Deferred revenue |
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134,099 |
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132,241 |
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Accrued expenses |
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17,251 |
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13,858 |
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Accrued restructuring charges |
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7,301 |
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13,231 |
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Accrued employee benefits and withholdings |
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39,531 |
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28,747 |
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Deferred tax liabilities |
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16,895 |
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|
16,928 |
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Income tax payable |
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8,477 |
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Other current liabilities |
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3,220 |
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4,354 |
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Total current liabilities |
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239,902 |
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224,290 |
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Long-term debt, net of current portion |
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839 |
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1,115 |
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Non-current deferred tax liabilities |
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17,809 |
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17,853 |
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Long-term accrued restructuring charges |
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11,365 |
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17,773 |
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Other liabilities |
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5,143 |
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5,188 |
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Total liabilities |
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275,058 |
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266,219 |
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Minority interest in subsidiary |
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2,997 |
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3,946 |
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Stockholders equity: |
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Preferred stock$.01 par value; shares authorized: |
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5,000,000; Series A junior participating preferred
stock - 50,000 shares designated, none issued
and outstanding |
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Common stock$.01 par value; shares authorized: |
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50,000,000;
shares issued and outstanding: 26,671,099 at March 31, 2006 and 26,153,334 at
June 30, 2005 |
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|
282 |
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275 |
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Additional paid-in capital |
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171,611 |
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163,921 |
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Retained earnings |
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56,846 |
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41,731 |
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Accumulated other comprehensive loss |
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(337 |
) |
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(356 |
) |
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Total stockholders equity |
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228,402 |
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205,571 |
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Total liabilities and stockholders equity |
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$ |
506,457 |
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$ |
475,736 |
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See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
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For the three months ended |
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For the nine months ended |
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March 31, |
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March 31, |
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2006 |
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2005 |
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2006 |
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2005 |
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Service revenue |
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$ |
157,320 |
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$ |
134,905 |
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$ |
445,462 |
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$ |
401,086 |
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Reimbursement revenue |
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35,295 |
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31,339 |
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|
100,232 |
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92,335 |
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Total revenue |
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192,615 |
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166,244 |
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545,694 |
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493,421 |
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Costs and expenses: |
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Direct costs |
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103,351 |
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|
89,698 |
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|
295,510 |
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|
262,236 |
|
Reimbursable out-of-pocket expenses |
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|
35,295 |
|
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|
31,339 |
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|
|
100,232 |
|
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|
92,335 |
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Selling, general and administrative |
|
|
36,364 |
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|
|
30,699 |
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|
104,670 |
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|
95,159 |
|
Depreciation and amortization |
|
|
6,439 |
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|
|
7,035 |
|
|
|
19,202 |
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|
20,226 |
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Restructuring benefit |
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|
(26 |
) |
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(705 |
) |
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Total costs and expenses |
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181,423 |
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158,771 |
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|
518,909 |
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|
469,956 |
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Income from operations |
|
|
11,192 |
|
|
|
7,473 |
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|
|
26,785 |
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|
|
23,465 |
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|
|
|
|
|
|
|
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|
|
|
|
|
|
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Other income |
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|
693 |
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|
|
368 |
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|
|
2,371 |
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|
|
2,810 |
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|
|
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|
|
|
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|
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|
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|
|
|
|
|
|
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Income before provision for income taxes
and minority interest (benefit) expense |
|
|
11,885 |
|
|
|
7,841 |
|
|
|
29,156 |
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|
|
26,275 |
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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Provision for income taxes |
|
|
5,371 |
|
|
|
3,149 |
|
|
|
14,748 |
|
|
|
9,883 |
|
Minority interest (benefit) expense |
|
|
(240 |
) |
|
|
73 |
|
|
|
(707 |
) |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Net income |
|
$ |
6,754 |
|
|
$ |
4,619 |
|
|
$ |
15,115 |
|
|
$ |
16,341 |
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|
|
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Earnings per share: |
|
|
|
|
|
|
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|
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|
|
|
|
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Basic |
|
$ |
0.25 |
|
|
$ |
0.18 |
|
|
$ |
0.57 |
|
|
$ |
0.63 |
|
Diluted |
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.56 |
|
|
$ |
0.61 |
|
|
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|
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Weighted average shares: |
|
|
|
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|
|
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|
|
|
|
|
|
|
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Basic |
|
|
26,564 |
|
|
|
26,138 |
|
|
|
26,452 |
|
|
|
26,059 |
|
Diluted |
|
|
27,145 |
|
|
|
26,751 |
|
|
|
26,812 |
|
|
|
26,631 |
|
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
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For the nine months ended |
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March 31, |
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2006 |
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|
2005 |
|
Cash flow from operating activities: |
|
|
|
|
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|
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Net income |
|
$ |
15,115 |
|
|
$ |
16,341 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Minority interest expense (benefit) in net income of
consolidated subsidiary |
|
|
(707 |
) |
|
|
51 |
|
Depreciation and amortization |
|
|
19,202 |
|
|
|
20,226 |
|
Stock-based compensation |
|
|
3,417 |
|
|
|
|
|
Changes in operating assets/liabilities |
|
|
(3,247 |
) |
|
|
(494 |
) |
|
|
|
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|
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Net cash provided by operating activities |
|
|
33,780 |
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|
|
36,124 |
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Cash flow from investing activities: |
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Purchases of marketable securities |
|
|
(59,825 |
) |
|
|
(56,570 |
) |
Proceeds from sale of marketable securities |
|
|
38,375 |
|
|
|
51,469 |
|
Acquisition of business |
|
|
(6,538 |
) |
|
|
(1,460 |
) |
Purchases of property and equipment |
|
|
(21,157 |
) |
|
|
(24,619 |
) |
Proceeds from sale of assets |
|
|
64 |
|
|
|
320 |
|
|
|
|
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|
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|
Net cash used in investing activities |
|
|
(49,081 |
) |
|
|
(30,860 |
) |
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Cash flow from financing activities: |
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Proceeds from issuance of common stock |
|
|
10,280 |
|
|
|
4,211 |
|
Proceeds from issuance of subsidiary common stock |
|
|
|
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|
|
18 |
|
Payments to repurchase common stock |
|
|
(6,000 |
) |
|
|
(7,742 |
) |
(Repayments) borrowings under lines of credit and
long-term debt |
|
|
(241 |
) |
|
|
198 |
|
|
|
|
|
|
|
|
Net cash provided (used) by financing activities |
|
|
4,039 |
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|
(3,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
473 |
|
|
|
4,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(10,789 |
) |
|
|
6,914 |
|
Cash and cash equivalents at beginning of period |
|
|
84,622 |
|
|
|
60,686 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
73,833 |
|
|
$ |
67,600 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Supplemental disclosures of cash flow information |
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Net cash paid during the year for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
5,338 |
|
|
$ |
3,045 |
|
Income taxes |
|
$ |
1,772 |
|
|
$ |
6,153 |
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired: |
|
|
|
|
|
|
|
|
Fair value of assets acquired and goodwill |
|
$ |
7,333 |
|
|
$ |
2,819 |
|
Liabilities assumed |
|
|
(795 |
) |
|
|
(1,359 |
) |
|
|
|
|
|
|
|
Cash paid for acquisition |
|
$ |
6,538 |
|
|
$ |
1,460 |
|
|
|
|
|
|
|
|
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 nine
months ended March 31, 2006 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 Companys Annual Report on Form 10-K for
the year ended June 30, 2005 (the 2005 10-K).
Certain fiscal year 2005 amounts have been reclassified to conform to the fiscal year 2006
presentation. Specifically, an accounting reclassification in the amount of $2.2 million for the
three months ended March 31, 2005 and $5.5 million for the nine months ended March 31, 2005 have
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 holders 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.
Additionally,
certain components of the PAREXEL Consulting and Marketing Services (PCMS) business
have been moved to the Clinical Research Services (CRS) business segment. This change had no
impact to consolidated total revenue, expenses, operating income, net income, or balance sheet
information, but did impact revenue and gross margin in PCMS and CRS.
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 Companys employee stock purchase plan.
Outstanding options to purchase approximately 0.2 million and 0.4 million shares of common stock
were excluded from the calculation of diluted earnings per share for the three months ended March
31, 2006 and 2005, respectively and outstanding options to purchase approximately 0.3 million and
0.6 million shares of common stock were excluded from the calculation of diluted earnings per share
for the nine months ended March 31, 2006 and 2005, respectively, because they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share computations:
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income attributable to common shares |
|
$ |
6,754 |
|
|
$ |
4,619 |
|
|
$ |
15,115 |
|
|
$ |
16,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share
Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
26,564 |
|
|
|
26,138 |
|
|
|
26,452 |
|
|
|
26,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.25 |
|
|
$ |
0.18 |
|
|
$ |
0.57 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Diluted Earnings Per Common Share
Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares attributable to common stock
outstanding |
|
|
26,564 |
|
|
|
26,138 |
|
|
|
26,452 |
|
|
|
26,059 |
|
Shares attributable to common stock options |
|
|
581 |
|
|
|
613 |
|
|
|
360 |
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,145 |
|
|
|
26,751 |
|
|
|
26,812 |
|
|
|
26,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.25 |
|
|
$ |
0.17 |
|
|
$ |
0.56 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
3 COMPREHENSIVE INCOME (LOSS)
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 (loss) for the three months and nine months ended
March 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
6,754 |
|
|
$ |
4,619 |
|
|
$ |
15,115 |
|
|
$ |
16,341 |
|
Add: Foreign currency translation adjustments |
|
|
3,322 |
|
|
|
(6,368 |
) |
|
|
(417 |
) |
|
|
6,538 |
|
Unrealized revaluation gains (losses) |
|
|
209 |
|
|
|
(368 |
) |
|
|
436 |
|
|
|
279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
10,285 |
|
|
$ |
(2,117 |
) |
|
$ |
15,134 |
|
|
$ |
23,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $2.1 million of excess cost over the fair value of the interest in the net
assets acquired as goodwill. Purchase accounting is substantially complete as of March 31, 2006.
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. (Perceptive), 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
Perceptives stock incentive plan. As a result, the holders of in-the-money Perceptive stock
options are entitled to receive upon exercise of such stock options $1.65 in cash, without
interest, for each share of Perceptive common stock that was subject to such stock 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.
7
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 INCENTIVE PLAN
In September 2005, the Company adopted the 2005 Stock Incentive Plan (2005 Plan), which provides
for the grant of incentive stock options, non-statutory stock options, stock appreciation rights,
restricted stock, restricted stock units and other stock-based award grants of up to an aggregate
of 1,000,000 shares of common stock to employees, officers, directors, consultants, and advisors.
The granting of Awards under the Plan is discretionary and the individuals who may become
participants and receive awards under the Plan, and the number of shares they may acquire, are not
determinable.
On December 16, 2005, the Compensation Committee of the Board of Directors voted to award an
aggregate of 150,000 shares of restricted stock to the members of the Board of Directors and
317,000 shares of restricted stock to certain executive officers of the Company. On March 3, 2006,
an additional 7,000 shares of restricted stock were awarded to an executive officer of the Company.
NOTE 6 STOCK-BASED COMPENSATION
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 was required to be recognized as long as the exercise price of
the Companys 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 and nine months ended March 31, 2006 includes
compensation expense for all stock-based payments granted during the nine months ended March 31,
2006 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. For the three months ended
March 31, 2006, the amount of compensation expense recognized was $1.9 million, of which, $0.2
million was recorded in direct costs and $1.7 million was recorded in selling, general and
administrative expense in the condensed consolidated statement of operations. For the nine months
ended March 31, 2006, the amount of compensation expense recognized was $3.4 million, of which,
$0.7 million was recorded in direct costs and $2.7 million was recorded in selling, general and
administrative expense in the condensed consolidated statement of operations. The adoption of SFAS
No. 123(R) had no effect on cash flow for the nine months ended March 31, 2006.
The net impact of adopting the new accounting guidance for the three months and nine months ended
March 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
March 31, 2006 |
|
March 31, 2006 |
|
|
|
|
|
|
If SFAS No.123(R) |
|
|
|
|
|
If SFAS No.123(R) |
($ in thousands, except per |
|
Upon Adoption of |
|
had not been |
|
Upon Adoption of |
|
had not been |
share data) |
|
SFAS No. 123(R) |
|
adopted |
|
SFAS No. 123(R) |
|
adopted |
Income from continuing
operations before income
taxes and minority interest |
|
$ |
11,885 |
|
|
$ |
13,833 |
|
|
$ |
29,156 |
|
|
$ |
32,573 |
|
Net income |
|
$ |
6,754 |
|
|
$ |
8,656 |
|
|
$ |
15,115 |
|
|
$ |
18,455 |
|
Basic earnings per share |
|
$ |
0.25 |
|
|
$ |
0.33 |
|
|
$ |
0.57 |
|
|
$ |
0.70 |
|
Diluted earnings per share |
|
$ |
0.25 |
|
|
$ |
0.32 |
|
|
$ |
0.56 |
|
|
$ |
0.70 |
|
No compensation expense related to stock-based grants has been recorded in the consolidated
statement of operations for the three months and nine months ended March 31 2005, 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).
8
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 at the beginning of fiscal
year 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine |
|
|
|
For the three months |
|
|
months ended |
|
|
|
ended March 31, |
|
|
March 31, |
|
($ in thousands, except per share data) |
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
4,619 |
|
|
$ |
16,341 |
|
Deduct total stock-based compensation, net of tax |
|
|
(959 |
) |
|
|
(2,934 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
3,660 |
|
|
$ |
13,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share as reported |
|
$ |
0.18 |
|
|
$ |
0.63 |
|
Basic net income per share pro forma |
|
$ |
0.14 |
|
|
$ |
0.51 |
|
Diluted net income per share as reported |
|
$ |
0.17 |
|
|
$ |
0.61 |
|
Diluted net income per share pro forma |
|
$ |
0.14 |
|
|
$ |
0.50 |
|
Stock Options
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.
The following assumptions were used in PAREXELs Black-Scholes option-pricing model for awards
issued during the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
March 31, |
|
March 31, |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
34.7 |
% |
|
|
42.9 |
% |
|
|
37.9 |
% |
|
|
39.1 |
% |
Risk-free interest rate |
|
|
4.71 |
% |
|
|
4.02 |
% |
|
|
4.34 |
% |
|
|
3.64 |
% |
Expected terms in years |
|
|
4.77 |
|
|
|
7.48 |
|
|
|
4.77 |
|
|
|
6.08 |
|
The following table summarizes information related to stock option activity for the respective
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
($ in thousands, except per share |
|
March 31, |
|
March 31, |
data) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Weighted-average fair value of
options granted per share |
|
$ |
9.73 |
|
|
$ |
9.85 |
|
|
$ |
8.41 |
|
|
$ |
8.56 |
|
Intrinsic value of options
exercised |
|
$ |
2,404 |
|
|
$ |
548 |
|
|
$ |
5,853 |
|
|
$ |
2,287 |
|
Cash received from options
exercised |
|
$ |
4,038 |
|
|
$ |
710 |
|
|
$ |
9,563 |
|
|
$ |
2,802 |
|
Actual tax benefit realized for tax
deductions from option exercises |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
9
Stock option activity for the nine months ended March 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Aggregate |
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Intrinsic |
|
|
Number of |
|
Average |
|
Contractual |
|
Value |
|
|
Options |
|
Exercise Price |
|
Life In Years |
|
(In Thousands) |
Outstanding at beginning of period |
|
|
3,093,194 |
|
|
$ |
16.53 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
756,500 |
|
|
$ |
20.18 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(707,639 |
) |
|
$ |
13.51 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(356,940 |
) |
|
$ |
24.97 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,785,115 |
|
|
$ |
17.19 |
|
|
|
4.46 |
|
|
$ |
25,918 |
|
Exercisable at end of period |
|
|
1,848,072 |
|
|
$ |
16.00 |
|
|
|
3.10 |
|
|
$ |
19,376 |
|
Restricted Stock
On December 16, 2005, PAREXEL awarded an aggregate of 150,000 restricted shares Restricted Stock
of Common Stock to members of the Board of Directors and 317,000 shares to certain executive
officers of the Company. On March 3, 2006, an additional 7,000 shares were awarded to an Executive
Officer of the Company. Valuation of the Restricted Stock is calculated under the Monte Carlo
simulation modeling method for valuing a contingent claim on stock with characteristics that depend
on the trailing stock price path. The shares granted to the Board of Directors contained a
market-based performance condition and the shares granted to executive officers contained both a
service condition and a market-based performance condition. Based on the valuation of the December
16, 2005 awards, the probability of vesting is 57.1% for the shares issued to the members of the
Board of Directors and the shares issued to the executive officers. The derived vesting period is
0.944 years for shares issued to the members of the Board of Directors and 3.044 years for the
shares issued to the executive officer. Based on the valuation of the March 3, 2006 awards, the
probability of vesting is 85.6% and the derived vesting period is 2.833 years.
Restricted stock activity under the Plan during the nine months ended March 31, 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant-Date |
|
|
Shares |
|
Fair Value |
Outstanding at beginning of period |
|
|
|
|
|
|
|
|
Granted |
|
|
474,000 |
|
|
$ |
12.77 |
|
Exercised |
|
|
|
|
|
|
|
|
Canceled |
|
|
77,000 |
|
|
$ |
12.62 |
|
Outstanding at end of period |
|
|
397,000 |
|
|
$ |
12.80 |
|
Exercisable at end of period |
|
|
50,000 |
|
|
$ |
12.62 |
|
As of March 31, 2006, stock-based compensation expense related to unvested awards (stock options
and restricted stock) is approximately $10.1 million to be
recognized over a weighted-average period
of 4.25 years.
NOTE
7 SEGMENT INFORMATION
The Company is managed through three business segments, namely, CRS, PCMS, and Perceptive. CRS
constitutes the Companys 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.
10
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands) |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research Services |
|
$ |
113,023 |
|
|
$ |
95,395 |
|
|
$ |
321,237 |
|
|
$ |
279,257 |
|
PAREXEL Consulting and
Marketing Services |
|
|
30,405 |
|
|
|
28,047 |
|
|
|
84,346 |
|
|
|
90,420 |
|
Perceptive Informatics, Inc. |
|
|
13,892 |
|
|
|
11,463 |
|
|
|
39,879 |
|
|
|
31,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
157,320 |
|
|
$ |
134,905 |
|
|
$ |
445,462 |
|
|
$ |
401,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research Services |
|
$ |
38,913 |
|
|
$ |
31,098 |
|
|
$ |
109,550 |
|
|
$ |
95,707 |
|
PAREXEL Consulting and
Marketing Services |
|
|
9,183 |
|
|
|
8,591 |
|
|
|
24,415 |
|
|
|
28,660 |
|
Perceptive Informatics, Inc. |
|
|
5,873 |
|
|
|
5,518 |
|
|
|
15,987 |
|
|
|
14,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,969 |
|
|
$ |
45,207 |
|
|
$ |
149,952 |
|
|
$ |
138,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
8 RESTRUCTURING CHARGES
During the three months ended March 31, 2006, the Company recorded a $0.6 million reduction to the
existing restructuring reserve as a result of execution of sub-lease agreements, which was offset
by $0.6 million in severance-related restructuring expenses incurred during the three months ended
March 31, 2006 in association with the fourth quarter fiscal 2005 restructuring plan.
Current activity charged against the restructuring accrual in the quarter ended March 31, 2006
(which is included in Current Liabilities Accrued Restructuring Charges and Long-term Accrued
Restructuring Charges in the Condensed Consolidated Balance Sheet) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
December 31, |
|
|
Provision/ |
|
|
|
|
|
|
March 31, |
|
($ in thousands) |
|
2005 |
|
|
Adjustments |
|
|
Payments/FX |
|
|
2006 |
|
Employee severance costs |
|
$ |
1,696 |
|
|
$ |
565 |
|
|
$ |
(984 |
) |
|
$ |
1,277 |
|
Facilities-related charges |
|
|
20,074 |
|
|
|
(591 |
) |
|
|
(2,094 |
) |
|
|
17,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
21,770 |
|
|
$ |
(26 |
) |
|
$ |
(3,078 |
) |
|
$ |
18,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE
9 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 Companys common stock to be repurchased in the open market
subject to market conditions. Unless terminated earlier by resolution of the Companys Board of
Directors, the Plan will expire when the entire amount authorized has been fully utilized. Through
March 31, 2006, the Company had acquired 552,377 shares at a total cost of $12.0 million under this
program. See Part II, Item 2 of this Quarterly Report on Form 10-Q for further detail. During the
period from April 1, 2006 to May 5, 2006, the Company acquired an additional 43,870
shares at a total cost of $1.3 million, leaving a remaining balance on the authorization of $6.7
million.
NOTE
10 INCOME TAXES
For the
nine months ended March 31, 2006 and 2005, the Company had an
effective income tax rate of 50.6% and 37.6%, respectively. The
unfavorable movement 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 was directly related to the quarterly
profile of the Companys projected losses in jurisdictions
11
(mainly in
the U.S.) where no tax benefit could be recognized and the need to
increase tax reserves in conjunction with on-going reviews by tax
authorities during reviews of prior year tax returns. The Company has
evaluated the likelihood of unfavorable adjustments arising from
these on-going reviews and believes adequate provisions have been
made in the income tax provision.
ITEM 2. MANAGEMENTS 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
Companys 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
Companys 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 in 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 Companys 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 Companys 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 Companys 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 Companys 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. |
12
|
|
|
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. |
The Company conducts a significant portion of its operations in foreign countries. Approximately
63.9% of the Companys consolidated service revenue for the nine months ended March 31, 2006 and
62.0% of the Companys consolidated service revenue for the nine months ended March 31, 2005, were
from non-United States operations. Over recent quarters, the Company has noticed a growing trend
toward winning new business awards in the United States (U.S.) for projects to be completed
outside of the U.S.
Because the Companys 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 nine
months ended March 31, 2006, approximately 16.7% of total consolidated service revenue was
denominated in British pounds and approximately 37.3% of total consolidated service revenue was
denominated in Euros. For the nine months ended March 31, 2005, approximately 19.6% of total
consolidated service revenue was denominated in British pounds and approximately 33.6% of total
consolidated service revenue was denominated in Euros.
Approximately 85.0% of the Companys 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 contracts 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 Companys 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 clients 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 Companys financial condition and results of operations are
based on the Companys 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 Companys consolidated results of operations and
financial position.
13
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 Companys consolidated results of operations and
financial position.
INCOME TAXES
The Companys 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 jurisdiction. Changes in the
distribution of profits and losses among taxing jurisdictions may have a significant impact on the
Companys 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 Companys 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
Companys 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 Companys 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 Companys 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
that value with the reporting units 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 Companys 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 and nine months ended March 31, 2006 and 2005 were as follows:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
For the nine months ended March 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
|
($ in thousands) |
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
|
% |
|
|
2006 |
|
|
2005 |
|
|
(Decrease) |
|
|
% |
|
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRS |
|
$ |
113,023 |
|
|
$ |
95,395 |
|
|
$ |
17,628 |
|
|
|
18.5 |
% |
|
$ |
321,237 |
|
|
$ |
279,257 |
|
|
$ |
41,980 |
|
|
|
15.0 |
% |
PCMS |
|
|
30,405 |
|
|
|
28,047 |
|
|
|
2,358 |
|
|
|
8.4 |
% |
|
|
84,346 |
|
|
|
90,420 |
|
|
|
(6,074 |
) |
|
|
-6.7 |
% |
Perceptive |
|
|
13,892 |
|
|
|
11,463 |
|
|
|
2,429 |
|
|
|
21.2 |
% |
|
|
39,879 |
|
|
|
31,409 |
|
|
|
8,470 |
|
|
|
27.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
157,320 |
|
|
$ |
134,905 |
|
|
$ |
22,415 |
|
|
|
16.6 |
% |
|
$ |
445,462 |
|
|
$ |
401,086 |
|
|
$ |
44,376 |
|
|
|
11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRS |
|
$ |
74,110 |
|
|
$ |
64,297 |
|
|
$ |
9,813 |
|
|
|
15.3 |
% |
|
$ |
211,687 |
|
|
$ |
183,550 |
|
|
$ |
28,137 |
|
|
|
15.3 |
% |
PCMS |
|
|
21,222 |
|
|
|
19,456 |
|
|
|
1,766 |
|
|
|
9.1 |
% |
|
|
59,931 |
|
|
|
61,760 |
|
|
|
(1,829 |
) |
|
|
-3.0 |
% |
Perceptive |
|
|
8,019 |
|
|
|
5,945 |
|
|
|
2,074 |
|
|
|
34.9 |
% |
|
|
23,892 |
|
|
|
16,926 |
|
|
|
6,966 |
|
|
|
41.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
103,351 |
|
|
$ |
89,698 |
|
|
$ |
13,653 |
|
|
|
15.2 |
% |
|
$ |
295,510 |
|
|
$ |
262,236 |
|
|
$ |
33,274 |
|
|
|
12.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on
service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRS |
|
$ |
38,913 |
|
|
$ |
31,098 |
|
|
$ |
7,815 |
|
|
|
25.1 |
% |
|
$ |
109,550 |
|
|
$ |
95,707 |
|
|
$ |
13,843 |
|
|
|
14.5 |
% |
PCMS |
|
|
9,183 |
|
|
|
8,591 |
|
|
|
592 |
|
|
|
6.9 |
% |
|
|
24,415 |
|
|
|
28,660 |
|
|
|
(4,245 |
) |
|
|
-14.8 |
% |
Perceptive |
|
|
5,873 |
|
|
|
5,518 |
|
|
|
355 |
|
|
|
6.4 |
% |
|
|
15,987 |
|
|
|
14,483 |
|
|
|
1,504 |
|
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,969 |
|
|
$ |
45,207 |
|
|
$ |
8,762 |
|
|
|
19.4 |
% |
|
$ |
149,952 |
|
|
$ |
138,850 |
|
|
$ |
11,102 |
|
|
|
8.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, 2006 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2005:
Service revenue increased $22.4 million, or 16.6%, to $157.3 million for the three months ended
March 31, 2006 from $134.9 million for the three months ended March 31, 2005. As a result of
year-over-year foreign currency fluctuations, current quarter service revenue was negatively
impacted by approximately $8.4 million. On a geographic basis, service revenue for the three
months ended March 31, 2006 was distributed as follows: U.S. $58.1 million (36.9%), Europe -
$89.5 million (56.9%), and Asia & Other $9.7 million (6.2%). For the three months ended March
31, 2005, service revenue was distributed as follows: U.S. $50.1 million (37.2%), Europe $77.6
million (57.5%), and Asia & Other $7.2 million (5.3%).
On a segment basis, CRS service revenue increased by $17.6 million, or 18.5%, to $113.0 million in
the three months ended March 31, 2006 from $95.4 million in the three months ended March 31, 2005.
The year-over-year increase was driven by strong revenue growth in all geographies and a continued
lower-than-average level of cancellations. Of the total $17.6 million increase, $13.0 million was
attributed to the Phases II-III clinical trials business, $2.8 million was attributed to
year-over-year growth in the Phase I business and incremental revenue from the Qdot acquisition,
with the remaining $1.8 million increase attributed to other components of the CRS business. PCMS
service revenue increased by $2.4 million, or 8.4%, to $30.4 million in the three months ended
March 31, 2006 from $28.0 million in the three months ended March 31, 2005. The year-over-year
increase was primarily the result of across-the-board growth in the consulting business.
Perceptive service revenue increased by $2.4 million, or 21.2%, to $13.9 million for the three
months ended March 31, 2006 from $11.5 million in the three months ended March 31, 2005. The
year-over-year increase was the result of strong growth in medical imaging, IVRS, and Integration
Services.
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.
15
Direct costs increased by $13.7 million, or 15.2 %, to $103.4 million for the three months ended
March 31, 2006 from $89.7 million in the three months ended March 31, 2005. As a result of
year-over-year foreign currency fluctuations, current quarter direct
costs were favorably impacted
by approximately $6.0 million. On a segment basis, CRS direct costs increased by $9.8 million, or
15.3%, to $74.1 million for the three months ended March 31, 2006 from $64.3 million in the three
months ended March 31, 2005. The year-over-year increase in CRS direct costs was primarily due to
costs incurred to support a higher volume of business, including increased hiring, training, and
incentive costs. As a percentage of service revenue, CRS direct costs decreased 1.8 points to
65.6% for the three months ended March 31, 2006 from 67.4% for the three months ended March 31,
2005. PCMS direct costs increased by $1.8 million, or 9.1%, to $21.2 million in the three months
ended March 31, 2006 from $19.4 million in the three months ended March 31, 2005. The
year-over-year increase in PCMS direct costs was primarily due to higher costs incurred to support
a higher volume of business and the recording of management incentives as opposed to last years
reversal of incentive accruals when these businesses performed well below their targets. As a
percentage of service revenue, PCMS direct costs increased by four-tenths of a point to 69.8% for
the three months ended March 31, 2006 from 69.4% for the three months ended March 31, 2005.
Perceptive direct costs increased $2.1 million, or 34.9%, to $8.0 million in the three months ended
March 31, 2006 from $5.9 million in the three months ended March 31, 2005. The year-over-year
increase in Perceptive direct costs was primarily due to higher labor costs associated with
increased staffing needs to support business growth. As a percentage of service revenue,
Perceptives direct costs increased by 5.8 points to 57.7% in the three months ended March 31, 2006
from 51.9% in the three months ended March 31, 2005 primarily caused by inefficiencies in the
medical imaging portion of the business, which the Company continuing to seek to address by making
further investments in underlying technologies and improved utilization of resources.
Selling, general and administrative (SG&A) expenses increased by $5.7 million, or 18.5%, to $36.4
million in the three-month period ended March 31, 2006 from $30.7 million in the three months ended
March 31, 2005. Of the total $5.7 million
increase, $3.2 million was attributed to management incentive costs and commission expense, $1.7
million in stock-based compensation related to the implementation of FAS 123(R), $0.5 million in
higher professional fees, and $0.3 million in higher research and development costs in Perceptive.
As a percentage of service revenue, SG&A increased three-tenths of a point to 23.1% in the three
months ended March 31, 2006 from 22.8% in the three months ended March 31, 2005.
Depreciation and amortization (D&A) expense decreased $0.6 million, or 8.5%, to $6.4 million for
the three months ended March 31, 2006 from $7.0 million in the three months ended March 31, 2005.
As a percentage of service revenue, D&A decreased by 1.1 points to 4.1% in the three months ended
March 31, 2006 from 5.2% in the three months ended March 31, 2005.
During the three months ended March 31, 2006, the Company recorded a $0.6 million reduction to the
existing restructuring reserve as a result of execution of sub-lease agreements, which was offset
by $0.6 million in severance-related restructuring expenses incurred during the three months ended
March 31, 2006 in association with the fourth quarter fiscal 2005 restructuring plan. There were no
incremental restructuring charges recorded during the three months ended March 31, 2005.
Other income increased by $0.3 million, or 88.3% to $0.7 million in the three months ended March
31, 2006 from $0.4 million in the three months ended March 31, 2005. The change was due primarily
to a reduction in foreign exchange losses.
The Company had an effective income tax rate of 45.2% for the three months ended March 31, 2006 and
40.2% for the three months ended March 31, 2005. The unfavorable movement in the tax rate was
primarily attributable to the need to increase tax reserves in conjunction with on-going reviews by
tax authorities during audits of prior year tax returns, offset by the impact of applying the
requirements of Financial Interpretation No. 18, which provides guidance on accounting for income
taxes during interim periods and was directly related to the quarterly profile of the Companys
projected losses in jurisdictions (mainly in the U.S.) where no tax benefit could be recognized.
In addition, the Company made some changes in its approach to allocating certain costs on a
regional basis. These changes improved U.S. profitability in the three months ended March 31, 2006
and, therefore, had the effect of reducing the tax rate during the quarter. Based upon current
projections, management expects the full-year tax rate for fiscal year 2006 to be approximately
47.6%.
16
NINE MONTHS ENDED MARCH 31, 2006 COMPARED WITH NINE MONTHS ENDED MARCH 31, 2005:
Service revenue increased $44.4 million, or 11.1%, to $445.5 million for the nine months ended
March 31, 2006 from $401.1 million for the nine months ended March 31, 2005. As a result of
year-over-year foreign currency fluctuations, service revenue was negatively impacted by
approximately $16.3 million. On a geographic basis, service revenue for the nine months ended
March 31, 2006 was distributed as follows: U.S. $160.7 million (36.1 %), Europe $259.2 million
(58.2%), and Asia & Other $25.6 million (5.7%). For the nine months ended March 31, 2005,
service revenue was distributed as follows: U.S. $152.5 million (38.0%), Europe $227.7 million
(56.8 %), and Asia & Other $20.9 million (5.2%). The year-over-year shift of revenue from the
U.S. to areas outside of the U.S. 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 $42.0 million, or 15.0%, to $321.2 million in
the nine months ended March 31, 2006 from $279.2 million in the nine months ended March 31, 2005.
Of the total $42.0 million increase, $35.2 million was attributed to business growth in activities
related to Phases II-III clinical trials, $4.7 million was caused by year-over-year growth in the
Phase I business and incremental revenue from the Qdot acquisition completed in July 2005, with the
remaining $2.1 million driven by other components of the CRS business. PCMS service revenue
decreased by $6.1 million, or 6.7%, to $84.3 million in the nine months ended March 31, 2006 from
$90.4 million in the nine months ended March 31, 2005. The year-over-year decrease was caused by a
variety of factors including cancellations and delays, 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. Of the total
$6.1 million decrease, $4.7 million was attributed to the medical marketing business and $1.4
million was related to the consulting business. Perceptive service revenue increased by $8.5
million, or 27.0%, to $39.9 million for the nine months ended March 31, 2006 from $31.4 million in
the nine months ended March 31, 2005 driven by gains in all operating units.
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.
Direct costs increased by $33.3 million, or 12.7%, to $295.5 million for the nine months ended
March 31, 2006 from $262.2 million in the nine months ended March 31, 2005. As a result of
year-over-year foreign currency fluctuations, direct costs were
favorably impacted by
approximately $11.7 million. On a segment basis, CRS direct costs increased by $28.1 million, or
15.3%, to $211.7 million for the nine months ended March 31, 2006 from $183.6 million in the nine
months ended March 31, 2005. The year-over-year increase in CRS direct costs was primarily due to
costs incurred to support a higher volume of business, including increased hiring, training, and
incentive costs. As a percentage of service revenue, CRS direct costs increased by two-tenths of a
point to 65.9% for the nine months ended March 31, 2006 from 65.7% for the nine months ended March
31, 2005. PCMS direct costs decreased by $1.8 million, or 3.0%, to $59.9 million in the nine
months ended March 31, 2006 from $61.7 million in the nine months ended March 31, 2005. The
year-over-year decrease in PCMS direct costs was primarily due to lower labor costs associated with
a lower volume of business. As a percentage of service revenue, PCMS direct costs increased by 2.8
points to 71.1% for the nine months ended March 31, 2006 from 68.3% for the nine months ended March
31, 2005 due to lower revenue, a less favorable revenue mix, and higher incentive costs.
Perceptive direct costs increased by $7.0 million, or 41.2%, to $23.9 million in the nine months
ended March 31, 2006 from $16.9 million in the nine months ended March 31, 2005. The
year-over-year increase in Perceptive direct costs was primarily due to higher labor costs
associated with increased staffing needs to support business growth and $0.5 million of
non-recurring costs deemed to be compensation expense in conjunction with PAREXELs purchase of the
minority interest in Perceptive. As a percentage of service revenue, Perceptives direct costs
increased by 6.0 points to 59.9% in the nine months ended March 31, 2006 from 53.9% in the nine
months ended March 31, 2005 primarily due to inefficiencies in the medical imaging portion of the
business, which are currently being addressed by making further investments in underlying
technologies and improving utilization of
resources and the need to record compensation expense in conjunction with the buyback of the
minority interest in Perceptive.
17
SG&A expenses increased by $9.5 million, or 10.0%, to $104.7 million in the nine months ended March
31, 2006 from $95.2 million in the nine months ended March 31, 2005. The $9.5 million increase was
primarily driven by $3.4 million in increased management incentive costs and commission expenses,
$2.7 million for stock-based compensation expense related to the implementation of FAS 123(R), $1.1
million related to non-recurring costs deemed to be compensation expense in conjunction with
PAREXELs purchase of the minority interest in Perceptive, and $0.6 million of incremental expense
associated with the Qdot acquisition completed in July 2005, with the remaining $1.7 million
attributed to higher professional fees and other costs. As a percentage of service revenue, SG&A
decreased two-tenths of a point to 23.5% in the nine months ended March 31, 2006 from 23.7% in the
nine months ended March 31, 2005.
D&A expense decreased by $1.0 million, or 5.1%, to $19.2 million in the nine months ended March 31,
2006 from $20.2 million in the nine months ended March 31, 2005 primarily as a result of writing
off certain impaired assets in June 2005. As a percentage of service revenue, D&A decreased by
seven-tenths of a point to 4.3% in the nine months ended March 31, 2006 from 5.0 % in the nine
months ended March 31, 2005.
During the nine months ended March 31, 2006, the Company recorded a $2.3 million reduction to
existing restructuring reserves as a result of changes in assumptions primarily related to
facilities sub-leases, which was offset by $1.6 million in severance-related restructuring expenses
incurred during the nine months ended March 31, 2006 in association with the fourth quarter fiscal
2005 restructuring plan.
Other income decreased by $0.4 million, or 15.6%, to $2.4 million in the nine months ended March
31, 2006 from $2.8 million in the nine months ended March 31, 2005. The change was due primarily
to lower foreign exchange gains.
The Company had an effective income tax rate of 50.6% for the nine months ended March 31, 2006 and
37.6% for the nine months ended March 31, 2005. The unfavorable movement 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 was directly
related to the quarterly profile of the Companys projected losses in jurisdictions (mainly in the
U.S.) where no tax benefit could be recognized and the need to increase tax reserves in conjunction
with on-going reviews by tax authorities during reviews of prior year tax returns. Based upon
current projections, management expects the full-year tax rate for fiscal year 2006 to be
approximately 47.6%.
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.
DAYS SALES OUTSTANDING
The Companys 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 41 days at March 31, 2006, 39 days at
June 30, 2005, and 32 days at March 31, 2005. The
year-over-year increase in DSO was caused by slow collections in
March 2006. Accounts receivable, net of the allowance for
doubtful accounts, was $232.7 million ($128.3 million in billed accounts receivable and $104.4
million in unbilled accounts receivable) at March 31, 2006 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 $134.1 million at March 31, 2006 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 nine months ended March 31, 2006 totaled $33.8
million and was generated from $19.2 million related to non-cash charges for depreciation and
amortization expense, $15.1 million of net income, an $11.8 million increase in current
liabilities, and $3.4 million related to a non-cash charge for stock-based compensation, offset by
an $11.8 million increase in accounts receivable (net of allowance for doubtful accounts and
deferred revenue), a $2.0 million decrease in accounts payable, and a $1.9 million increase in
prepaid expenses. Net cash provided by operating activities for the nine months ended March 31, 2005
totaled $36.1 million
18
and was
generated from $20.2 million related to non-cash for depreciation
and amortization expense, $16.3 million of net income, and a $10.9 million decrease in accounts receivable (net of allowance for doubtful
accounts and deferred revenue), offset by a $6.3 million decrease in accounts payable, $2.7 million
increase in prepaid expenses and other assets, and a $2.3 million decrease in liabilities and other
sources.
Net cash used in investing activities for the nine months ended March 31, 2006 totaled $49.1
million and consisted of $21.4 million used in the net purchase of marketable securities, $21.2
million used for capital expenditures (primarily computer software and hardware and analytical
equipment), and $6.5 million used for the combined acquisition-related payments for Qdot, the
equity interests of minority stockholders in Perceptive, and an earn-out payment related to the IMC
acquisition. Net cash used in investing activities for the nine months ended March 31, 2005
totaled $30.9 million and consisted of $24.6 million used for capital expenditures (primarily
computer hardware and software), $5.1 million used in the net purchase of marketable securities and
$1.5 million used in the acquisition of a business, offset by $0.3 million of proceeds from the
sale of fixed assets.
Net cash provided by financing activities for the nine months ended March 31, 2006 totaled $4.0
million, and was generated from $10.2 million in proceeds related to the issuance of common stock
in conjunction with the Companys stock option and employee stock purchase plans, offset by $6.0
million used to repurchase the Companys common stock pursuant to its stock repurchase program and
$0.2 million used in repayment of debt. Net cash used in financing activities for the nine months
ended March 31, 2005 totaled $3.3 million, and resulted from $7.7 million used to repurchase the
Companys common stock pursuant to its stock repurchase program, offset by $4.2 million in proceeds
related to the issuance of common stock in conjunction with the Companys stock option and employee
stock purchase plans, and $0.2 million in net borrowings.
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 March 31, 2006, 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 March 31, 2006, the Company had approximately $1.8 million available under these
arrangements.
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 pools 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 Companys condensed
consolidated statements of operations.
FINANCING NEEDS
The Companys 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 Companys 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 Companys revenue and cash flow would be
adversely affected (see Risk Factors for further detail). Absent a material adverse change in
the level of the Companys 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 and product
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.
19
The Company expects capital expenditures to total approximately $30.0 million in fiscal year 2006.
As of March 31, 2006, the Company had spent $21.2 million and expects to spend an additional $8.8
million primarily for computer software and hardware during the remainder of the fiscal year.
CONTINGENT LIABILITIES AND GUARANTEES
In connection with its acquisition of IMC during fiscal year 2005, the Company agreed to pay up to
a maximum of $3.2 million in contingent purchase price payments if IMC achieves certain established
financial targets through September 30, 2007. As of March 31, 2006, the Company had paid $0.6
million in earn-out payments under the terms of the IMC acquisition.
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 agreed 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 Companys financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to the Companys investors.
FOREIGN CURRENCY EXCHANGE RATES
The Company derived approximately 63.9% of its service revenue for the nine-month period ended
March 31, 2006 and 62.0% of its service revenue for the nine months ended March 31, 2005 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 Companys 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 Companys consolidated financial results.
The Company may be subjected to foreign currency transaction risk when the Companys foreign
subsidiaries enter into contracts denominated in a currency other than the foreign subsidiarys
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 Companys 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 nine-month periods ended March 31, 2006 and 2005, the Company recorded foreign-exchange
gains of $0.5 million and $1.0 million, respectively.
INFLATION
The Company believes the effects of inflation generally do not have a material adverse impact on
its operations or financial condition.
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 Managements 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 Companys business, financial condition, or
results of operations would likely suffer.
20
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY IMPACT THE COMPANYS
FINANCIAL PERFORMANCE
The Companys 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 Companys 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 fiscal year 2005.
Clients terminate or delay their contracts for a variety of reasons, including, but not limited to:
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merger or potential merger related activities; |
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failure of products being tested to satisfy safety requirements; |
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failure of products being tested to prove effective; |
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products having unexpected or undesired clinical results; |
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client decisions to forego a particular study, perhaps for economic reasons; |
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insufficient patient enrollment in a study; |
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insufficient investigator recruitment; |
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production problems which cause shortages of the product; |
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product withdrawal following market launch; and |
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manufacturing facility shut down. |
In addition, the Company believes that companies regulated by the U.S. 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, PAREXELs 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 Companys 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 COMPANYS CONTRACTS COULD HURT ITS OPERATING RESULTS
Approximately 85.0% of the Companys 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.
21
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY INDUSTRY CHANGES, THE NEED
FOR THE COMPANYS 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 Companys 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 Companys services. If companies regulated by the FDA or
similar foreign regulatory authorities needed fewer of the Companys 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 new drug 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 Companys services.
Parts of PAREXELs 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 groups 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 Companys 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 Companys
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 Companys 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 healthcare 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.
22
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 COMPANYS
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 COMPANYS PERCEPTIVE INFORMATICS BUSINESS
The biotechnology, pharmaceutical and medical device industries generally, and clinical research
specifically, are subject to increasingly rapid technological changes. The Companys competitors
or others might develop technologies, products or services that are more effective or commercially
attractive than the Companys 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 Companys revenue and adversely affect its business and financial
condition, possibly materially. In the fiscal year ended June 30, 2005, the Companys 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
Companys 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
Companys 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 COMPANYS 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 Companys 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 Perceptives business.
Although Perceptives 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,
Perceptives 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.
23
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 Companys 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 Companys 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 COMPANYS 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 Companys 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 Companys 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 CRS 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:
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the Company had to pay damages or incur defense costs in connection with a claim that is
outside the scope of an indemnity; or |
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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 Companys
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.
THE COMPANYS 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 Companys service revenue from
non-U.S. operations represented approximately 63.9% of total consolidated service revenue for the
nine months ended March 31, 2006 and approximately 62.0% of total consolidated service revenue for
the nine months ended, March 31, 2005. In addition, the Companys service revenue from operations
in the United Kingdom represented approximately
24
16.7% of total consolidated service revenue for the nine months ended March 31, 2006 and
approximately 19.6% of total consolidated service revenue for the nine months ended March 31, 2005.
The Companys service revenue from operations in Germany represented approximately 20.3% of total
consolidated service revenue for the nine months ended March 31, 2006 and approximately 18.4% of
total consolidated service revenue for the nine months ended March 31, 2005. Accordingly, the
Companys business is subject to risks associated with doing business internationally, including:
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changes in a specific countrys or regions political or economic conditions, including
Western Europe, in particular; |
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potential negative consequences from changes in tax laws affecting its ability to repatriate profits; |
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difficulty in staffing and managing widespread operations; |
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unfavorable labor regulations applicable to its European operations; |
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changes in foreign currency exchange rates; and |
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longer payment cycles of foreign customers and difficulty of collecting receivables in
foreign jurisdictions. |
THE COMPANYS 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 Companys 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 Companys income (loss) from
operations was $7.5 million for the quarter ended March 31, 2005, $(23.7) million for the quarter
ended June 30, 2005, $5.0 million for the quarter ended September 30, 2005, and $10.6 million for
the quarter ended December 31, 2005, and $11.2 million for the quarter ended March 31, 2006.
Factors that cause these variations include:
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the level of new business authorizations in a particular quarter or year; |
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the timing of the initiation, progress, or cancellation of significant projects; |
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exchange rate fluctuations between quarters or years; |
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restructuring charges; |
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the mix of services offered in a particular quarter or year; |
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the timing of the opening of new offices; |
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costs and the related financial impact of acquisitions; |
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the timing of internal expansion; |
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the timing and amount of costs associated with integrating acquisitions; and |
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the timing and amount of startup costs incurred in connection with the introduction of
new products, services or subsidiaries; and |
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the dollar amount of changes in scope finalized during a particular period. |
Many of these factors, such as the timing of cancellations of significant projects and exchange
rate fluctuations between quarters or years, are beyond the Companys control.
Approximately 65-70% of the Companys operating costs are fixed in the short term. In particular,
a significant portion of the Companys operating costs relate to personnel, which are estimated to
have accounted for 75-80% of the Companys total operating costs in fiscal year 2005. As a result,
the effect on the Companys 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 Companys operating results do not match the expectations of securities analysts and
investors, the trading price of its common stock will likely decrease.
THE COMPANYS REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 63.9% of the Companys total consolidated service revenue for the nine months ended
March 31, 2006 and approximately 62.0% of the Companys total consolidated service revenue for the
nine months ended March 31, 2005 were from non-U.S. operations. The Companys 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 Companys operating results. Exchange rate fluctuations
between local currencies and the U.S. dollar create risk in several ways, including:
25
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Foreign Currency Translation Risk. The revenue and expenses of the Companys 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 nine months ended March 31, 2006, approximately 16.7% of total
consolidated service revenue was denominated in British pounds and approximately 37.3%
of total consolidated service revenue was denominated in Euros. For the nine months
ended March 31, 2005, approximately 19.6% of total consolidated service revenue was
denominated in British pounds and approximately 33.6% of total consolidated service
revenue was denominated in Euros. |
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Foreign Currency Transaction Risk. The Companys 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 COMPANYS 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 Companys operational, human and financial resources. In order to manage expansion, the
Company must:
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continue to improve operating, administrative and information systems; |
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accurately predict future personnel and resource needs to meet client contract commitments; |
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track the progress of ongoing client projects; and |
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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:
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assimilate differences in foreign business practices, exchange rates and regulatory requirements; |
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operate amid political and economic instability; |
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hire and retain qualified personnel; and |
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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 Companys ability to:
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assimilate the operations and services or products of the acquired company; |
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integrate acquired personnel; |
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retain and motivate key employees; |
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retain customers; and |
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minimize the diversion of managements 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 Companys 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.
26
THE COMPANYS CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS ARTICLES OF ORGANIZATION,
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 Companys articles of organization, by-laws and its shareholder rights plan, as
well as provisions of Massachusetts law, may enable the Companys 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:
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the Company has divided its board of directors into three classes that serve staggered
three-year terms; |
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|
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 Companys board of directors may only be filled by a vote of the Companys board of
directors and the number of directors may be fixed only by the Companys board of
directors; |
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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; |
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the Companys stockholders are limited in their ability to call or introduce proposals
at stockholder meetings; and |
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the Companys shareholder rights plan would cause a proposed acquirer of 20% or more of
the Companys 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 Companys 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 Companys
stock. In addition, the Companys board of directors may issue preferred stock in the future
without stockholder approval. If the Companys board of directors issues preferred stock, the
holders of common stock would be subordinate to the rights of the holders of preferred stock. The
Companys 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 Companys
stock.
THE COMPANYS STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH COULD LEAD TO LOSSES BY
INVESTORS
The market price of the Companys common stock has fluctuated widely in the past and may continue
to do so in the future. On May 5, 2006, the closing sale price of the Companys common stock on the
NASDAQ National Market was $30.19 per share. During the period from April 1, 2004 to March 31,
2006, the closing price of the Companys common stock ranged from a high of $27.52 per share to a
low of $17.28 per share. Investors in the Companys 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 Companys
stock could decline.
The Companys stock price can be affected by quarter-to-quarter variations in a number of factors
including:
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operating results; |
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earnings estimates by analysts; |
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market conditions in the industry; |
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prospects of health care reform; |
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changes in government regulations; |
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general economic conditions, and |
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|
the Companys 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 Companys common stock. Since the
Companys 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.
27
THE COMPANYS EFFECTIVE INCOME TAX RATE MAY FLUCTUATE FROM QUARTER-TO-QUARTER, WHICH MAY AFFECT
EARNINGS AND EARNINGS PER SHARE
The Companys quarterly effective income tax rate is influenced by the Companys 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
Companys effective income tax rate, which in turn could have a material adverse effect on the
Companys net income and earnings per share. Factors that affect the effective income tax rate
include:
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|
the requirement to exclude from its quarterly worldwide effective income tax
calculations losses in jurisdictions where no tax benefit can be recognized; |
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actual and projected full year pretax income; |
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changes in tax laws in the various taxing jurisdictions; |
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audits by the taxing authorities; and |
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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 DISCLOSURES 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 Companys 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 Companys foreign
subsidiaries enter into contracts or incur liabilities denominated in a currency other than the
foreign subsidiarys functional currency. For the nine months ended March 31, 2006, approximately
16.7% of total consolidated service revenue was denominated in British pounds and approximately
37.3% 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 $28.3
million at March 31, 2006. 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 $1.7 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.
INTEREST RATE
The Companys 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 $0.8 million and $1.1 million as of
March 31, 2006 and June 30, 2005, respectively.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Companys management, with the participation of the Companys chief executive officer and chief
financial officer, evaluated the effectiveness of the Companys disclosure controls and procedures
as of March 31, 2006. The term disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act of 1934, as amended, 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 SECs rules and forms. Disclosure
28
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 companys 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 Companys disclosure controls and
procedures as of March 31, 2006, the Companys chief executive officer and chief financial officer
concluded that, as of such date, the Companys disclosure controls and procedures were effective at
the reasonable assurance level.
CHANGES IN INTERNAL CONTROLS
No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2006 that
has materially affected, or is reasonably likely to materially affect, the Companys 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 March 31, 2006. |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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Maximum |
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|
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|
|
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|
|
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Approximate |
|
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|
Total Number of |
|
|
Dollar Value of |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
Shares that May |
|
|
|
Total Number |
|
|
Average |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
Period |
|
Purchased |
|
|
Per Share |
|
|
Programs |
|
|
Programs (1) |
|
01/01/06 01/31/06 |
|
|
28,489 |
|
|
$ |
24.85 |
|
|
|
28,489 |
|
|
$9.3 million |
02/01/06 02/28/06 |
|
|
53,199 |
|
|
$ |
24.28 |
|
|
|
53,199 |
|
|
$8.0 million |
03/01/06 03/31/06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$8.0 million |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
81,688 |
|
|
|
|
|
|
|
81,688 |
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
(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 Companys 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 Companys Board of
Directors, the Plan will expire when the entire amount authorized has been fully utilized. |
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.
29
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: May 9, 2006
|
|
By: /s/ Josef H. von Rickenbach |
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|
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|
|
|
|
|
Josef H. von Rickenbach |
|
|
Chairman of the Board and Chief Executive Officer |
|
|
|
Date: May 9, 2006
|
|
By: /s/ James F. Winschel, Jr. |
|
|
|
|
|
|
|
|
James F. Winschel, Jr. |
|
|
Senior Vice President and Chief Financial Officer |
30
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 |
31