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, 2007
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.
Large Accelerated Filer þ Accelerated Filer o 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 2, 2007, there were 27,828,406 shares of common stock
outstanding.
PAREXEL INTERNATIONAL CORPORATION
INDEX
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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March 31, |
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2007 |
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June 30, |
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(Unaudited) |
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2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
92,608 |
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$ |
82,749 |
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Marketable securities |
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3,550 |
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10,000 |
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Billed and unbilled accounts receivable, net |
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319,752 |
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272,063 |
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Prepaid expenses |
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14,534 |
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11,258 |
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Deferred tax assets |
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852 |
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934 |
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Other current assets |
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11,650 |
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8,074 |
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Total current assets |
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442,946 |
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385,078 |
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Property and equipment, net |
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89,698 |
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78,386 |
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Goodwill |
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89,752 |
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50,112 |
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Other intangible assets, net |
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29,112 |
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7,832 |
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Non-current deferred tax assets |
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10,497 |
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10,495 |
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Other assets |
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8,042 |
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6,730 |
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Total assets |
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$ |
670,047 |
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$ |
538,633 |
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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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$ |
30,486 |
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$ |
498 |
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Accounts payable |
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13,120 |
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17,185 |
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Deferred revenue |
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191,207 |
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139,836 |
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Accrued expenses |
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20,112 |
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20,117 |
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Accrued restructuring charges |
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4,943 |
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5,190 |
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Accrued employee benefits and withholdings |
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47,138 |
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46,385 |
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Deferred tax liabilities |
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12,644 |
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12,645 |
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Income tax payable |
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12,809 |
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7,498 |
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Other current liabilities |
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4,115 |
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4,172 |
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Total current liabilities |
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336,574 |
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253,526 |
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Long-term debt, net of current portion |
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329 |
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705 |
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Non-current deferred tax liabilities |
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16,895 |
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16,780 |
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Long-term accrued restructuring charges |
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6,426 |
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10,967 |
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Other liabilities |
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7,943 |
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5,569 |
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Total liabilities |
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368,167 |
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287,547 |
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Minority interest in subsidiary |
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2,341 |
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2,323 |
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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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75,000,000 at
March 31, 2007 and 50,000,000 at June 30, 2006; shares issued and outstanding: |
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27,518,273 at March 31, 2007 and 26,920,119 at
June 30, 2006 |
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288 |
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283 |
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Additional paid-in capital |
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189,692 |
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177,309 |
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Retained earnings |
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92,129 |
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65,275 |
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Accumulated other comprehensive income |
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17,430 |
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5,896 |
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Total stockholders equity |
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299,539 |
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248,763 |
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Total liabilities and stockholders equity |
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$ |
670,047 |
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$ |
538,633 |
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See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(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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2007 |
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2006 |
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2007 |
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2006 |
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Service revenue |
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$ |
191,215 |
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$ |
157,320 |
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$ |
536,746 |
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$ |
445,462 |
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Reimbursement revenue |
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49,404 |
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35,295 |
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127,376 |
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100,232 |
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Total revenue |
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240,619 |
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192,615 |
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664,122 |
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545,694 |
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Costs and expenses: |
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Direct costs |
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125,312 |
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103,351 |
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354,609 |
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295,510 |
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Reimbursable out-of-pocket expenses |
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49,404 |
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35,295 |
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127,376 |
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100,232 |
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Selling, general and administrative |
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42,253 |
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36,364 |
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119,222 |
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104,670 |
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Depreciation |
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6,702 |
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6,063 |
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19,453 |
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18,032 |
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Amortization |
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1,473 |
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376 |
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2,873 |
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1,170 |
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Restructuring benefit |
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(26 |
) |
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(74 |
) |
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(705 |
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Total costs and expenses |
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225,144 |
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181,423 |
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623,459 |
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518,909 |
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Income from operations |
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15,475 |
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11,192 |
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40,663 |
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26,785 |
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Interest income |
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3,700 |
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2,460 |
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8,769 |
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|
7,121 |
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Interest expense |
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(3,632 |
) |
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|
(1,816 |
) |
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(8,021 |
) |
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(5,338 |
) |
Other income |
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224 |
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49 |
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|
850 |
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|
588 |
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Total other income, net |
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292 |
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693 |
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1,598 |
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2,371 |
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Income before provision for income taxes
and minority interest expense (benefit) |
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15,767 |
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11,885 |
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42,261 |
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29,156 |
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Provision for income taxes |
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5,071 |
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|
5,371 |
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|
15,369 |
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|
14,748 |
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Minority interest expense (benefit), net
of tax |
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(101 |
) |
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|
(240 |
) |
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38 |
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(707 |
) |
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Net income |
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$ |
10,797 |
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$ |
6,754 |
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$ |
26,854 |
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$ |
15,115 |
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Earnings per share: |
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Basic |
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$ |
0.39 |
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$ |
0.25 |
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$ |
0.99 |
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$ |
0.57 |
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Diluted |
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$ |
0.38 |
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$ |
0.25 |
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$ |
0.96 |
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$ |
0.56 |
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Weighted average shares: |
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Basic |
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27,433 |
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26,564 |
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27,242 |
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26,452 |
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Diluted |
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28,110 |
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27,145 |
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28,002 |
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|
26,812 |
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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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2007 |
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2006 |
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Cash flow from operating activities: |
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Net income |
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$ |
26,854 |
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$ |
15,115 |
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Adjustments to reconcile net income to net cash
provided
by operating activities: |
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Minority interest expense (benefit), net of tax |
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38 |
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(707 |
) |
Depreciation and amortization |
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22,326 |
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19,202 |
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Stock-based compensation |
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|
3,229 |
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|
3,417 |
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Changes in operating assets/liabilities |
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4,192 |
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(3,247 |
) |
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Net cash provided by operating activities |
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56,639 |
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|
33,780 |
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Cash flow from investing activities: |
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Purchases of marketable securities |
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(100,800 |
) |
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(59,825 |
) |
Proceeds from sale of marketable securities |
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107,250 |
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|
38,375 |
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Purchases of property and equipment |
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(26,841 |
) |
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(21,157 |
) |
Acquisition of businesses |
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(70,538 |
) |
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|
(6,538 |
) |
Proceeds from sale of assets |
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|
299 |
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|
64 |
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Net cash used in investing activities |
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(90,630 |
) |
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(49,081 |
) |
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Cash flow from financing activities: |
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Borrowing under lines of credit |
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65,000 |
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Repayments under lines of credit |
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(35,000 |
) |
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|
(241 |
) |
Proceeds from issuance of common stock |
|
|
9,159 |
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|
|
10,280 |
|
Payments to repurchase common stock |
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(6,000 |
) |
Repayments under long-term debt |
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|
(442 |
) |
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|
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|
|
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Net cash provided by financing activities |
|
|
38,717 |
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|
|
4,039 |
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|
|
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|
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|
|
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Effect of exchange rate changes on cash and cash
equivalents |
|
|
5,133 |
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net increase (decrease) in cash and cash equivalents |
|
|
9,859 |
|
|
|
(10,789 |
) |
Cash and cash equivalents at beginning of period |
|
|
82,749 |
|
|
|
84,622 |
|
|
|
|
|
|
|
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Cash and cash equivalents at end of period |
|
$ |
92,608 |
|
|
$ |
73,833 |
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Supplemental disclosures of cash flow information |
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Net cash paid during the period for: |
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|
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|
|
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Interest |
|
$ |
8,021 |
|
|
$ |
5,338 |
|
Income taxes, net of refunds |
|
$ |
10,054 |
|
|
$ |
1,772 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of investing activities |
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|
|
|
|
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Fair value of assets acquired and goodwill |
|
$ |
74,565 |
|
|
$ |
7,333 |
|
Liabilities assumed |
|
|
(4,027 |
) |
|
|
(795 |
) |
|
|
|
|
|
|
|
Cash paid for acquisitions |
|
$ |
70,538 |
|
|
$ |
6,538 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of PAREXEL International
Corporation (PAREXEL or the Company) have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the instructions of Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating results for the three
and nine months ended March 31, 2007 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, 2006 (the 2006 10-K).
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.
All outstanding restricted stock and certain outstanding options to purchase approximately 74,000
and 0.2 million shares of common stock were excluded from the calculation of diluted earnings per
share for the three months ended March 31, 2007 and 2006, respectively, because they were
anti-dilutive. All outstanding restricted stock and certain outstanding options to purchase
approximately 74,000 and 0.3 million shares of common stock were excluded from the calculation of
diluted earnings per share for the nine months ended March 31, 2007 and 2006, 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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|
|
|
|
|
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|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
(in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
10,797 |
|
|
$ |
6,754 |
|
|
$ |
26,854 |
|
|
$ |
15,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding
used in computing basic earnings per
share |
|
|
27,433 |
|
|
|
26,564 |
|
|
|
27,242 |
|
|
|
26,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive common stock equivalents |
|
|
677 |
|
|
|
581 |
|
|
|
760 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
outstanding
used in computing diluted earnings per
share |
|
|
28,110 |
|
|
|
27,145 |
|
|
|
28,002 |
|
|
|
26,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.39 |
|
|
$ |
0.25 |
|
|
$ |
0.99 |
|
|
$ |
0.57 |
|
Diluted earnings per share |
|
$ |
0.38 |
|
|
$ |
0.25 |
|
|
$ |
0.96 |
|
|
$ |
0.56 |
|
NOTE 3 COMPREHENSIVE INCOME
Comprehensive income has been calculated by the Company in accordance with Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 130,
Reporting Comprehensive Income. Comprehensive income for the three months and nine months ended
March 31, 2007 and 2006 were as follows:
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
10,797 |
|
|
$ |
6,754 |
|
|
$ |
26,854 |
|
|
$ |
15,115 |
|
Add: Foreign currency translation |
|
|
2,112 |
|
|
|
3,322 |
|
|
|
11,619 |
|
|
|
(417 |
) |
Unrealized gain (loss)
on available for sale
securities and
derivative
instruments |
|
|
(213 |
) |
|
|
209 |
|
|
|
(85 |
) |
|
|
436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
12,696 |
|
|
$ |
10,285 |
|
|
$ |
38,388 |
|
|
$ |
15,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 4 ACQUISITIONS
On November 15, 2006, PAREXEL acquired substantially all of the assets of Behavioral and Medical
Research, LLC (BMR) and caused the transfer of all of the outstanding stock of California
Clinical Trials Medical Group, Inc. (CCT) as previously announced on October 12, 2006.
Established in 1981 with headquarters in San Diego, CCT and BMR provide a broad range of specialty
Phase I IV clinical research services through four clinical sites in California. In connection
with the transaction, PAREXEL entered into a long-term management agreement with CCT.
The acquisition expanded PAREXELs Clinical Pharmacology capacity to over 450 beds. It also brings
new expertise to the Companys service offerings in the area of bridging studies, especially
Japanese bridging studies, and adds depth to existing expertise in central nervous system clinical
trials, neuroscience drug development services and sleep studies.
The acquisition has been accounted for using the purchase method in accordance with SFAS No. 141,
Business Combinations, and accordingly, the results of operations of CCT/BMR have been included
in the accompanying Consolidated Statements of Income as of the date of acquisition.
Total purchase price has been allocated to the tangible and intangible assets and liabilities
acquired based on fair value, with any excess recorded as goodwill. These estimates of fair value
and the purchase price allocation are preliminary, as intangible valuations will be finalized in
the latter part of fiscal year 2007.
The components of the purchase price allocation are as follows (in thousands):
|
|
|
|
|
Purchase Price: |
|
|
|
|
Cash paid, net of cash acquired |
|
$ |
66,480 |
|
Transaction costs |
|
|
1,900 |
|
|
|
|
|
|
|
$ |
68,380 |
|
|
|
|
|
Allocations: |
|
|
|
|
Current assets |
|
$ |
11,884 |
|
Property and equipment, net |
|
|
1,477 |
|
Goodwill |
|
|
35,346 |
|
Other intangible assets, net |
|
|
23,621 |
|
Other assets |
|
|
79 |
|
|
|
|
|
Total assets acquired |
|
|
72,407 |
|
|
|
|
|
|
Current liabilities |
|
|
4,027 |
|
|
|
|
|
Total liabilities assumed |
|
|
4,027 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
68,380 |
|
|
|
|
|
This acquisition was initially financed with borrowings from a line of credit. The Company
subsequently repaid the line of credit with proceeds from an executed $100 million unsecured senior
revolving credit facility on January 12, 2007 (see Note 5).
7
The following table presents the details of the intangible assets purchased in the CCT/BMR
acquisition as of March 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Useful Life |
|
|
Cost |
|
|
Amortization |
|
|
Net |
|
Backlog |
|
7.5 months |
|
$ |
1,881 |
|
|
$ |
1,129 |
|
|
$ |
752 |
|
Non-competition and non-
solicitation agreements |
|
|
3 years |
|
|
126 |
|
|
|
16 |
|
|
|
110 |
|
Customer relationships |
|
|
15 years |
|
|
21,614 |
|
|
|
540 |
|
|
|
21,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
purchased |
|
|
|
|
|
$ |
23,621 |
|
|
$ |
1,685 |
|
|
$ |
21,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated amortization expense of intangible assets purchased in the CCT/BMR acquisition
for the current fiscal year, including amounts amortized to date, and in future years will be
recorded on the Consolidated Statements of Income as follows (in thousands):
|
|
|
|
|
Fiscal Year |
|
Amortization |
2007 |
|
$ |
2,808 |
|
2008 |
|
|
1,483 |
|
2009 |
|
|
1,483 |
|
2010 |
|
|
1,457 |
|
2011 |
|
|
1,441 |
|
The following (unaudited) pro forma consolidated results of operations have been prepared as
if the acquisition of CCT and BMR had occurred at July 1, 2005, the beginning of PAREXELs fiscal
year 2006 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
March 31, 2007 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCT/ |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
PRXL |
|
BMR |
|
Total |
Service revenue |
|
|
|
|
|
|
|
|
|
$ |
191,215 |
|
|
|
$ |
536,746 |
|
|
$ |
20,484 |
|
|
$ |
557,230 |
|
Net income* |
|
|
|
|
|
|
|
|
|
$ |
10,797 |
|
|
|
$ |
26,854 |
|
|
$ |
513 |
|
|
$ |
27,367 |
|
Basic EPS* |
|
|
|
|
|
|
|
|
|
$ |
0.39 |
|
|
|
$ |
0.99 |
|
|
$ |
0.01 |
|
|
$ |
1.00 |
|
Diluted EPS* |
|
|
|
|
|
|
|
|
|
$ |
0.38 |
|
|
|
$ |
0.96 |
|
|
$ |
0.02 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
March 31, 2006 |
|
|
March 31, 2006 |
|
|
|
|
|
|
CCT/ |
|
|
|
|
|
|
|
|
|
|
CCT/ |
|
|
|
|
PRXL |
|
BMR |
|
Total |
|
|
PRXL |
|
BMR |
|
Total |
Service revenue |
|
$ |
157,320 |
|
|
$ |
7,412 |
|
|
$ |
164,732 |
|
|
|
$ |
445,462 |
|
|
$ |
15,030 |
|
|
$ |
460,462 |
|
Net income (loss)* |
|
$ |
6,754 |
|
|
$ |
(386 |
) |
|
$ |
6,368 |
|
|
|
|
15,115 |
|
|
$ |
(803 |
) |
|
$ |
14,312 |
|
Basic EPS* |
|
$ |
0.25 |
|
|
$ |
(0.01 |
) |
|
$ |
0.24 |
|
|
|
$ |
0.57 |
|
|
$ |
(0.03 |
) |
|
$ |
0.54 |
|
Diluted EPS* |
|
$ |
0.25 |
|
|
$ |
(0.01 |
) |
|
$ |
0.24 |
|
|
|
$ |
0.56 |
|
|
$ |
(0.03 |
) |
|
$ |
0.53 |
|
|
|
|
* |
|
Inclusive of the interest expense we would have incurred related to the $50 million in borrowings at
an annual interest rate of 6.25% and amortization expense we would have incurred in connection with the
customer relationship and non-competition and non-solicitation agreements. |
8
Effective July 1, 2005, the Company acquired the assets of Qdot PHARMA (Qdot), a Phase I and IIa
Proof of Concept clinical pharmacology business located in George, South Africa for approximately
$5.7 million, net of liabilities assumed. Under the agreement, the Company agreed to make
additional payments of up to approximately $3.0 million in contingent purchase price if Qdot
achieved certain established financial targets through June 30, 2008. In September 2006, the
Company paid an $0.8 million contingent earn-out payment. As a result of management responsibility
changes, the Company reached an agreement with Qdot in December 2006 and amended the earn-out
agreement to pay a fixed additional amount of approximately $2.1 million (approximately $0.9
million was paid in January 2007 and approximately $1.2 million to be paid on December 31, 2007).
As of March 31, 2007, the Company recorded approximately $4.9 million of excess cost over the fair
value of the interest in the net assets acquired as goodwill. Pro forma results of Qdot operations
have not been presented because the effect of this acquisition is not material.
NOTE 5 CREDIT FACILITY
Effective November 15, 2006, the Company amended the $15 million uncommitted line of credit it
had with JPMorgan Chase Bank, N.A. (Bank) with a new $70 million maximum borrowing amount with a
maturity date of January 31, 2007. The amended line of credit permitted borrowing at interest rates
equal to LIBOR (ranging from 5.32% to 5.37% at December 31, 2006) plus a margin to be agreed by the
Bank and the Company, or rates to be set in any other manner as agreed between the Bank and the
Company. The Company entered into the amended line of credit to provide short-term financing for
the acquisition of CCT and BMR (see Note 4).
Subsequently, on January 12, 2007, the Company entered into a five-year, $100 million unsecured
senior revolving credit facility (the Credit Agreement) with a group of lenders (including and
managed by JPMorgan Bank, N.A.) and terminated the $70 million line of credit. The Credit Agreement
is guaranteed by certain of the Companys U.S. subsidiaries. A portion of the loan amount is
available for swingline loans of up to $20 million to be made by JPMorgan Chase Bank, N.A. The
Company has an option to increase the maximum amount that may be borrowed under the Credit
Agreement by $50 million.
At closing on January 12, 2007, the Company borrowed $50 million and repaid the entire balance
outstanding under the $70 million line of credit plus all associated interest and fees. The balance
outstanding under this Credit Agreement was $30 million at
March 31, 2007 at an interest rate of 6.125%, as determined
based on LIBOR plus a margin. The remaining $70
million is available and subject to the annual commitment fee (Unused Fees) on the unused
commitment amount ranging from 0.125% to 0.300% based on the total leverage ratio.
NOTE 6 STOCK-BASED COMPENSATION
Effective July 1, 2005, the Company adopted SFAS No. 123(R) Share-Based Payment under the
modified prospective method as described in SFAS No. 123(R). Under this transition method,
compensation expense recognized in the three months and nine months ended March 31, 2007 and 2006
includes compensation expense for all stock-based payments granted during the period and for all
stock-based payments granted prior to, but not yet vested, as of July 1, 2005, based on the grant
date fair value estimated in accordance with the original provision of SFAS No. 123.
Stock-based compensation expense recognized in the three and nine months ended March 31, 2007 and
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
March 31, |
|
|
March 31, |
|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Direct costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research Services |
|
$ |
128 |
|
|
$ |
144 |
|
|
$ |
418 |
|
|
$ |
428 |
|
PAREXEL Consulting and
MedCom Services |
|
|
(7 |
) |
|
|
54 |
|
|
|
83 |
|
|
|
168 |
|
Perceptive Informatics, Inc. |
|
|
53 |
|
|
|
48 |
|
|
|
159 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
246 |
|
|
|
660 |
|
|
|
707 |
|
Selling, general and
administrative |
|
|
531 |
|
|
|
1,702 |
|
|
|
2,569 |
|
|
|
2,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
705 |
|
|
$ |
1,948 |
|
|
$ |
3,229 |
|
|
$ |
3,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTE 7 SEGMENT INFORMATION
The Company is managed through three business segments, namely, Clinical Research Services (CRS),
PAREXEL Consulting and MedCom Services (PCMS), and Perceptive Informatics, Inc. (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. Perceptive
provides information technology solutions designed to improve clients product development
processes. Perceptive offers a portfolio of products and services that includes medical imaging
services, interactive voice response systems (IVRS), clinical trials management systems (CTMS),
web-based portals, systems integration, and patient diary applications.
The Company evaluates its segment performance and allocates resources based on service revenue and
gross profit (service revenue less direct costs), and allocates and evaluates other operating costs
on a geographic basis. Accordingly, the Company does not include selling, general, and
administrative expense, 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) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research Services |
|
$ |
143,461 |
|
|
$ |
113,023 |
|
|
$ |
396,161 |
|
|
$ |
321,237 |
|
PAREXEL Consulting and
MedCom Services |
|
|
29,707 |
|
|
|
30,405 |
|
|
|
87,326 |
|
|
|
84,346 |
|
Perceptive Informatics, Inc. |
|
|
18,047 |
|
|
|
13,892 |
|
|
|
53,259 |
|
|
|
39,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
191,215 |
|
|
$ |
157,320 |
|
|
$ |
536,746 |
|
|
$ |
445,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clinical Research Services |
|
$ |
49,764 |
|
|
$ |
38,913 |
|
|
$ |
134,938 |
|
|
$ |
109,550 |
|
PAREXEL Consulting and
MedCom Services |
|
|
8,338 |
|
|
|
9,183 |
|
|
|
24,095 |
|
|
|
24,415 |
|
Perceptive Informatics, Inc. |
|
|
7,801 |
|
|
|
5,873 |
|
|
|
23,104 |
|
|
|
15,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,903 |
|
|
$ |
53,969 |
|
|
$ |
182,137 |
|
|
$ |
149,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 RESTRUCTURING CHARGES
There have not been any significant changes in restructuring charges in the nine months ended
March 31, 2007. For further information, refer to Note 7 of the consolidated financial statements
included in the 2006 10-K for the fiscal year ended June 30, 2006.
Current activity charged against the restructuring accrual in the three months ended March 31,
2007 (which is included in Current Liabilities Accrued Restructuring Charges and Long-term
Accrued Restructuring Charges in the Consolidated Balance Sheet) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments/ |
|
|
|
|
|
|
Balance at |
|
|
Foreign |
|
|
Balance at |
|
|
|
December 31, |
|
|
Currency |
|
|
March 31, |
|
($ in thousands) |
|
2006 |
|
|
Exchange |
|
|
2007 |
|
Employee severance costs |
|
$ |
353 |
|
|
$ |
(123 |
) |
|
$ |
230 |
|
Facilities-related charges |
|
|
12,502 |
|
|
|
(1,363 |
) |
|
|
11,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,855 |
|
|
$ |
(1,486 |
) |
|
$ |
11,369 |
|
|
|
|
|
|
|
|
|
|
|
10
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, 2007, the Company had acquired 620,414 shares at a total cost of $14.0 million
under this program, leaving a remaining balance on the authorization of $6.0 million. The Company
did not repurchase additional shares during either the nine months ended March 31, 2007 or for the
period from April 1, 2007 to May 9, 2007.
NOTE 10 RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
creates a fair value option under which an entity may elect to record certain financial assets or
liabilities at fair value upon their initial recognition. Subsequent changes in fair value would be
recognized in earnings as those changes occur. The election of the fair value option would be made
on a contract-by-contract basis and would need to be supported by concurrent documentation or a
preexisting documented policy. SFAS 159 requires an entity to separately disclose the fair value of
these items on the balance sheet or in the footnotes to the financial statements and to provide
information that would allow the financial statement user to understand the impact on earnings from
changes in the fair value. SFAS 159 is effective as of the beginning of an entitys first fiscal
year that begins after November 15, 2007 and will be in effect for PAREXEL beginning on July 1,
2008. The Company is currently evaluating the potential impact that the adoption of SFAS 159 will
have on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 108 regarding the process of quantifying financial statement misstatements.
SAB No. 108 states that registrants should use both a balance sheet approach and an income
statement approach when quantifying and evaluating the materiality of a misstatement. The
interpretations in SAB No. 108 contain guidance on correcting errors under the dual approach as
well as provide transition guidance for correcting errors. This interpretation does not change the
requirements within SFAS No. 154, Accounting Changes and Error Correctionsa replacement of APB
No. 20 and FASB Statement No. 3, for the correction of an error on financial statements. SAB No.
108 is effective for annual financial statements covering the first fiscal year ending after
November 15, 2006. The Company has adopted SAB No. 108 effective immediately with no impact on its
financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 provides guidance for using fair value to measure assets and liabilities. The standard also
responds to investors requests for more information about (1) the extent to which companies
measure assets and liabilities at fair value, (2) the information used to measure fair value, and
(3) the effect that fair-value measurements have on earnings. SFAS 157 will apply whenever another
standard requires (or permits) assets or liabilities to be measured at fair value. The standard
does not expand the use of fair value to any new circumstances. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years and will be in effect for PAREXEL beginning on July 1, 2008. The Company
is currently evaluating the potential impact that the adoption of SFAS 157 will have on its
financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 clarifies the accounting for uncertain income tax positions that are
recognized in a companys financial statements in accordance with the provisions of FASB Statement
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on the
derecognition of uncertain positions, financial statement classification, accounting for interest
and penalties, accounting for interim periods and new disclosure requirements. FIN 48 is effective
for fiscal years beginning after December 15, 2006 and will be in effect for PAREXEL beginning on
July 1, 2007. The Company is currently evaluating the potential impact that the adoption of FIN 48
will have on its financial statements.
11
NOTE 11 INCOME TAXES
For the three months ended March 31, 2007 and 2006, the Company had an effective income tax rate of
32.2% and 45.2%, respectively. For the nine months ended March 31, 2007 and 2006, the Company had
an effective income tax rate of 36.4% and 50.6%, respectively. The favorable movement in the tax
rate year-over-year was primarily attributable to projected and realized profitability improvements
in the United States (U.S.) and other taxing jurisdictions, as well as favorable resolution of
several tax audit matters in The Netherlands which allowed the
Company to recognize a tax benefit of approximately $1.5 million
related to the reversal of a tax reserve during the quarter ended March 31, 2007. The Company has evaluated the likelihood of unfavorable
adjustments arising from other on-going reviews by various taxing authorities and believes adequate
provisions have been made in the income tax provision.
NOTE 12 COMMITMENTS, CONTINGENCIES AND GUARANTEES
In connection with the Integrated Marketing Concepts (IMC) acquisition during fiscal year 2005,
as discussed in Note 3 to the Consolidated Financial Statements of the Companys 2006 10-K, the
Company agreed to make additional payments of up to $2.9 million in contingent purchase price if
IMC achieved certain established financial targets through March 31, 2008. As of March 31, 2007,
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, the Company agreed to make additional payments of up to approximately $3.0
million in contingent purchase price if Qdot achieved certain established financial targets through
June 30, 2008. In September 2006, the Company paid $0.8 million in contingent earn-out payment.
As a result of management responsibility changes, the Company reached an agreement with Qdot in
December 2006 and amended the earn-out agreement to pay a fixed additional approximate amount of
$2.1 million ($0.9 million was paid in January 2007, with the remaining $1.2 million to be paid on
December 31, 2007).
The Company has letter-of-credit agreements with banks totaling approximately $6.9 million
guaranteeing performance under various operating leases and vendor agreements.
The Company has an unsecured senior revolving credit facility for $100 million with a group of
lenders (including and managed by JPMorgan Chase Bank, N.A.) that is guaranteed by certain of the
Companys U.S. subsidiaries.
As of March 31, 2007, the Company had approximately $39.4 million in purchase obligations with
various vendors for the purchase of computer software and recruiting services through October 31,
2011.
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.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
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 set forth below and under Risk Factors set forth in Item 1A 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
12
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 communications, 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 to its clients 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 incorporation in
the beginning of 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 communications, clinical
pharmacology, patient recruitment, regulatory and product development consulting, health policy and
reimbursement, performance improvement, industry training and publishing, medical imaging services,
IVRS, CTMS, web-based portals, systems integration, patient diary applications, 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, and 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.
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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. |
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|
PCMS provides scientific and 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. |
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|
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, IVRS, CTMS, web-based portals, systems
integration, and patient diary applications. |
The Company conducts a significant portion of its operations in foreign countries. Approximately
63.5% of the Companys consolidated service revenue for the nine months ended March 31, 2007 and
63.9% of the Companys consolidated service revenue for the nine months ended March 31, 2006, were
from non-U.S. operations. 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, 2007, 15.9% of total consolidated service revenue was
denominated in British pounds and approximately 36.5% of total consolidated service revenue was
denominated in Euros. For the nine months ended March 31, 2006, 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.
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.
13
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. Changes in the scope of work generally result in a renegotiation
of contract pricing terms. Renegotiated amounts are not included in net revenues until earned and
realization is assured. Costs are not deferred in anticipation of contracts being awarded, but
instead are expensed as incurred. Historically, there have not been any significant variations
between contract estimates and the actual cost incurred that were not recovered from clients.
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 a provision for losses on receivables
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 basis of recorded
assets and liabilities. A valuation allowance is established if it is more likely than not that
future tax benefits from the deferred tax assets will not be realized. Income tax expense is based
on the distribution of profit before tax among the various taxing jurisdictions in which 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 based on estimates. 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 2006 and 2005. 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, 2006. Any future impairment of goodwill could have a material
impact on the Companys financial position or its results of operations.
14
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 allocated and
evaluated on a geographic basis. Accordingly, the Company does not include the impact of selling,
general, and administrative expense, 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. Service revenue, direct costs and gross profit on service revenue for the
three months and nine months ended March 31, 2007 and 2006 were as follows:
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For the three months ended March 31, |
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For the nine months ended March 31, |
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Increase |
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|
Increase |
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|
($ in thousands) |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
% |
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
|
% |
|
Service revenue: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
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|
CRS |
|
$ |
143,461 |
|
|
$ |
113,023 |
|
|
$ |
30,438 |
|
|
|
26.9 |
% |
|
$ |
396,161 |
|
|
$ |
321,237 |
|
|
$ |
74,924 |
|
|
|
23.3 |
% |
PCMS |
|
|
29,707 |
|
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|
30,405 |
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|
(698 |
) |
|
|
-2.3 |
% |
|
|
87,326 |
|
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|
84,346 |
|
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|
2,980 |
|
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|
3.5 |
% |
Perceptive |
|
|
18,047 |
|
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|
13,892 |
|
|
|
4,155 |
|
|
|
29.9 |
% |
|
|
53,259 |
|
|
|
39,879 |
|
|
|
13,380 |
|
|
|
33.6 |
% |
|
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|
|
|
|
|
|
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|
|
|
|
|
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|
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|
$ |
191,215 |
|
|
$ |
157,320 |
|
|
$ |
33,895 |
|
|
|
21.5 |
% |
|
$ |
536,746 |
|
|
$ |
445,462 |
|
|
$ |
91,284 |
|
|
|
20.5 |
% |
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Direct costs: |
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|
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|
CRS |
|
$ |
93,697 |
|
|
$ |
74,110 |
|
|
$ |
19,587 |
|
|
|
26.4 |
% |
|
$ |
261,223 |
|
|
$ |
211,687 |
|
|
$ |
49,536 |
|
|
|
23.4 |
% |
PCMS |
|
|
21,369 |
|
|
|
21,222 |
|
|
|
147 |
|
|
|
0.7 |
% |
|
|
63,231 |
|
|
|
59,931 |
|
|
|
3,300 |
|
|
|
5.5 |
% |
Perceptive |
|
|
10,246 |
|
|
|
8,019 |
|
|
|
2,227 |
|
|
|
27.8 |
% |
|
|
30,155 |
|
|
|
23,892 |
|
|
|
6,263 |
|
|
|
26.2 |
% |
|
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|
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|
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|
|
|
|
|
|
|
|
|
$ |
125,312 |
|
|
$ |
103,351 |
|
|
$ |
21,961 |
|
|
|
21.2 |
% |
|
$ |
354,609 |
|
|
$ |
295,510 |
|
|
$ |
59,099 |
|
|
|
20.0 |
% |
|
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|
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|
Gross profit on |
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|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
service revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRS |
|
$ |
49,764 |
|
|
$ |
38,913 |
|
|
$ |
10,851 |
|
|
|
27.9 |
% |
|
$ |
134,938 |
|
|
$ |
109,550 |
|
|
$ |
25,388 |
|
|
|
23.2 |
% |
PCMS |
|
|
8,338 |
|
|
|
9,183 |
|
|
|
(845 |
) |
|
|
-9.2 |
% |
|
|
24,095 |
|
|
|
24,415 |
|
|
|
(320 |
) |
|
|
-1.3 |
% |
Perceptive |
|
|
7,801 |
|
|
|
5,873 |
|
|
|
1,928 |
|
|
|
32.8 |
% |
|
|
23,104 |
|
|
|
15,987 |
|
|
|
7,117 |
|
|
|
44.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65,903 |
|
|
$ |
53,969 |
|
|
$ |
11,934 |
|
|
|
22.1 |
% |
|
$ |
182,137 |
|
|
$ |
149,952 |
|
|
$ |
32,185 |
|
|
|
21.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED MARCH 31, 2007 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2006:
Service revenue increased $33.9 million, or 21.5%, to $191.2 million for the three months ended
March 31, 2007 from $157.3 million for the three months ended March 31, 2006. On a geographic
basis, service revenue for the three months ended March 31, 2007 was distributed as follows: United
States $71.7 million (37.5%), Europe $105.8 million (55.3%), and Asia & Other $13.7 million
(7.2%). For the three months ended March 31, 2006, service revenue was distributed as follows:
United States $58.1 million (36.9%), Europe $89.5 million (56.9%), and Asia & Other $9.7
million (6.2%).
On a segment basis, CRS service revenue increased by $30.4 million, or 26.9%, to $143.5 million in
the three months ended March 31, 2007 from $113.0 million in the three months ended March 31, 2006.
Of the total $30.4 million increase, approximately $6.2 million was attributed to foreign currency
fluctuations, $8.5 million related to incremental revenue from the CCT/BMR acquisition completed in
November 2006, with the remaining $15.7 million attributed to business growth across all CRS
business units; however, CRS revenue was adversely impacted by cancellations and delays in the
Phase I portion of the business. PCMS service revenue decreased by $0.7 million, or 2.3%, to $29.7
million in the three months ended March 31, 2007 from $30.4 million in the three months ended March
31, 2006. The decrease was caused entirely by weakness in the MedCom business. Perceptive service
revenue increased by $4.2 million, or 29.9%, to $18.0 million for the three months ended March 31,
2007 from $13.9 million in the three months ended March 31, 2006. Of the total $4.2 million
increase, approximately $0.5
15
million was the result of foreign currency fluctuations, with the remaining $3.7 million increase
resulting from strong business growth across all business lines.
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 $22.0 million, or 21.2%, to $125.3 million for the three months ended
March 31, 2007 from $103.3 million in the three months ended March 31, 2006. On a segment basis,
CRS direct costs increased by $19.6 million, or 26.4%, to $93.7 million for the three months ended
March 31, 2007 from $74.1 million in the three months ended March 31, 2006. Of the total $19.6
million increase, approximately $4.5 million was attributed to foreign currency fluctuations, with
the remaining $15.1 million primarily due to higher labor and related costs incurred to support
higher revenue levels. As a percentage of service revenue, CRS direct costs decreased by 0.3
points to 65.3% for the three months ended March 31, 2007 from 65.6% for the three months ended
March 31, 2006. PCMS direct costs increased by $0.1 million, or 0.7%, to $21.4 million in the
three months ended March 31, 2007 from $21.2 million in the three months ended March 31, 2006. As
a percentage of service revenue, PCMS direct costs increased 2.1 points to 71.9% for the three
months ended March 31, 2007 from 69.8% for the three months ended March 31, 2006 primarily as a
result of absorbing approximately $1 million in severance costs, which were offset by the impact of
a favorable revenue mix in MedCom Services. Perceptive direct costs increased by $2.2 million, or
27.8%, to $10.2 million in the three months ended March 31, 2007 from $8.0 million in the three
months ended March 31, 2006. The year-over-year increase in Perceptive direct costs was due
principally to higher labor costs associated with higher revenue levels. As a percentage of
service revenue, Perceptives direct costs decreased by 0.9 points to 56.8% in the three months
ended March 31, 2007 from 57.7% in the three months ended March 31, 2006 primarily due to favorable
revenue mix with improvements in most parts of the business.
Selling, general and administrative (SG&A) expense increased by $5.9 million, or 16.2%, to $42.3
million in the three-month period ended March 31, 2007 from $36.4 million in the three months ended
March 31, 2006. Of the total $5.9 million increase, $1.2 million was attributed to incremental
expense associated with the CCT/BMR acquisition completed in November 2006, $1.5 million to higher
selling and promotion costs, $1.0 million to increased research and development spending,
approximately $1.7 million was related to foreign exchange fluctuations, and $0.5 million related
to other sources. As a percentage of service revenue, SG&A decreased by 1 point to 22.1% in the
three months ended March 31, 2007 from 23.1% in the three months ended March 31, 2006 mainly
because of substantial leverage of costs in connection with strong revenue growth.
Depreciation and amortization (D&A) expense increased by $1.7 million, or 27.0%, to $8.1
million in the three months ended March 31, 2007 from $6.4 million for the three months ended March
31, 2006, mainly due to incremental amortization expense associated with the CCT/BMR acquisition
completed in November 2006 and foreign currency fluctuations. As a percentage of service revenue,
D&A increased by 0.2 points to 4.3% in the three months ended March 31, 2007 from 4.1% in the three
months ended March 31, 2006.
Other income, net decreased by $0.4 million, or 57.9%, to $0.3 million in the three months
ended March 31, 2007 from $0.7 million in the three months ended March 31, 2006. The change was
due to lower net interest income resulting from higher interest expense, partly offset by higher
foreign exchange gains.
The Company had an effective income tax rate of 32.2% for the three months ended March 31,
2007 and 45.2 % for the three months ended March 31, 2006. The favorable movement in the
tax rate was primarily attributable to
projected and realized profitability improvements in the U.S. and other taxing jurisdictions, as
well as favorable resolution of several tax audit matters in The Netherlands which allowed the
Company to reverse a tax reserve during the quarter ended March 31, 2007. The Company has
evaluated the likelihood of unfavorable adjustments arising from other on-going reviews by various
taxing authorities and believes adequate provisions have been made in the income tax provision.
NINE MONTHS ENDED MARCH 31, 2007 COMPARED WITH NINE MONTHS ENDED MARCH 31, 2006:
Service revenue increased $91.3 million, or 20.5%, to $536.8 million for the nine months ended
March 31, 2007 from $445.5 million for the nine months ended March 31, 2006. On a geographic
basis, service revenue for the nine months ended March 31, 2007 was distributed as follows: United
States $196.1 million (36.5%), Europe $302.4 million (56.4%), and Asia & Other $38.2 million
(7.1%). For the nine months ended March 31, 2006, service revenue was distributed as follows:
United States $160.7 million (36.1%), Europe $259.2 million (58.2%), and Asia & Other $25.6
million (5.7%).
16
On a segment basis, CRS service revenue increased by $74.9 million, or 23.3%, to $396.1 million in
the nine months ended March 31, 2007 from $321.2 million in the nine months ended March 31, 2006.
Of the total $74.9 million increase, approximately $12.8 million was attributed to foreign currency
fluctuations, $12.8 million was related to incremental business from the CCT/BMR acquisition
completed in November 2006, while the remaining $49.3 million was the result of business growth
across all CRS business units. PCMS service revenue increased by $3.0 million, or 3.5%, to $87.3
million in the nine months ended March 31, 2007 from $84.3 million in the nine months ended March
31, 2006. Of the total $3.0 million increase, approximately $1.4 million was attributed to foreign
currency fluctuations and $6.3 million was the result of strong performance in the consulting
business, partly offset by a $4.7 million decline caused by weakness in the MedCom business.
Perceptive service revenue increased by $13.4 million, or 33.6%, to $53.3 million for the nine
months ended March 31, 2007 from $39.9 million in the nine months ended March 31, 2006. Of the
total $13.4 million increase, approximately $1.5 million resulted from foreign currency
fluctuations, with the remaining $11.9 million increase attributed to strong business growth across
all business lines of Perceptive.
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 $59.1 million, or 20.0%, to $354.6 million for the nine months ended
March 31, 2007 from $295.5 million in the nine months ended March 31, 2006. On a segment basis,
CRS direct costs increased by $49.5 million, or 23.4%, to $261.2 million for the nine months ended
March 31, 2007 from $211.7 million in the nine months ended March 31, 2006. Of the total $49.5
million increase, approximately $4.5 million was attributed to foreign currency fluctuations with
the remaining $45.0 million primarily due to higher labor and related costs incurred to support
higher revenue levels. As a percentage of service revenue, CRS direct costs were flat at 65.9% for
the nine months ended March 31, 2007 and March 31, 2006. PCMS direct costs increased by $3.3
million, or 5.5%, to $63.2 million in the nine months ended March 31, 2007 from $59.9 million in
the nine months ended March 31, 2006. Of the total $3.3 million increase, approximately $1.0
million was attributed to foreign currency fluctuations, $1.0 million related to severance costs in
MedCom Services, with the remaining $1.3 million primarily due to higher labor costs associated
with higher revenue levels. As a percentage of service revenue, PCMS direct costs increased by 1.3
points to 72.4% for the nine months ended March 31, 2007 from 71.1% for the nine months ended March
31, 2006. Perceptives direct costs increased $6.3 million, or 26.2%, to $30.2 million in the nine
months ended March 31, 2007 from $23.9 million in the nine months ended March 31, 2006. The
year-over-year increase in Perceptive direct costs was primarily due to higher labor costs
associated with increased staffing needed to support business growth. As a percentage of service
revenue, Perceptives direct costs decreased by 3.3 points to 56.6% in the nine months ended March
31, 2007 from 59.9% in the nine months ended March 31, 2006 primarily due to improvements in
productivity and a more favorable revenue mix. In addition, there was no counterpart to recording
compensation expense in conjunction with the buyback of the minority interest in Perceptive in the
first quarter of fiscal year 2006.
SG&A expenses increased by $14.6 million, or 13.9%, to $119.2 million in the nine-month period
ended March 31, 2007 from $104.7 million in the nine months ended March 31, 2006. Of the total
$14.6 million increase, $1.7 million was attributed to incremental expense associated with the
CCT/BMR acquisition completed in November 2006, $3.4 million in higher selling and promotion costs,
$2.8 million of increased research and development spending, approximately $4.8 million related to
foreign exchange fluctuations, and $1.9 million related to other increases. As a percentage of
service revenue, SG&A decreased by 1.3 points to 22.2% in the nine months
ended March 31, 2007 from 23.5% in the nine months ended March 31, 2006 mainly because of
substantial leveraging of costs in connection with strong revenue growth.
D&A expense increased by $3.1million, or 16.3%, to $22.3 million in the nine months ended
March 31, 2007 from $19.2 million in the nine months ended March 31, 2006, partly due to
incremental amortization expense associated with the CCT/BMR acquisition completed in November 2006
and foreign currency fluctuations. As a percentage of service revenue, D&A decreased by 0.1 point
to 4.2% in the nine months ended March 31, 2007 from 4.3% in the nine months ended March 31, 2006.
There was no restructuring activity in the nine months ended March 31, 2007. During the nine
months ended March 31, 2006, the Company recorded a $1.7 million reduction to the existing
restructuring reserve as a result of changes in assumptions primarily related to facilities
sub-leases, which was offset by $1.0 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.
17
Other income, net decreased by $0.8 million, or 32.6%, to $1.6 million in the nine months
ended March 31, 2007 from $2.4 million in the nine months ended March 31, 2006, mainly due to
higher interest expense.
The Company had an effective income tax rate of 36.4% for the nine months ended March 31, 2007
compared with 50.6% for the nine months ended March 31, 2006. The favorable movement in the tax
rate was primarily attributable to projected and realized profitability improvements in the U.S.
and other taxing jurisdictions, as well as favorable resolution of several tax audit matters in The
Netherlands which allowed the Company to reverse a tax reserve during the quarter ended March 31,
2007. The Company has evaluated the likelihood of unfavorable adjustments arising from other
on-going reviews by various taxing authorities and believes adequate provisions have been made in
the income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth, including
acquisitions, with cash flow from operations, proceeds from the sale of equity securities and
borrowings. Investing activities primarily reflect acquisition costs and capital expenditures for
information systems enhancements and leasehold improvements.
Approximately 90% 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 thirty to
sixty days notice or can delay execution of services. Clients may terminate or delay contracts for
a variety of reasons, including: merger or potential merger-related activities involving the
client, the failure of products being tested to satisfy safety requirements or efficacy criteria,
unexpected or undesired clinical results of the product, client cost reductions as a result of
budgetary limits or changing priorities, the clients decision to forego a particular study,
insufficient patient enrollment or investigator recruitment or clinical drug manufacturing problems
resulting in shortages of the product, product withdrawal following market launch or shut down of
manufacturing facilities.
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 43 days at March 31, 2007, 49 days at
June 30, 2006, and 41 days at March 31, 2006. The current year decrease in DSO was primarily due
to strong cash collections. Accounts receivable, net of the provision for losses on receivables
was $319.8 million ($176.4 million in billed accounts receivable and $143.4 million in unbilled
accounts receivable) at March 31, 2007 and $272.1 million ($152.2 million in billed accounts
receivable and $119.9 million in unbilled accounts receivable) at June 30, 2006. Deferred revenue
was $191.2 million at March 31, 2007 and $139.8 million at June 30, 2006. DSO is calculated by
adding the end-of-period balances of billed and unbilled account receivables, net of deferred
revenue and the provision for losses on receivables, then dividing the resulting amount by the sum
of total revenue plus investigator fees billed for the most recent quarter, and multiplying the
resulting fraction by the number of days in the quarter.
CASH FLOWS
Net cash provided by operating activities for the nine months ended March 31, 2007 totaled $56.6
million and was generated from $26.9 million of net income, $22.3 million related to non-cash
charges for depreciation and amortization expense, $18.4 million related to a decrease in accounts
receivable (net of the allowance for doubtful accounts and deferred revenue), $3.2 million related
to non-cash charges for stock-based compensation, and $1.6 million from other sources, which was
offset by a $10.4 million increase in current and other assets and a $5.4 million decrease in
accounts payable. 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 non-cash charges for stock-based compensation,
offset by an $11.8 million increase in accounts receivable (net of the allowance for doubtful
accounts and deferred revenue), a $2.0 million decrease in accounts payable and a $1.9 million
increase in prepaid expenses.
18
Net cash used in investing activities for the nine months ended March 31, 2007 totaled $90.6
million and consisted of $70.5 million used in business acquisitions and $26.8 million for capital
expenditures (primarily computer software and hardware and analytical equipment), offset by $6.4
million of net proceeds from sales of marketable securities and $0.3 million of proceeds from the
sale of fixed assets. 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 provided by financing activities for the nine months ended March 31, 2007 totaled $38.7
million, and consisted of $65.0 million in borrowings under lines of credit, $9.1 million generated
from proceeds related to the issuance of common stock in conjunction with the Companys stock
option and employee stock purchase plans, offset by $35.4 million used in repayments under lines of
credit and capital lease obligations. 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.
LINES OF CREDIT
The Company had in place an unsecured, uncommitted line of credit with JPMorgan Chase Bank, N.A.
for up to $70 million. On January 12, 2007, the Company entered into a $100 million unsecured
senior revolving credit facility and repaid and terminated the $70 million line of credit. As of
March 31, 2007, the amount outstanding under this Credit Agreement was $30 million. See Note 5 to
the Consolidated Financial Statements for more detail.
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 4% and 6%. 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, 2007, 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 5%
to 7%. The lines of credit are payable on demand and are supported by PAREXEL International
Corporation. At March 31, 2007, 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
Consolidated Statements of Income.
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 Item 1A 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 continue 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 $36 million in fiscal year
2007. As of March 31, 2007, the Company had spent approximately $26.8 million and expects to spend
an additional $9.2 million primarily for computer software and hardware, analytical equipment, and
leasehold improvements during the remainder of the fiscal year.
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. As of March 31, 2007, the Company had acquired 620,414 shares
at a total cost of $14.0 million under this program. There were no additional shares repurchased
during either the first nine months ended March 31, 2007 or for the period from April 1, 2007 to
May 9, 2007.
COMMITMENTS, CONTINGENCIES AND GUARANTEES
In connection with the IMC acquisition during fiscal year 2005, as discussed in Note 3 to the
Consolidated Financial Statements of the Companys 2006 10-K, the Company agreed to make additional
payments of up to $2.9 million in contingent purchase price if IMC achieved certain established
financial targets through March 31, 2008. As of March 31, 2007, 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, the Company agreed to make additional payments of up to approximately $3.0
million in contingent purchase price if Qdot achieved certain established financial targets through
June 30, 2008. In September 2006, the Company paid $0.8 million in contingent earn-out payment.
As a result of management responsibility changes, the Company reached an agreement with Qdot in
December 2006 and amended the earn-out agreement to pay a fixed additional approximate amount of
$2.1 million ($0.9 million was paid in January 2007, with the remaining $1.2 million to be paid on
December 31, 2007).
The Company has letter-of-credit agreements with banks totaling approximately $6.9 million
guaranteeing performance under various operating leases and vendor agreements.
The Company has an unsecured senior revolving credit facility for $100 million with a group of
lenders (including and managed by JPMorgan Chase Bank, N.A.) that is guaranteed by certain of the
Companys U.S. subsidiaries.
As of March 31, 2007, the Companys purchase obligations with various vendors for the purchase
of computer software and recruiting services with scheduled maturities subsequent to March 31, 2007
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1 |
|
|
1 3 |
|
|
3 5 |
|
|
More than 5 |
|
($ in thousands) |
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
years |
|
Purchase obligations |
|
$ |
39,399 |
|
|
$ |
8,893 |
|
|
$ |
14,801 |
|
|
$ |
15,705 |
|
|
|
|
|
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.
INFLATION
The Company believes the effects of inflation generally do not have a material adverse impact on
its operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities including an amendment of FASB Statement No. 115. SFAS 159 creates a fair
value option under which an entity may elect to record certain financial assets or liabilities at
fair value upon their initial recognition. Subsequent changes in fair value would be recognized in
earnings as those changes occur. The election of the fair value option would be made on a
contract-by-contract basis and would need to be supported by concurrent documentation or a
preexisting documented policy. SFAS 159 requires an entity to separately disclose the fair value of
these items on the balance sheet or in the footnotes to the financial statements and to provide
information that would allow the financial
20
statement user to understand the impact on earnings from changes in the fair value. SFAS 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007
and will be in effect for PAREXEL beginning on July 1, 2008. The Company is currently evaluating
the potential impact that the adoption of SFAS 159 will have on its consolidated financial
statements.
In September 2006, the SEC issued SAB No. 108 regarding the process of quantifying financial
statement misstatements. SAB No. 108 states that registrants should use both a balance sheet
approach and an income statement approach when quantifying and evaluating the materiality of a
misstatement. The interpretations in SAB No. 108 contain guidance on correcting errors under the
dual approach as well as provide transition guidance for correcting errors. This interpretation
does not change the requirements within SFAS No. 154, Accounting Changes and Error Correctionsa
replacement of APB No. 20 and FASB Statement No. 3, for the correction of an error on financial
statements. SAB No. 108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006. The Company has adopted SAB No. 108 effective immediately with no
impact on its financial statements.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS 157 provides
guidance for using fair value to measure assets and liabilities. The standard also responds to
investors requests for more information about (1) the extent to which companies measure assets and
liabilities at fair value, (2) the information used to measure fair value, and (3) the effect that
fair-value measurements have on earnings. SFAS 157 will apply whenever another standard requires
(or permits) assets or liabilities to be measured at fair value. The standard does not expand the
use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years
and will be in effect for PAREXEL beginning on July 1, 2008. The Company is currently evaluating
the potential impact that the adoption of SFAS 157 will have on its financial statements.
In July 2006, the FASB issued FIN. 48, Accounting for Uncertainty in Income Taxes. FIN 48
clarifies the accounting for uncertain income tax positions that are recognized in a companys
financial statements in accordance with the provisions of FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on the derecognition of uncertain positions, financial
statement classification, accounting for interest and penalties, accounting for interim periods and
new disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15,
2006 and will be in effect for PAREXEL beginning on July 1, 2007. The Company is currently
evaluating the potential impact that the adoption of FIN 48 will have on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices,
such as foreign currency rates, interest rates, and other relevant market rates or price changes.
In the ordinary course of business, the Company is exposed to market risk resulting from changes in
foreign currency exchange rates, and the Company regularly evaluates its exposure to such changes.
The 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 derived approximately 63.5% of its consolidated service revenue for the nine-month
period ended March 31, 2007 from operations outside of the U.S., of which 15.9% was denominated in
British pounds and approximately 36.5% was denominated in Euros. The Company derived approximately
63.9% of its consolidated service revenue for the nine months ended March 31, 2006 from operations
outside of the U.S., of which 16.7% was
denominated in British pounds and approximately 37.3% was denominated in Euros. 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.
21
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 (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, as well as variable to fixed interest rate swaps. Under this policy,
derivatives are accounted for in accordance with SFAS 133. The notional contract amount of these
outstanding foreign currency exchange contracts totaled approximately $116.8 million at March 31,
2007.
Occasionally, the Company enters into other foreign currency exchange contracts to offset the
impact of currency fluctuations. These foreign 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 foreign currency exchange contracts was
approximately $115.5 million at March 31, 2007. The Company does not expect gains or losses on
these contracts to have a material impact on its financial results. The potential change in the
fair value of these foreign currency exchange contracts that would result from a hypothetical
change of 10% in exchange rates would be approximately $10.9 million. During the nine-month period
ended March 31, 2007 and 2006, the Company recorded foreign exchange gains of $0.6 million and $0.5
million, respectively. 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 RATES
The Companys exposure to interest rate changes relates primarily to the level of short-term and
long-term debts and marketable securities. Short-term debts were approximately $30.5 million at
March 31, 2007 and approximately $0.5 million at June 30, 2006. Long-term debts were approximately
$0.3 million at March 31, 2007 and approximately $0.7 million at June 30, 2006. Marketable
securities were $3.6 million at March 31, 2007 and $10.0 million at June 30, 2006.
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, 2007. The term disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the 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 the cost-benefit relationship of possible controls
and procedures. Based on the evaluation of the Companys disclosure controls and procedures as of
March 31, 2007, 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 CONTROL OVER FINANCIAL REPORTING
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,
2007 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
22
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to other information in this report, the following risk factors should be
considered carefully in evaluating our Company and our 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 we may make from
time to time. If any of the following risks occur, our business, financial condition, or results
of operations would likely suffer.
Additional risks not currently known to us or other factors not perceived by us to present
significant risk to our business at this time also may impair our business operations.
THE LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY IMPACT OUR FINANCIAL
PERFORMANCE
Our clients generally can terminate their contracts with us 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 our operating results, possibly materially. We have in
the past experienced contract cancellations, which have adversely affected our operating results,
including a major Phase III cancellation during the first quarter of fiscal year 2005 and a Phase
III cancellation during the second quarter of fiscal year 2007.
Clients terminate or delay their contracts for a variety of reasons, including:
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merger or potential merger related activities involving the client; |
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failure of products being tested to satisfy safety requirements; |
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failure of products being tested to satisfy efficiency criteria; |
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products having unexpected or undesired clinical results; |
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client cost reductions as a result of budgetary limit or changing priorities; |
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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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clinical drug manufacturing problems resulting in shortages of the product; |
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product withdrawal following market launch; and |
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shut down of manufacturing facilities. |
In addition, clients may determine to 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 clients to cancel
contracts with us.
WE FACE INTENSE COMPETITION IN MANY AREAS OF OUR BUSINESS; IF WE DO NOT COMPETE EFFECTIVELY, OUR
BUSINESS WILL BE HARMED
The bio/pharmaceutical services industry is highly competitive and we face numerous competitors in
many areas of our business. If we fail to compete effectively, we may lose clients, which would
cause our business to suffer.
We primarily compete against in-house departments of pharmaceutical companies, other full service
clinical research organizations, or CROs, small specialty CROs, and to a lesser extent,
universities, teaching hospitals, and other site organizations. Some of the larger CROs against
which we compete include Quintiles Transnational Corporation, Covance, Inc. and Pharmaceutical
Product Development Inc. In addition, our PCMS business competes with a large
23
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
us. In addition, our competitors that are smaller specialized companies may compete effectively
against us because of their concentrated size and focus.
THE FIXED RATE NATURE OF OUR CONTRACTS COULD HURT OUR OPERATING RESULTS
Approximately 90% of our contracts are fixed rate. If we fail to adequately price our
contracts or if we experience significant cost overruns, our gross margins on the contracts would
be reduced and we could lose money on contracts. In the past, we have had to commit unanticipated
resources to complete projects, resulting in lower gross margins on those projects. We might
experience similar situations in the future.
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY INDUSTRY CHANGES, THE NEED
FOR OUR SERVICES COULD DECREASE
Governmental regulation of the drug, medical device and biotechnology product development process
is complicated, extensive, and demanding. A large part of our 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 our services. If companies regulated by the Food and Drug Administration
(FDA) or similar foreign regulatory authorities needed fewer of our services, we would have fewer
business opportunities and our 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 reviewers 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. 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, or 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 reduces 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 our services.
Parts of our PCMS business advises clients on how to satisfy regulatory standards for manufacturing
and clinical 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 or
clinical processes or levels of regulatory enforcement, generally, would result in fewer business
opportunities for our business in this area.
IF WE FAIL TO COMPLY WITH EXISTING REGULATIONS, OUR REPUTATION AND OPERATING RESULTS WOULD BE
HARMED
Our business is subject to numerous governmental regulations, primarily relating to worldwide
pharmaceutical product development and regulatory approval and the conduct of clinical trials. If
we fail to comply with these governmental regulations, it could result in the termination of our
ongoing research, development or sales and marketing projects, or the disqualification of data for
submission to regulatory authorities. We also could be barred from providing clinical trial
services in the future or could be subjected to fines. Any of these consequences would harm our
reputation, our prospects for future work and our operating results. In addition, we may have to
repeat research or redo trials. If we are required to repeat research or redo trials, we may be
contractually required to do so at no further cost to our clients, but at substantial cost to us.
WE MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM AND THE EXPANSION OF
MANAGED-CARE ORGANIZATIONS
Numerous governments, including the U.S. government and governments outside of the U.S. have
undertaken efforts to control growing health care costs through legislation, regulation and
voluntary agreements with medical care providers and drug companies. If these efforts are
successful, drug, medical device and biotechnology companies may react by spending less on research
and development. If this were to occur, we would have fewer business
24
opportunities and our revenues could decrease, possibly materially. In addition, new laws or
regulations may create a risk of liability, increase our costs or limit our service offerings.
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. We are 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
health care market and 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, we would have
fewer business opportunities and our revenues could decrease, possibly materially.
IF WE DO NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, OUR PRODUCTS AND SERVICES MAY BECOME
LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN OUR PERCEPTIVE BUSINESS
The biotechnology, pharmaceutical and medical device industries generally, and clinical
research specifically, are subject to increasingly rapid technological changes. Our competitors or
others might develop technologies, products or services that are more effective or commercially
attractive than our current or future technologies, products or services, or render our
technologies, products or services less competitive or obsolete. If competitors introduce superior
technologies, products or services and we cannot make enhancements to our technologies, products
and services necessary to remain competitive, our competitive position would be harmed. If we are
unable to compete successfully, we may lose clients or be unable to attract new clients, which
could lead to a decrease in our revenue.
BECAUSE WE DEPEND ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL OF OUR BUSINESS, THE
LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM OUR 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 our revenue and adversely affect our business and financial condition,
possibly materially. In both fiscal year 2006 and fiscal year 2005, our five largest clients
accounted for approximately 25% of our consolidated service revenue and no single client accounted
for 10% or more of consolidated service revenue. We expect that a small number of clients will
continue to represent a significant part of our consolidated revenue. Our contracts with these
clients generally can be terminated on short notice. We have in the past experienced contract
cancellations with significant clients.
IF OUR PERCEPTIVE 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
Our Perceptive Informatics business involves collecting, managing, manipulating and analyzing
large amounts of data, and communicating data via the Internet. In our Perceptive Informatics
business, we depend on the continuous, effective, reliable and secure operation of computer
hardware, software, networks, telecommunication networks, Internet servers and related
infrastructure. If the hardware or software malfunctions or access to data by internal research
personnel or customers through the Internet is interrupted, our Perceptive Informatics business
could suffer. In addition, any sustained disruption in Internet access provided by third parties
could adversely impact our Perceptive Informatics business.
Although the computer and communications hardware used in our Perceptive Informatics business
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, the Perceptive Informatics 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 the needs of our Perceptive Informatics customers, it could result in
a loss of or a delay in revenue and market acceptance.
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IF WE ARE UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL TRIALS OF OUR CLIENTS, OUR
CRS BUSINESS MAY SUFFER
One of the factors on which our CRS business competes is the ability to recruit patients for the
clinical studies we are 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 we manage a study for
a treatment of a particular type of cancer, our ability to conduct the study may be limited by the
number of patients that we can recruit that have that form of cancer. If multiple organizations
are conducting similar studies and competing for patients, it could also make our recruitment
efforts more difficult. If we were unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by our CRS business,
which could have a material adverse effect on our CRS business.
IF WE CANNOT RETAIN OUR HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL, OUR BUSINESS
WOULD BE HARMED
We rely on the expertise of our Chairman and Chief Executive Officer, Josef H. von Rickenbach, and
it would be difficult and expensive to find a qualified replacement with the level of specialized
knowledge of our products and services and the bio/pharmaceutical services industry. We are a
party to an employment agreement with Mr. von Rickenbach, which may be terminated by us or Mr. von
Rickenbach upon notice to the other party.
In addition, in order to compete effectively, we 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. We
may not be successful in attracting or retaining key personnel.
WE MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS AND MAY NOT HAVE ADEQUATE
INSURANCE TO COVER SUCH CLAIMS
Our 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, we seek to include indemnity provisions in our Clinical
Research Services contracts with clients and with investigators. However, we are not able to
include indemnity provisions in all of our contracts. The indemnity provisions we include in these
contracts would not cover our exposure if:
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we 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 us 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. |
We also carry insurance to cover our risk of liability. However, our 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, we may not be able to maintain or obtain liability insurance
on reasonable terms, at a reasonable cost, or in sufficient amounts to protect us against losses
due to claims.
In March 2006, we conducted a Phase I clinical trial on behalf of TeGenero AG, a German
pharmaceutical company. During the trial, six participants experienced adverse reactions to the
TeGenero compound being tested. Through March 31, 2007, we recorded approximately $1.8 million in
legal fees and other incremental costs in connection with the incident. To date, none of the
participants in the clinical trial have filed suit against us. We
carry insurance to cover risks such as this, but our insurance is subject to deductibles and
coverage limits and may not be adequate to cover claims against us. While we believe that TeGenero
is responsible to indemnify us with respect to claims related to this matter, TeGenero filed for
insolvency in July 2006, which likely will limit any recovery by us from them. In addition, while
TeGenero carried insurance with respect to this type of matter, this insurance also is subject to
deductibles and coverage limits.
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OUR BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL, AND OTHER RISKS THAT COULD NEGATIVELY
AFFECT OUR RESULTS OF OPERATIONS OR FINANCIAL POSITION
We provide most of our services on a worldwide basis. Our service revenue from non-U.S. operations
represented approximately 63.5% of total consolidated service revenue for the nine months ended
March 31, 2007 and approximately 63.9 % of total consolidated service revenue for the nine
months ended March 31, 2006. More specifically, our service revenue from operations in the United
Kingdom represented 15.9% of total consolidated service revenue for the nine months ended March 31,
2007 and 16.7 % of total consolidated service revenue for the nine months ended March 31,
2006. Our service revenue from operations in Germany represented 19.6% of total consolidated
service revenue for the nine months ended March 31, 2007 and 20.3 % of total consolidated
service revenue for the nine months ended March 31, 2006. Accordingly, our 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 our 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 or other international 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
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OUR OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND MAY CONTINUE TO FLUCTUATE IN
THE FUTURE, WHICH COULD AFFECT THE PRICE OF OUR COMMON STOCK
Our 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, our income from operations totaled $13.1 million for
the fiscal quarter ended June 30, 2006, $11.3 million for the fiscal quarter ended September 30,
2006, $13.9 million for the fiscal quarter ended December 31, 2006 and $15.5 million for the fiscal
quarter ended March 31, 2007. 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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seasonality; |
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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; |
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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 contract scope finalized during a particular period. |
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Many of these factors, such as the timing of cancellations of significant projects and exchange
rate fluctuations between quarters or years, are beyond our control.
Approximately 60-65% of our operating costs are fixed in the short term with a significant portion
of those costs related to personnel. Total personnel costs are estimated to have accounted for
approximately 80% of our total operating costs in fiscal year 2006. As a result, the effect on our
revenues of the timing of the completion, delay or loss of contracts, or the progress of client
projects, could cause our operating results to vary substantially between reporting periods.
If our operating results do not match the expectations of securities analysts and investors, the
trading price of our common stock will likely decrease.
OUR REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 63.5% of our total consolidated service revenue for the nine months ended March 31,
2007 and approximately 63.9% of our total consolidated service revenue for the nine months ended
March 31, 2006 were from non-U.S. operations. Our financial statements are denominated in U.S.
dollars. As a result, changes in foreign currency exchange rates could have and have had a
significant effect on our operating results. For example, as a result of year-over-year foreign
currency fluctuation, service revenue for the nine months ended March 31, 2007 was positively
impacted by approximately $15.7 million as compared to the nine months ended March 31, 2006.
Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several
ways, including:
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Foreign Currency Translation Risk. The revenue and expenses of our 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, 2007, 15.9% of total consolidated service revenue was denominated in
British pounds and approximately 36.5% of total consolidated service revenue was
denominated in Euros. For the nine months ended March 31, 2006, 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. Accordingly, changes in
exchange rates between foreign currencies and the U.S. dollar will affect the translation
of foreign results into U.S. dollars for purposes of reporting our consolidated results. |
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Foreign Currency Transaction Risk. We may be subjected to foreign currency transaction
risk when our foreign subsidiaries enter into contracts or incur liabilities denominated in
a currency other than the foreign subsidiaries functional (local) currency. To the extent
we are unable to shift the effects of currency fluctuations to the clients, foreign
exchange fluctuations as a result of foreign currency exchange losses could have a material
adverse effect on our results of operations. |
Although we try to limit these risks through exchange rate fluctuation provisions stated in our
service contracts, or by hedging transaction risk with foreign currency exchange contracts, we may
still experience fluctuations in financial results from our operations outside of the U.S., and may
not be able to favorably reduce the currency transaction risk associated with our service
contracts.
OUR BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND SUCH EXPANSION AND ANY FUTURE
EXPANSION COULD STRAIN OUR RESOURCES IF NOT PROPERLY MANAGED
We have expanded our business substantially in the past. Future rapid expansion could strain our
operational, human and financial resources. In order to manage expansion, we 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 we do not take these actions and are not able to manage the expanded business, the expanded
business may be less successful than anticipated, and we may be required to allocate additional
resources to the expanded business, which we would have otherwise allocated to another part of our
business.
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We may face additional risks in expanding our foreign operations. Specifically, we 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. |
WE MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS TO OUR ONGOING BUSINESS
We have made a number of acquisitions and will continue to review new acquisition opportunities.
If we are unable to successfully integrate an acquired company, the acquisition could lead to
disruptions to our business. The success of an acquisition will depend upon, among other things,
our 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; |
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identify and manage risks facing the acquired company; 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 our performance expectations,
we may have to restructure the acquired business or write-off the value of some or all of the
assets of the acquired business.
OUR EFFECTIVE INCOME TAX RATE MAY FLUCTUATE FROM QUARTER-TO-QUARTER, WHICH MAY AFFECT EARNINGS AND
EARNINGS PER SHARE
Our quarterly effective income tax rate is influenced by our projected profitability in the various
taxing jurisdictions in which we operate. Changes in the distribution of profits and losses among
taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn
could have a material adverse effect on our net income and earnings per share. Factors that affect
the effective income tax rate include, but are not limited to:
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the requirement to exclude from our 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
determined that it is more likely than not that future tax benefits will not be realized. |
Fluctuations in our effective income tax rate could cause fluctuations in our earnings and earnings
per share, which can affect our stock price.
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OUR CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF OUR ARTICLES OF ORGANIZATION, AND
BY-LAWS, AND OUR SHAREHOLDER RIGHTS PLAN, AND MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN
CONTROL OR MANAGEMENT THAT STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of our articles of organization, by-laws and our shareholder rights plan, as well as
provisions of Massachusetts law, may enable our management to resist acquisition of us by a third
party, or may discourage a third party from acquiring us. These provisions include the following:
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we have divided our board of directors into three classes that serve staggered
three-year terms; |
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we are 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 our
board of directors may only be filled by a vote of our board of directors and the number
of directors may be fixed only by our board of directors; |
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we are subject to Chapter 110F of the Massachusetts General Laws which limits our
ability to engage in business combinations with certain interested stockholders; |
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our stockholders are limited in their ability to call or introduce proposals at
stockholder meetings; and |
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our shareholder rights plan would cause a proposed acquirer of 20% or more of our
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
us or a change in our 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 our stock.
In addition, our board of directors may issue preferred stock in the future without stockholder
approval. If our board of directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. Our 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 our stock.
OUR STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH COULD LEAD TO LOSSES BY INVESTORS
The market price of our common stock has fluctuated widely in the past and may continue to do so in
the future. On May 3, 2007, the closing sale price of our common stock on the NASDAQ Global Select
Market was $40.29 per share. During the period from April 1, 2005 to March 31, 2007, our common
stock traded at prices ranging from a high of $37.68 per share to a low of $17.12 per share.
Investors in our 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 our stock could decline.
Our stock price can be affected by quarter-to-quarter variations in a number of factors including,
but not limited to:
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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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our effective income tax rate. |
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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 our common stock. Since our 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.
ITEM 6. EXHIBITS
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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. |
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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.
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PAREXEL International Corporation |
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Date: May 9, 2007
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By: /s/ Josef H. von Rickenbach |
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|
Josef H. von Rickenbach |
|
|
Chairman of the Board and Chief Executive Officer |
|
|
|
Date: May 9, 2007
|
|
By: /s/ James F. Winschel, Jr. |
|
|
|
|
|
|
|
|
James F. Winschel, Jr. |
|
|
Senior Vice President and Chief Financial Officer |
32
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 |
33