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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-27058
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
195 WEST STREET
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 487-9900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 6, 2004, there were
26,105,870 shares of PAREXEL International Corporation common stock outstanding,
excluding 258,600 shares in treasury.
PAREXEL INTERNATIONAL CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - March 31, 2004 and June 30, 2003 3
Condensed Consolidated Statements of Operations - Three months ended 4
March 31, 2004 and 2003 (Restated); Nine months ended March 31, 2004
and 2003 (Restated)
Condensed Consolidated Statements of Cash Flows - Nine months ended 5
March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results 10
of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 19
Item 4 Controls and Procedures 27
PART II. OTHER INFORMATION
Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 27
Securities
Item 5 Other Information 28
Item 6 Exhibits and Report on Form 8-K 28
SIGNATURES 29
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, JUNE 30,
2004 2003
--------- ---------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 52,135 $ 69,734
Marketable securities 31,842 12,990
Billed and unbilled accounts receivable, net 222,827 222,726
Prepaid expenses 12,082 12,087
Current deferred tax assets 27,597 27,604
Other current assets 5,001 4,936
--------- ---------
Total current assets 351,484 350,077
Property and equipment, net 65,726 61,924
Goodwill 41,403 29,803
Other intangible assets, net 11,233 5,763
Non-current deferred tax assets 10,432 10,043
Other assets 6,657 6,627
--------- ---------
Total assets $ 486,935 $ 464,237
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 235 $ 118
Accounts payable 6,951 14,462
Deferred revenue 147,581 130,650
Accrued expenses 14,447 13,766
Accrued restructuring charges - short term 7,251 8,750
Accrued employee benefits and withholdings 27,272 37,849
Current deferred tax liabilities 2,881 2,557
Income taxes payable 3,775 1,801
Other current liabilities 4,977 5,778
--------- ---------
Total current liabilities 215,370 215,731
Long-term debt 348 644
Non-current deferred tax liabilities 10,667 10,674
Other liabilities 15,114 6,092
--------- ---------
Total liabilities 241,499 233,141
--------- ---------
Minority interest in subsidiary 3,670 3,996
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized: 5,000,000 at March 31, 2004
and June 30, 2003; Series A Junior Participating Preferred Stock - 50,000
shares designated; none issued and outstanding
Common stock--$.01 par value; shares authorized: 50,000,000 at March 31, 2004
and June 30, 2003; shares issued: 26,328,331 at March 31, 2004 and
26,683,055 at June 30, 2003; shares outstanding: 26,069,731
at March 31, 2004 and 25,822,055 at June 30, 2003 273 267
Additional paid-in capital 171,711 174,734
Treasury stock, at cost; 258,600 shares at March 31, 2004
and 861,000 shares at June 30, 2003 (4,445) (8,165)
Retained earnings 70,407 63,117
Accumulated other comprehensive income/(loss) 3,820 (2,853)
--------- ---------
Total stockholders' equity 241,766 227,100
--------- ---------
Total liabilities and stockholders' equity $ 486,935 $ 464,237
========= =========
See notes to condensed consolidated financial statements.
3
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(RESTATED) (RESTATED)
Service revenue $ 139,899 $ 135,005 $ 406,110 $ 381,364
Reimbursement revenue 28,350 24,157 77,193 73,393
--------- --------- --------- ---------
168,249 159,162 483,303 454,757
Total revenue
Costs and expenses:
Direct costs 90,762 88,260 266,317 253,353
Reimbursable out-of-pocket expenses 28,350 24,157 77,193 73,393
Selling, general and administrative expenses 33,234 33,157 95,846 89,953
Depreciation and amortization 6,791 5,307 18,791 15,155
Restructuring charge 10,796 - 10,796 5,886
--------- --------- --------- ---------
Total costs 169,933 150,881 468,943 437,740
--------- --------- --------- ---------
Income (loss) from operations (1,684) 8,281 14,360 17,017
Other expense (1,468) (740) (1,473) (3,122)
--------- --------- --------- ---------
Income (loss) before provision (benefit) for
income taxes and minority interest (3,152) 7,541 12,887 13,895
Provision (benefit) for income taxes (636) 2,936 5,299 5,596
Minority interest expense (income) (32) 230 298 519
--------- --------- --------- ---------
Net income (loss) $ (2,484) $ 4,375 $ 7,290 $ 7,780
========= ========= ========= =========
Earnings (loss) per share:
Basic $ (0.10) $ 0.17 $ 0.28 $ 0.31
Diluted $ (0.10) $ 0.17 $ 0.27 $ 0.30
Shares used in computing earnings per share:
Basic 26,113 25,376 25,970 25,238
Diluted 26,113 25,825 26,720 25,511
See notes to condensed consolidated financial statements.
4
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
FOR THE NINE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,290 $ 7,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,791 15,155
Minority interest in net income of consolidated subsidiary 298 519
Loss on disposal of fixed assets 55 151
Deferred income taxes (66) 450
Changes in operating assets/liabilities 1,887 12,401
---------- ----------
Net cash provided by operating activities 28,255 36,456
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (140,981) (175,348)
Proceeds from sale of marketable securities 122,129 200,272
Acquisition of businesses (13,457) (11,201)
Proceeds from sale of fixed assets 116 417
Purchase of property and equipment (17,655) (22,288)
---------- ----------
Net cash used in investing activities (49,848) (8,148)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,318 1,907
Proceeds from issuance of subsidiary common stock 8 -
Payments to repurchase common stock (4,445) -
Repayments under credit arrangements (179) (81)
---------- ----------
Net cash provided by financing activities 702 1,826
---------- ----------
Effect of exchange rate changes on cash and cash equivalents 3,292 4,874
---------- ----------
Net increase (decrease) in cash for the period (17,599) 35,008
Cash and cash equivalents at beginning of period 69,734 22,479
---------- ----------
Cash and cash equivalents at end of period $ 52,135 $ 57,487
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 3,241 $ 12,802
Interest 3,401 2,217
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 17,536 $ 20,633
Liabilities assumed (4,079) (6,925)
---------- ----------
Cash paid and common stock issued for acquisitions $ 13,457 $ 13,708
========== ==========
See notes to condensed consolidated financial statements.
5
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
PAREXEL International Corporation ("PAREXEL" or "the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions of Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (primarily
consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months and nine
months ended March 31, 2004, are not necessarily indicative of the results that
may be expected for other quarters or the entire fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2003.
Certain prior year balances have been reclassified in order to conform to
current year presentation. Specifically, effective July 1, 2003, the Company
decided to merge the Conferences and Publishing business of the PAREXEL
Consulting Group ("PCG") with and into the Meetings and Events business of
Medical Marketing Services ("MMS") in order to eliminate duplication and improve
synergies. As a result, revenue and direct costs were moved from PCG to MMS. In
addition, the Company combined certain Clinical Research Services ("CRS") and
Corporate Information Technology groups into one organization led by the
Company's Corporate Information Systems group in order to capitalize on various
synergies in those areas. As a result, ongoing and historical expenses related
to CRS activities were shifted from CRS direct costs to selling, general and
administrative expenses.
These financials reflect a restatement of the Company's financial results for
the three and nine-month periods ended March 31, 2003 and the first two quarters
of fiscal year 2004. The restatement relates to reclassifications of certain
reimbursable expense of PCG from "Reimbursement Revenue" into "Service Revenue",
and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs." The
restatement had no impact to the Company's total revenue, expenses, operating
income, net income, or balance sheet.
THE EFFECT ON CONSOLIDATED RESULTS WAS AS FOLLOWS:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
CONSOLIDATED MARCH 31, 2003 MARCH 31, 2003
-------------- --------------
Service revenue - as reported $132,263 $373,964
Effect of adjustments 2,742 7,400
-------- --------
Service revenue - restated $135,005 $381,364
======== ========
Gross profit - as reported $ 46,745 $128,011
Effect of adjustments - -
-------- --------
Gross profit - restated $ 46,745 $128,011
======== ========
Gross margin as % of service revenue - as reported 35.3% 34.2%
Gross margin as % of service revenue - restated 34.6% 33.6%
6
THE EFFECT ON SEGMENT INFORMATION WAS AS FOLLOWS:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
THE PAREXEL CONSULTING GROUP MARCH 31, 2003 MARCH 31, 2003
-------------- --------------
Service revenue - as reported $23,439 $68,897
Effect of adjustments 2,742 7,400
------- -------
Service Revenue - restated $26,181 $76,297
======= =======
Gross profit - as reported $ 5,318 $17,528
Effect of adjustments - -
------- -------
Gross profit - restated $ 5,318 $17,528
======= =======
Gross margin as % of service revenue - as reported 22.7% 25.4%
Gross margin as % of service revenue - restated 20.3% 23.0%
Reimbursement Revenue totaling $3.5 million and $2.7 million was reclassified to
Service Revenue for the three months ended March 31, 2004 and March 31, 2003
respectively. Adjustments of the same amounts were recorded to reclassify
Reimbursable Out-of-Pocket Expenses to Direct Costs.
NOTE 2 -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income for the period by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares plus the dilutive effect of outstanding stock
options and shares issuable under the employee stock purchase plan.
Approximately 0.9 million and 1.6 million outstanding stock options were
excluded from the calculation of diluted earnings per share for the three months
ended March 31, 2004 and 2003, respectively, and approximately 1.1 million and
2.2 million outstanding stock options were excluded from the calculation of
diluted earnings per share for the nine months ended March 31, 2004 and 2003,
respectively, because they were anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ---------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) attributable to common
shares $ (2,484) $ 4,375 $ 7,290 $ 7,780
============ ============ ============ ============
BASIC EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding
26,113 25,376 25,970 25,238
============ ============ ============ ============
Basic earnings (loss) per common share $ (0.10) $ 0.17 $ 0.28 $ 0.31
============ ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock
Outstanding 26,113 25,376 25,970 25,238
Shares attributable to common stock
Options - 449 750 273
------------ ------------ ------------ ------------
26,113 25,825 26,720 25,511
============ ============ ============ ============
Diluted earnings (loss) per common share $ (0.10) $ 0.17 $ 0.27 $ 0.30
============ ============ ============ ============
7
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income (loss) has been calculated by the Company in accordance
with Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
Comprehensive income (loss) for the three months and nine months ended March 31,
2004 and 2003 were as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ---------------------------
($ IN THOUSANDS) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) $ (2,484) $ 4,375 $ 7,290 $ 7,780
Add: foreign currency translation adjustments 107 1,410 6,673 7,041
------------ ------------ ------------ ------------
Comprehensive income (loss) $ (2,377) $ 5,785 $ 13,963 $ 14,821
============ ============ ============ ============
NOTE 4 - ACQUISITIONS
Effective March 1 2004, the Company acquired the remaining outstanding shares of
3 Clinical Research AG ("3C"), a clinical research organization with expertise
in Phase I and Phase IIa Proof-Of-Concept studies in Berlin, Germany, for
approximately $12.0 million in cash. Prior to March 1, 2004, PAREXEL was a
minority shareholder of 3C. In association with this transaction, the Company
recorded as goodwill approximately $8.1 million of excess cost over the fair
value of the interest in the net assets acquired. Goodwill is subject to
impairment testing under SFAS No. 142.
NOTE 5 - STOCK-BASED COMPENSATION
The Company accounts for employee stock awards using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", as described by FASB Interpretation No. 44.
Accordingly, no compensation expense was recognized because the exercise price
of the Company's stock options was equal to the market price of the underlying
stock on the date of grant. The Company has adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" for disclosure purposes only.
If the compensation cost for the Company's stock options and the Company's
employee stock purchase plan had been determined based on the fair value at the
date of grant, as prescribed in SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income (loss) as reported $ (2,484) $ 4,375 $ 7,290 $ 7,780
Deduct: total stock-based compensation, net of tax (1,132) (744) (2,064) (1,821)
Pro forma net income (loss) $ (3,616) $ 3,631 $ 5,226 $ 5,959
============ ============ ============ ============
Pro forma net income (loss) per share:
Basic $ (0.14) $ 0.14 $ (0.20) $ 0.24
Diluted $ (0.14) $ 0.14 $ (0.20) $ 0.23
As stock options vest over several years and additional stock option grants are
expected to be made each year, the above pro forma disclosures are not
necessarily representative of pro forma effects on results of operations for
future periods.
8
NOTE 6 - SEGMENT INFORMATION
The Company is managed through four business segments: CRS, PCG, MMS, and
Perceptive Informatics, Inc. ("Perceptive"). CRS constitutes the Company's core
business and includes clinical trials management, biostatistics and data
management, as well as related medical advisory and investigator site services.
PCG provides technical expertise in such disciplines as clinical pharmacology,
regulatory affairs, industry training, and management consulting. PCG
consultants identify alternatives and propose solutions to address clients'
product development, registration, and commercialization issues. MMS provides a
full spectrum of market development, product development, and targeted
communications services in support of product launch. Perceptive provides
technology solutions to improve clients' product development and
commercialization processes. Perceptive offers a portfolio of services that
include design of web-based portals, interactive voice response systems
("IVRS"), clinical trial management systems ("CTMS"), electronic data capture
solutions, and medical imaging services. Perceptive is a majority-owned
subsidiary of the Company. As of March 31, 2004, the Company owned 98.2% of
Perceptive, based on outstanding shares of common stock, and 93.4% on a fully
diluted basis.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include selling, general, and administrative expenses,
depreciation and amortization expense, interest income (expense), other income
(expense), and income tax expense in segment profitability. Furthermore, 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.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ---------------------------
($ IN THOUSANDS) 2004 2003 2004 2003
------------- ----------- ------------ -------------
(RESTATED) (RESTATED)
Service revenue:
Clinical Research Services $ 76,798 $ 81,496 $ 234,903 $ 228,542
PAREXEL Consulting Group 29,338 26,181 80,253 76,297
Medical Marketing Services 24,755 20,749 65,028 59,563
Perceptive Informatics, Inc. 9,008 6,579 25,926 16,962
------------- ----------- ------------ -------------
$ 139,899 $ 135,005 $ 406,110 $ 381,364
============= =========== ============ =============
Gross profit on service revenue:
Clinical Research Services $ 30,552 $ 32,042 $ 92,759 $ 84,745
PAREXEL Consulting Group 7,529 5,318 19,017 17,528
Medical Marketing Services 6,651 6,701 15,837 19,764
Perceptive Informatics, Inc. 4,405 2,684 12,180 5,974
------------- ----------- ------------ -------------
$ 49,137 $ 46,745 $ 139,793 $ 128,011
============= =========== ============ =============
These financials reflect a restatement of the Company's financial results for
the three and nine-month periods ended March 31, 2003 and the first two quarters
of fiscal year 2004. The restatement relates to reclassifications of certain
reimbursable expense of PCG from "Reimbursement Revenue" into "Service Revenue",
and from "Reimbursable Out-of-Pocket Expenses" into "Direct Costs." The
restatement had no impact to the Company's total revenue, expenses, operating
income, net income, or balance sheet. See Note 1 for further discussion and
analysis.
NOTE 7 - RESTRUCTURING CHARGES
During the quarter ended March 31, 2004, the Company recorded restructuring
charges totaling $10.8 million. These charges included $3.9 million of employee
severance and related costs for eliminating approximately 157 managerial and
staff positions worldwide, $5.6 million related to newly abandoned leased
facilities, and $1.3 million related to changes in assumptions for previously
abandoned leased facilities under the Company's June 2001 restructuring plan.
During the three months ended June 30, 2003 and December 31, 2002, the Company
recorded facilities-related restructuring charges totaling $3.5 and $5.9
million, respectively, as a result of changes in prior assumptions regarding
certain leased facilities which were previously abandoned as part of the
Company's June 2001 restructuring charge. The changes in prior assumptions were
caused by a further deterioration in challenging real estate market conditions,
which made it difficult to sub-lease the abandoned facilities at previously
estimated rental rates.
9
In June 2001, the Company made certain reasonable assumptions based upon market
conditions, which indicated that sub-lease payments for these abandoned
facilities were probable. The June 2001 restructuring charge involved fourteen
properties. As of March 31, 2004, the Company has been successful in exiting or
subleasing eleven of those properties. After expending significant effort
attempting to sub-lease the remaining properties during a declining commercial
real estate market, it became apparent to the Company during fiscal year 2003
that the original assumptions for the remaining three properties were no longer
valid under current market conditions.
Current quarter activity charged against the restructuring accrual (which is
included in "Accrued Restructuring Charges - Short Term and Other Liabilities"
in the Condensed Consolidated Balance Sheet) was as follows:
BALANCE AS OF BALANCE AS OF
DECEMBER 31, 3RD QUARTER 3RD QUARTER MARCH 31,
($ IN THOUSANDS) 2003 PROVISION PAYMENTS 2004
------------- ----------- ----------- -------------
Employee severance costs $ 221 $ 3,875 $ (938) $ 3,158
Facilities-related charges 6,756 6,921 (681) 12,996
---------- ----------- ----------- ----------
$ 6,977 $ 10,796 $ (1,619) $ 16,154
========== =========== =========== ==========
NOTE 8 - STOCKHOLDER'S EQUITY
In September 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to $20.0 million of the Company's common stock.
Repurchases are made in the open market subject to market conditions. As of
March 31, 2004, the Company has acquired 1,119,600 shares at a total cost of
$12.6 million. During the period of April 1, 2004 to May 6, 2004, the Company
acquired an additional 137,600 shares at a total cost of $2.6 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information discussed below is derived from the Condensed
Consolidated Financial Statements included herein. The financial information set
forth and discussed below is unaudited but, in the opinion of management,
reflects all adjustments (primarily consisting of normal recurring adjustments)
considered necessary for a fair presentation of such information. The Company's
results of operations for a particular quarter may not be indicative of results
expected during subsequent fiscal quarters or for the entire year.
Certain prior year balances have been reclassified in order to conform to
current year presentation. Specifically, effective july 1, 2003, the Company
decided to merge the conferences and Publishing business of PCG with and into
the meetings and events business of MMS in order to eliminate duplication and
improve synergies. As a result, revenue and direct costs were moved from PCG to
MMS. In addition, the Company combined certain CRS and Corporate information
technology groups into one organization led by the Company's Corporate
Information systems group in order to capitalize on various synergies in those
areas. As a result, ongoing and historical expenses related to CRS activities
were shifted from CRS direct costs to selling, general and administrative
expenses.
During the third quarter of fiscal year 2004, the Company restated the three and
nine-month periods ended March 31, 2003 and the first two quarters of fiscal
year 2004, the effect of which had no impact to the Company's total revenue,
expenses, operating income, net income, or balance sheet. The restatement
related to reclassifications of certain reimbursable expense of PCG from
"Reimbursement Revenue" into "Service Revenue", and from "Reimbursable
Out-of-Pocket Expenses" into "Direct Costs". The reclassified amount was $8.9
million for the nine months ended March 31, 2004 and $7.4 million for the nine
months ended March 31, 2003.
The statements included in this quarterly report on form 10-Q, including the
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", may contain "forward-looking statements", within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding the adequacy of
the Company's existing capital resources and future cash flows from operations,
and statements regarding expected financial results, future growth and customer
demand. For this purpose, any statements that are not statements of historical
fact may be deemed forward-looking statements. Without limiting the foregoing,
the words "believes", "anticipates", "plans", "expects", "intends", "appears",
"will" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results, including the company's actual operating performance,
actual expense savings and other operating improvements resulting from
restructurings, and other corporate actions, to differ materially from the
results indicated by the forward-looking statements. These important factors are
discussed in greater detail under "RISK FACTORS" below and elsewhere in this
quarterly report.
10
The forward-looking statements included in this quarterly report represent the
Company's estimates as of the date of this quarterly report. The Company
specifically disclaims any obligation to update these forward-looking statements
in the future. These forward-looking statements should not be relied upon as
representing the Company's estimates or views as of any date subsequent to the
date of this quarterly report.
OVERVIEW
The Company is a leading biopharmaceutical services company, providing a broad
range of expertise in clinical research, medical marketing, consulting and
informatics and advanced technology products and services to the worldwide
pharmaceutical, biotechnology, and medical device industries. The Company's
primary objective is to provide solutions for managing the biopharmaceutical
product lifecycle with the goal of reducing the time, risk and cost associated
with the development and commercialization of new therapies. Since its founding
in 1983, PAREXEL has developed significant expertise in processes and
technologies supporting this strategy. The Company's product and service
offerings include: clinical trials management, data management, biostatistical
analysis, medical marketing, clinical pharmacology, regulatory and medical
consulting, performance improvement, industry training and publishing, web-based
portal solutions, interactive voice response systems ("IVRS"), clinical trial
management systems ("CTMS"), electronic data capture solutions, medical imaging
services, and other drug development consulting services. The Company believes
that its integrated services, depth of therapeutic area expertise, access to
patients, and sophisticated information technology, along with its experience in
global drug development and product launch services, represent key competitive
strengths.
The Company is managed through four business segments, namely, CRS, PCG, MMS and
Perceptive. CRS constitutes the Company's core business and includes clinical
trials management and biostatistics and data management, as well as related
medical advisory and investigator site services. PCG provides technical
expertise in such disciplines as clinical pharmacology, regulatory affairs,
industry training, and management consulting. PCG consultants identify
alternatives and propose solutions to address clients' product development,
registration, and commercialization issues. MMS provides a full spectrum of
market development, product development, and targeted communications services in
support of product launch. Perceptive provides technology solutions to improve
clients' product development and commercialization processes. Perceptive offers
a portfolio of services that include the design of web-based portals, IVRS,
CTMS, electronic data capture solutions, and medical imaging services.
Perceptive is a majority-owned subsidiary of the Company. As of March 31, 2004,
the Company owned 98.2% of Perceptive, based on outstanding shares of common
stock, and 93.4% on a fully diluted basis.
The Company conducts a significant portion of its operations in foreign
countries. Approximately 53.7% of the Company's service revenue for the nine
months ended March 31, 2004 and 48.2% of the Company's service revenue for the
nine months ended March 31, 2003, were from non-U.S. operations. Because the
Company's financial statements are denominated in United States ("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, 2004,
approximately 18.3% of total service revenue was denominated in British pounds
and approximately 28.2% of total service revenue was denominated in Euros. For
the nine months ended March 31, 2003, approximately 18.4% of total service
revenue was denominated in British pounds and approximately 23.7% of total
service revenue was denominated in Euros.
Approximately 90% of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Cash flows
from these contracts typically consist of a down payment required to be paid at
the time of contract execution with the balance due in installments over the
contract's duration, usually on a milestone achievement basis. Revenue from
these contracts is generally recognized as work is performed. As a result, cash
receipts do not necessarily correspond to costs incurred and revenue recognized
on contracts.
Generally, the Company's clients can terminate their contracts with the Company
upon thirty to sixty days' notice or can delay execution of services. Clients
may terminate or delay contracts for a variety of reasons, including, among
others: merger or potential merger related activities involving the client, the
failure of products being tested to satisfy safety requirements or efficacy
criteria, unexpected or undesired clinical results of the product, client cost
reductions as a result of budgetary limits or changing priorities, the client's
decision to forego a particular study, insufficient patient enrollment or
investigator recruitment, or production problems resulting in shortages of the
product.
In the fiscal year ended June 30, 2003, the Company's five largest clients
accounted for 33% of its consolidated service revenue and one client,
AstraZeneca accounted for 11% of consolidated service revenue. In the fiscal
year ended June 30, 2002, the Company's five largest clients accounted for 34%
of its consolidated service revenue, and one client, AstraZeneca, accounted for
11% of its consolidated service revenue.
11
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's financial condition and results of
operations are based on the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the U.S. The preparation of these financial statements requires the Company
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenue and expenses, and other financial information. On an
ongoing basis, the Company evaluates its estimates and judgments, including
those related to revenue recognition. The Company bases its estimates on
historical experience and on various other factors that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
While the Company's significant accounting policies are more fully described in
Note 2 to the consolidated financial statements included in Item 8 of Form 10-K
for the year ended June 30, 2003, the Company believes that the following
accounting policies are most critical to aid in fully understanding and
evaluating its reported financial results.
REVENUE
Service revenue on fixed price contracts is recognized as services are
performed. The Company measures progress on fixed price contracts using the
concept of proportional performance based upon a direct labor cost-to-cost
methodology or by the unit based output method. These methods require the
Company to estimate total expected revenue and total expected costs. Generally,
the assigned financial manager or financial analyst reviews contract estimates
on a monthly basis. Adjustments to contract estimates are made in the periods in
which the facts that require the revisions become known. Historically, there
have not been any significant variations between contract estimates and the
actual costs incurred, which were not recovered from clients. In the event that
future estimates are incorrect, they could materially impact the Company's
consolidated results of operations or financial position.
BILLED ACCOUNTS RECEIVABLE, UNBILLED ACCOUNTS RECEIVABLE AND DEFERRED REVENUE
Billed accounts receivable represent amounts for which invoices have been sent
to clients. Unbilled accounts receivable represent amounts recognized as revenue
for which invoices have not yet been sent to clients. Deferred revenue
represents amounts billed or payments received for which revenue has not yet
been earned. The Company maintains an allowance for doubtful accounts based on
historical collectability and specific identification of potential problems. In
the event the Company is unable to collect portions of its outstanding billed or
unbilled receivables, there may be a material impact to the Company's
consolidated results of operations and financial position.
INCOME TAXES
The Company's global provision for corporate income taxes is calculated using
the tax accounting rules established by SFAS No. 109 "Accounting for Income
Taxes". Income tax expense is based on the distribution of profit before tax
amongst the various taxing jurisdictions in which the Company operates, adjusted
as required by the tax laws of each taxing jurisdiction. Changes in the amount
or distribution of profits and losses between taxing jurisdictions may have a
significant impact on the Company's effective tax rate. The provision is a
combination of current-year tax liability and future tax liability/benefit that
results from differences between book and taxable income that will reverse in
future periods. Deferred tax assets and liabilities for these future tax effects
are established on the Company's balance sheet. A valuation allowance is
established if it is more likely than not that future tax benefits will not be
realized. Monthly interim tax provision calculations are prepared during the
year. Differences between these interim estimates and the final results for the
year could materially impact the Company's effective tax rate and its
consolidated financial results and financial position.
12
EMPLOYEE STOCK COMPENSATION
The Company elected to follow Accounting Principal Board Opinion No. 25,
"Accounting for Stock Options Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Company's employee stock options because
the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), requires the use of
option valuation models that were not developed for valuing employee stock
options. Under APB 25, no compensation expense is recognized if the exercise
price equals the market price of the underlying stock on the date of the grant.
If PAREXEL accounted for stock options under SFAS 123, the Company would have
recorded additional compensation expense for stock option grants to employees.
If PAREXEL were unable to account for stock options under APB 25, the Company's
financial results would be materially affected to the extent the additional
compensation expense would have to be recognized. The additional compensation
expense could vary significantly from period to period based on several factors
including the number of stock options granted and stock price fluctuations.
FOREIGN CURRENCIES
The Company derives a large portion of its service revenue from operations in
foreign countries. The Company's financial statements are denominated in U.S.
dollars. As a result, factors associated with international operations,
including changes in foreign currency exchange rates, could significantly affect
the Company's results of operations. Gains and losses on transactions
denominated in currencies other than an entity's functional currency are
reported in other income (expense). Adjustments from the translation of the
subsidiary entities' foreign functional currencies to U.S. dollars are reported
in accumulated other comprehensive income/(loss) within stockholder's equity.
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. Prior to the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142"), goodwill was amortized using the straight-line method over its expected
useful life. Subsequent to the adoption of SFAS No. 142, goodwill is subject to
annual impairment testing. The Company has assessed the impairment of goodwill
under SFAS No. 142 in fiscal year 2003. Based on this assessment, there was no
impairment identified. The Company tests for impairment at least annually
(generally in the fourth quarter) and more often if events or circumstances
warrant. Any future impairment of goodwill could have a material impact to the
Company's financial position or its results of operations.
RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are evaluated on a geographic basis. Accordingly, the
Company does not include the impact of selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income taxes in segment profitability. Service revenue, direct costs and gross
profit on service revenue for the three months and nine months ended March 31,
2004 and 2003 were as follows:
13
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE NINE MONTHS ENDED MARCH 31,
------------------------------------------- -----------------------------------------
($ IN THOUSANDS) INCREASE INCREASE
2004 2003 (DECREASE) % 2004 2003 (DECREASE) %
-------- -------- -------- -------- -------- -------- -------- ---------
(RESTATED) (RESTATED)
Service revenue:
CRS $ 76,798 $ 81,496 $ (4,698) -5.8% $234,903 $228,542 $ 6,361 2.8%
PCG 29,338 26,181 3,157 12.1% 80,253 76,297 3,956 5.2%
MMS 24,755 20,749 4,006 19.3% 65,028 59,563 5,465 9.2%
Perceptive 9,008 6,579 2,429 36.9% 25,926 16,962 8,964 52.8%
-------- -------- -------- -------- -------- --------
$139,899 $135,005 $ 4,894 3.6% $406,110 $381,364 $ 24,746 6.5%
======== ======== ======== ======== ======== ========
Direct costs:
CRS $ 46,246 $ 49,454 $ (3,208) -6.5% $142,144 $143,797 $ (1,653) -1.1%
PCG 21,809 20,863 946 4.5% 61,236 58,769 2,467 4.2%
MMS 18,104 14,048 4,056 28.9% 49,191 39,799 9,392 23.6%
Perceptive 4,603 3,895 708 18.2% 13,746 10,988 2,758 25.1%
-------- -------- -------- -------- -------- --------
$ 90,762 $ 88,260 $ 2,502 2.8% $266,317 $253,353 $ 12,964 5.1%
======== ======== ======== ======== ======== ========
Gross profit on service revenue:
CRS $ 30,552 $ 32,042 $ (1,490) -4.7% $ 92,759 $ 84,745 $ 8,014 9.5%
PCG 7,529 5,318 2,211 41.6% 19,017 17,528 1,489 8.5%
MMS 6,651 6,701 (50) -0.7% 15,837 19,764 (3,927) -19.9%
Perceptive 4,405 2,684 1,721 64.1% 12,180 5,974 6,206 103.9%
-------- -------- -------- -------- -------- --------
$ 49,137 $ 46,745 $ 2,392 5.1% $139,793 $128,011 $ 11,782 9.2%
======== ======== ======== ======== ======== ========
These financials reflect a restatement of the Company's financial results for
the three and nine-month periods ended March 31, 2003 and the first two quarters
of fiscal year 2004. The restatement relates to reclassifications of certain
reimbursable expense of PAREXEL Consulting Group from "Reimbursement Revenue"
into "Service Revenue", and from "Reimbursable Out-of-Pocket Expenses" into
"Direct Costs." The restatement had no impact to the Company's total revenue,
expenses, operating income, net income, or balance sheet. See Note 1 to the
Condensed Consolidated Financial Statements for further discussion and analysis.
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2003:
Service revenue increased by $4.9 million, or 3.6%, to $139.9 million for the
three months ended March 31, 2004 from $135.0 million for the same period one
year ago. On a geographic basis, service revenue for the three months ended
March 31, 2004 was distributed as follows: The Americas - $64.7 million (46.3%),
Europe - $70.7 million (50.5%), and Asia/Pacific - $4.5 million (3.2%). For the
three months ended March 31, 2003, service revenue was distributed as follows:
The Americas - $70.0 million (51.9%), Europe - $60.5 million (44.8%), and
Asia/Pacific - $4.5 million (3.3%). On a segment basis, CRS service revenue
decreased $4.7 million, or 5.8%, to $76.8 million for the three months ended
March 31, 2004 from $81.5 million in the same period in fiscal year 2003. Of the
5.8% total decrease, 15.9% was attributable primarily to fewer favorable
changes-in-scope and the lingering impact of a relatively low level of new
business wins in calendar year 2003, offset by positive impacts of 7.4% from
foreign currency fluctuations and 2.7% from the final reconciliation of
closed-out contracts. PCG service revenue increased by $3.1 million, or 12.1%,
to $29.3 million in the three months ended March 31, 2004 from $26.2 million in
the three months ended March 31, 2003. Of the total 12.1% increase,
approximately 10.7% was attributed to a positive impact from foreign currency
fluctuations and 3.5% to an increase in incremental service revenue associated
with the 3C acquisition completed during the third quarter of fiscal year 2004,
offset by a 2.1% decrease in service revenue primarily due to a reduction in FDA
enforcement activity. MMS service revenue increased by $4.0 million, or 19.3%,
to $24.7 million in the three-month period ended March 31, 2004 from $20.7
million in the same period one year ago. The 19.3% increase was primarily due to
the impact of signature timing and a strong rebound in demand for the group's
services as customers kicked off their new budget years. Perceptive service
revenue increased by $2.4 million, or 36.9%, to $9.0 million in the three months
ended March 31, 2004 as compared with $6.6 million in the same period one year
ago. Of the total 36.9% increase, 5.2% was attributed to a positive impact from
foreign currency fluctuations and 8.8% to an increase in revenue associated
14
with FW Pharma, which was acquired by the Company in January 2003. The remaining
22.9% increase resulted primarily from continued increased demand for the
group's medical diagnostic imaging services.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and reimbursable by, clients. It does not yield any gross profit
to the Company, nor does it have an impact on net income.
Direct costs increased by $2.5 million, or 2.8%, to $90.8 million for the three
months ended March 31, 2004 from $88.3 million in the same period last fiscal
year. On a segment basis, CRS direct costs decreased by $3.2 million, or 6.5%,
to $46.2 million for the three months ended March 31, 2004 from $49.4 million in
the same three-month period in fiscal year 2003. Of the total 6.5% decrease,
13.9% resulted from lower labor costs associated with restructuring activity,
tighter cost controls and continued improvements in quality and productivity,
partly offset by a 7.4% increase from foreign currency fluctuations. As a
percentage of service revenue, CRS direct costs improved by 0.5 points to 60.2%
for the three months ended March 31, 2004 from 60.7% for the three months ended
March 31, 2003. PCG direct costs increased $0.9 million, or 4.5%, to $21.8
million in the three months ended March 31, 2004 from $20.9 million in the same
period one year ago. Of the total 4.5% increase, foreign currency fluctuations
contributed approximately 9.9%, partially offset by a 5.4% decrease as a result
of tighter cost controls. As a percentage of service revenue, PCG direct costs
decreased by 5.4 points to 74.3% for the three months ended March 31, 2004 from
79.7% for the three months ended March 31, 2003 as a result of increased
strength in three of the group's four operating units. MMS direct costs
increased approximately $4.1 million, or 28.9%, to $18.1 million in the three
months ended March 31, 2004 from $14.0 million for the three months ended March
31, 2003. Of the total 28.9% increase, approximately 6.1% was attributed to
foreign currency fluctuations and the remaining 22.8% was caused by incremental
labor costs related to recent staff additions. As a percentage of service
revenue, MMS direct costs increased by 5.4 points to 73.1% in the three-month
period ended March 31, 2004 from 67.7% in the same period in the last fiscal
year primarily due to the impact of additional hiring in anticipation of
increased business and a change in business mix. Perceptive direct costs
increased $0.7 million, or 18.2%, to $4.6 million in the three months ended
March 31, 2004 from $3.9 million in the same period in the last fiscal year. Of
the total 18.2% increase, approximately 4.5% was attributed to foreign currency
fluctuations, 2.7% was attributed to incremental costs associated with the FW
Pharma acquisition completed during the third quarter of fiscal year 2003 and
the remaining 11.0% increase primarily due to higher labor costs associated with
increased staffing needs to support business growth. As a percentage of service
revenue, Perceptive's direct costs improved by 8.1 points to 51.1% in the three
months ended March 31, 2004 from 59.2% in the same three-month period one year
ago as a result of sharply higher revenue and continued productivity
improvements.
Selling, general and administrative ("SG&A") expenses remained flat at $33.2
million in both the three-month periods ended March 31, 2004 and 2003. As a
percentage of service revenue, SG&A improved by 0.8 points to 23.8% in the three
months ended March 31, 2004 from 24.6% in the same period one year ago. The
improvement was primarily due to tighter cost controls and reduced discretionary
spending.
Depreciation and amortization ("D&A") expense increased by $1.5 million, or
28.0%, to $6.8 million for the three months ended March 31, 2004 from $5.3
million for the same period in the last fiscal year. Of the total 28.0%
increase, 13.9% was attributed to impairment charges associated with abandoned
leased facilities and other fixed assets, and the remaining 14.1% was primarily
due to foreign currency fluctuations and an increased level of capital
expenditures in the fourth quarter of fiscal year 2003. As a percentage of
service revenue, D&A was 4.9% for the three months ended March 31, 2004 and 3.9%
for the three months ended March 31, 2003.
During the quarter ended March 31, 2004, the Company recorded restructuring
charges totaling $10.8 million. These charges included $3.9 million of employee
severance and related costs for eliminating approximately 157 managerial and
staff positions worldwide, $5.6 million related to newly abandoned leased
facilities, and $1.3 million related to changes in assumptions for previously
abandoned leased facilities. There were no restructuring charges recorded during
the three months ended March 31, 2003.
Income from operations decreased by $10.0 million to a loss of $1.7 million for
the three months ended March 31, 2004 from income of $8.3 million in the same
period one year ago primarily due to the reasons noted in the preceding
paragraphs.
Total other expense increased by $0.7 million, to $1.4 million in the three
months ended March 31, 2004 from $0.7 million in the same three-month period in
the last fiscal year primarily due to higher foreign currency transaction
exchange losses and a one-time charge associated with a vendor dispute.
15
The Company had an effective income tax rate of negative 20.2% for the three
months ended March 31, 2004 and 38.9% for the three months ended March 31, 2003.
The decline was primarily due to this quarter's restructuring charge as noted
above and a re-assessment of tax reserves based on current tax exposure.
NINE MONTHS ENDED MARCH 31, 2004 COMPARED WITH NINE MONTHS ENDED MARCH 31, 2003:
Service revenue increased by $24.7 million, or 6.5%, to $406.1 million for the
nine months ended March 31, 2004 from $381.4 million in the same period one year
ago. On a geographic basis, service revenue for the nine months ended March 31,
2004 was distributed as follows: The Americas - $190.6 million (46.9%), Europe -
$200.3 million (49.3%), and Asia/Pacific - $15.2 million (3.8%). For the nine
months ended March 31, 2003, service revenue was distributed as follows: The
Americas - $199.8 million (52.4%), Europe - $167.6 million (43.9%), and
Asia/Pacific - $14.0 million (3.7%). On a segment basis, CRS service revenue
increased by $6.4 million, or 2.8%, to $234.9 million for the nine months ended
March 31, 2004 from $228.5 million in the same period in fiscal year 2003. Of
the total 2.8% increase, approximately 7.1% was attributed to the positive
impact of foreign currency fluctuations, partially offset by a 4.3% decrease in
revenue caused by signing of fewer favorable changes-in-scope, and the lingering
impact of a relatively low level of new business wins in calendar year 2003. PCG
service revenue for the nine months ended March 31, 2004 increased by $4.0
million, or 5.2%, to $80.3 million for the nine months ended March 31, 2004 from
$76.3 million in the same period one year ago. Of the total 5.2% increase,
approximately 10.9% was attributed to the positive impact of foreign currency
fluctuations, partly offset by a 5.7% decrease in revenue primarily due to a
reduction in FDA enforcement activity and reduced levels of discretionary
spending by biopharmaceutical companies, which impacted the regulatory and
consulting segments of the PCG business as compared with the same nine-month
period in the last fiscal year. MMS service revenue increased by $5.5 million,
or 9.2%, to $65.0 million in the nine-month period ended March 31, 2004 from
$59.5 million in the same period one year ago. Of the total 9.2% increase, 1.3%
was attributed to incremental revenue from the Pracon and HealthIQ business,
which was acquired by the Company in November 2002, and the remaining 7.9% was
primarily due to a strong rebound in demand for the group's services as
customers kicked off their new budget years during the third quarter of this
fiscal year. Perceptive service revenue increased by $9.0 million, or 52.8%, to
$25.9 million in the nine months ended March 31, 2004 as compared with $16.9
million in the same period one year ago. Of the total 52.8% increase, 31.7% was
attributed to incremental revenue associated with the FW Pharma business, which
was acquired by the Company in January 2003, approximately 4.9% was attributed
to the positive impact of foreign currency fluctuations, and the remaining 16.2%
primarily resulted from a continued increased demand for the group's medical
diagnostic imaging services.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and reimbursable by, clients. It does not yield any gross profit
to the Company, nor does it have an impact on net income.
Direct costs increased by $13.0 million, or 5.1%, to $266.3 million for the nine
months ended March 31, 2004 from $253.3 million in the same period last fiscal
year. On a segment basis, CRS direct costs decreased $1.7 million, or 1.1%, to
$142.1 million for the nine months ended March 31, 2004 from $143.8 million in
the same nine-month period in fiscal year 2003. Of the total 1.1% decrease,
10.1% resulted from tighter cost controls, continued improvements in quality and
productivity, and reduced loss reserve requirements related to the Company's
success in resolving aged receivable issues, partially offset by a 9.0% increase
caused by foreign currency fluctuations. As a percentage of service revenue, CRS
direct costs for the nine months ended March 31, 2004 improved by 2.4 points to
60.5% in the nine months ended March 31, 2004 from 62.9% in the same period in
the last fiscal year primarily due to tighter cost controls and continued
improvements in quality and productivity. PCG direct costs increased $2.4
million, or 4.2%, to $61.2 million in the nine months ended March 31, 2004 from
$58.8 million in the same period one year ago. Of the total 4.2% increase,
foreign currency fluctuations contributed approximately 10.8%, partially offset
by a 6.6% decrease in direct costs from the same nine-month period in fiscal
year 2003, as a result of tighter cost controls. As a percentage of service
revenue, PCG direct costs for the nine months ended March 31, 2004 decreased by
0.7 points to 76.3% in the nine-month period ended March 31, 2004 from 77.0% in
the same period one year ago. MMS direct costs increased $9.4 million, or 23.6%,
to $49.2 million in the nine months ended March 31, 2004 from $39.8 million for
the nine months ended March 31, 2003. Of the total 23.6% increase, approximately
4.1% was attributed to foreign currency fluctuations, with the remaining 19.5%
primarily due to additional hiring in anticipation of increased business. As a
percentage of service revenue, MMS direct costs increased by 8.8 points to 75.6%
in the nine months ended March 31, 2004 from 66.8% in the same period one year
ago primarily reflecting the increased costs described above, coupled with a
less favorable revenue mix. Perceptive direct costs increased by $2.8 million,
or 25.1%, to $13.7 million in the nine months ended March 31, 2004 from $11.0
million in the same period in the last fiscal year. Of the total 25.1% increase,
approximately 4.1% was attributed to foreign currency fluctuations and 9.1% was
attributed to incremental costs associated with the FW Pharma acquisition
completed in January 2003, with the remaining 11.9% increase primarily due to
increased labor costs associated with increased staffing needs to support
business growth. As a percentage of service revenue, Perceptive's direct costs
for the nine
16
months ended March 31, 2004 decreased by 11.8 points to 53.0% in the nine-month
period ended March 31, 2004 from 64.8% in the same period one year ago primarily
due to sharply higher revenue and continued productivity improvements.
SG&A expenses increased by $5.9 million, or 6.6%, to $95.8 million for the nine
months ended March 31, 2004 from $89.9 million in the same period in the last
fiscal year primarily due to foreign currency fluctuations. As a percentage of
service revenue, SG&A was flat at 23.6% in both of the nine-month periods ended
March 31, 2004 and 2003.
D&A expense increased by $3.6 million, or 24.0%, to $18.8 million for the nine
months ended March 31, 2004 from $15.2 million for the same period in the last
fiscal year. Of the total 24.0% increase, 4.9% was attributed to impairment
charges associated with abandoned leased facilities and other fixed assets, and
the remaining 19.1% was primarily due to foreign currency fluctuations and a
higher level of depreciation expense as a result of an increase in capital
spending during the second half of fiscal year 2003. As a percentage of service
revenue, D&A was 4.6% for the nine months ended March 31, 2004 and 4.0% for the
same period one year ago.
During the nine months ended March 31, 2004, the Company recorded restructuring
charges totaling $10.8 million. These charges were all recorded in the quarter
ended March 31, 2004, and included $3.9 million of employee severance and
related costs for eliminating approximately 157 managerial and staff positions
worldwide, $5.6 million related to newly abandoned leased facilities, and $1.3
million related to changes in assumptions for previously abandoned leased
facilities. During the nine months ended March 31, 2003, the Company recorded a
facilities-related restructuring charge totaling $5.9 million, as a result of
changes in prior assumptions regarding certain leased facilities which were
previously abandoned as part of the Company's June 2001 restructuring charge.
The changes in prior assumptions were caused by challenging real estate market
conditions, which made it difficult to sub-lease the abandoned facilities,
especially at previously estimated rental rates.
Income from operations decreased by $2.6 million, or 15.6%, to $14.4 million for
the nine months ended March 31, 2004 from $17.0 million in the same period one
year ago primarily due to an increased level of restructuring charges and the
other reasons noted in the preceding paragraphs. Income from operations
decreased as a percentage of service revenue to 3.5% for the nine months ended
March 31, 2004 from 4.5% for the same period in the last fiscal year.
Total other income (expense) improved by $1.6 million to $(1.5) million in the
nine months ended March 31, 2004 as compared with $(3.1) million in the same
nine-month period ended March 31, 2003, primarily due to lower foreign currency
transaction exchange losses.
The Company had an effective income tax rate of 41.1% for the nine months ended
March 31, 2004 and 40.3% for the nine months ended March 31, 2003. Tax rates are
a function of profitability in the various taxing jurisdictions in which the
Company does business. A valuation allowance that had been previously
established for certain future foreign income tax benefits related to income tax
loss carryforwards and temporary tax adjustments was released during the second
quarter of this fiscal year based on an assessment that it is more likely than
not that these benefits will be realized.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth,
including acquisitions, with cash flow from operations and proceeds from the
sale of equity securities. Investing activities primarily reflect acquisition
costs and capital expenditures for information systems enhancements and
leasehold improvements.
Approximately 90% of the Company's contracts are fixed price, with some variable
components, and range in duration from a few months to several years. Cash flow
from these contracts typically consists of a down payment required to be paid at
the time of contract execution with the balance due in installments over the
contract's duration, usually on a milestone achievement basis. Revenue from
these contracts is generally recognized as work is performed. As a result, cash
receipts do not necessarily correspond to costs incurred and revenue recognized
on contracts.
17
DAYS SALES OUTSTANDING
The Company's operating cash flow is heavily influenced by changes in the levels
of billed and unbilled receivables and deferred revenue. These account balances
as well as days sales outstanding ("DSO") in accounts receivable, net of
deferred revenue, can vary based on contractual milestones and the timing and
size of cash receipts. DSO in accounts receivable, net of deferred revenue, was
37 days at March 31, 2004 compared with 45 days at June 30, 2003. The decrease
in DSO at March 31, 2004 as compared with June 30, 2003 primarily resulted from
continued improvement in billing practices and increased collection activities,
including resolution and collection of aged accounts receivable. Accounts
receivable, net of the allowance for doubtful accounts was $222.8 million
($124.5 million in billed accounts receivable and $98.3 million in unbilled
accounts receivable) at March 31, 2004 and $222.7 million ($144.0 million in
billed accounts receivable and $78.7 million in unbilled accounts receivable) at
June 30, 2003. Deferred revenue was $147.6 million at March 31, 2004 and $130.7
million at June 30, 2003. DSO is calculated by adding the end-of-period balances
for billed and unbilled account receivables, net of deferred revenue and the
allowance for doubtful accounts, then dividing the resulting amount by the sum
of total revenue plus investigator fees billed for the most recent quarter, and
multiplying the resulting fraction by the number of days in the quarter.
CASH FLOWS
Net cash provided by operating activities for the nine months ended March 31,
2004 totaled $28.3 million and was generated from $18.8 million related to
non-cash charges for depreciation and amortization expense, a $17.1 million
decrease in accounts receivable (net of the allowance for doubtful accounts and
deferred revenue), $7.3 million of net income, and $1.2 million from other
sources, partially offset by a $7.7 million decrease in accounts payable, a $4.3
million increase in other assets, and a $4.1 million decrease in liabilities.
For the nine months ended March 31, 2003, net cash provided by operating
activities was $36.5 million and was generated from a $20.5 million decrease in
accounts receivable (net of the allowance for doubtful accounts and deferred
revenue), $15.2 million related to non-cash charges for depreciation and
amortization expense, and $7.8 million of net income, offset by a $3.7 million
decrease in accounts payable and a $3.3 million increase in other assets.
Net cash used in investing activities for the nine months ended March 31, 2004
totaled $49.8 million and consisted of $18.8 million used in the purchase of
marketable securities, $17.6 million used for capital expenditures (primarily
computer hardware and software), and $13.4 million used for the acquisition of
3C and for the purchase of additional capital stock of FARMOVS, a majority owned
subsidiary of the Company. Net cash used in investing activities for the nine
months ended March 31, 2003 totaled $8.1 million and consisted of $22.3 million
used for capital expenditures (primarily computer software/hardware and
leasehold improvements and $11.2 million used for the acquisitions of Pracon &
HealthIQ and FW Pharma, offset by $25.0 million of net proceeds from the sale of
marketable securities and $0.4 million in proceeds from the sale of fixed
assets.
Net cash provided by financing activities for the nine months ended March 31,
2004 totaled $0.7 million, and was generated from $5.3 million in proceeds
related to the issuance of common stock in conjunction with the Company's stock
option and employee stock purchase plans, offset by $4.4 million used to
repurchase the Company's common stock pursuant to its stock repurchase program,
and $0.2 million of other items. For the nine months ended March 31, 2003, net
cash provided by financing activities totaled $1.8 million, and was primarily
generated from proceeds related to the issuance of common stock associated with
the Company's stock option and employee stock purchase plans.
LINES OF CREDIT
The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro
12.0 million. This line of credit is not collateralized, is payable on demand,
and bears interest at a rate ranging between 3% and 5%. The Company entered into
this line of credit primarily to facilitate business transactions with the bank.
At March 31, 2004 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
$1.7 million. These lines are used as overdraft protection and bear interest at
rates ranging from 4% to 6%. The lines of credit are payable on demand and are
supported by PAREXEL International Corporation. At March 31, 2004, the Company
had approximately $1.7 million available credit 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 interest calculations. Each legal entity owned
by the Company and party to this arrangement remains the owner of either a
credit or debit balance.
18
Therefore, interest income is earned in legal entities with credit balances,
while interest expense is charged in legal entities with debit balances. Based
on the pool's overall balance, the bank than recalculates the overall interest
to be charged or earned, compares this amount with the sum of interest amounts
already charged/earned per account and pays/charges the difference to the
entities. Interest income and interest expense are included in "other income
(loss), net" of the Company's condensed consolidated statements of operations.
FINANCING NEEDS
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company's principal source of cash is from contracts with clients. If the
Company were unable to generate new contracts with existing and new clients or
the level of contract cancellations increased, the Company's revenue and cash
flow would be adversely affected (see "Risk Factors" for further detail). Absent
a material adverse change in the level of the Company's new business bookings or
contract cancellations, PAREXEL believes that its existing capital resources
together with cash flow from operations and borrowing capacity under existing
lines of credit will be sufficient to meet its foreseeable cash needs over both
the next twelve months and the next five years.
In the future, the Company expects to consider acquiring businesses to enhance
its service offerings, expand its therapeutic expertise, and/or increase its
global presence. Any such acquisitions may require additional external
financing, and the Company may from time to time seek to obtain funds from
public or private issuances of equity or debt securities. The Company may be
unable to secure such financing on terms acceptable to the Company.
GUARANTEES
The Company has letter-of-credit agreements with banks totaling approximately
$1.0 million guaranteeing performance under various operating leases and vendor
agreements.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to the
Company.
RELATED PARTY TRANSACTIONS
During the third quarter of fiscal year 2004, the Company disposed of a small
business by closing an asset sale arrangement with a former employee. In
association with the transaction, the buyer issued a four-year promissory note
to the Company. Payments on the promissory note are due on a quarterly basis,
commencing on June 30, 2004.
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 rate or price changes. In the ordinary course of business, the Company is
exposed to market risk resulting from changes in foreign currency exchange
rates, and the Company regularly evaluates its exposure to such changes. The
Company's overall risk management strategy seeks to balance the magnitude of the
exposure and the costs and availability of appropriate financial instruments.
FOREIGN CURRENCY EXCHANGE RATES
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts or incur liabilities
denominated in a currency other than the foreign subsidiary's functional
currency. For the nine months ended March 31, 2004, approximately 18.3% of total
service revenue was denominated in British pounds and approximately 28.2% of
total service revenue was denominated in Euros. The Company enters into foreign
currency exchange contracts to offset the impact of currency fluctuations. Such
contracts are not treated as hedges for accounting purposes. The notional
contract amount of outstanding currency exchange contracts was approximately
$11.2 million as of March 31, 2004. The potential loss in the fair value of
these currency exchange contracts that would result from a hypothetical change
of 10% in exchange rates would be approximately $1.2 million.
19
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business,
including forward-looking statements made in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other forward-looking statements that the Company may make from
time to time. If any of the following risks actually occur, the Company's
business, financial condition, or results of operations would likely suffer.
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY
IMPACT THE COMPANY'S FINANCIAL PERFORMANCE
The Company's clients generally can terminate their contracts with the Company
upon thirty to sixty days notice or can delay execution of services. The loss or
delay of a large contract or the loss or delay of multiple contracts could
adversely affect its operating results, possibly materially. The Company has in
the past experienced contract cancellations, which have adversely affected its
operating results. In both the fiscal years 2003 and 2002, AstraZeneca accounted
for 11% of the Company's consolidated service revenue. If the Company's largest
client terminated all of its contracts with the Company, it would adversely
affect the Company's operating results, possibly materially.
Clients terminate or delay their contracts for a variety of reasons, including,
but not limited to:
- merger or potential merger related activities;
- failure of products being tested to satisfy safety requirements;
- failure of products being tested to prove effective;
- products having unexpected or undesired clinical results;
- client decisions to forego a particular study, perhaps for
economic reasons;
- insufficient patient enrollment in a study;
- insufficient investigator recruitment;
- production problems which cause shortages of the product;
- product withdrawal following market launch; and
- manufacturing facility shut down.
In addition, the Company believes that companies regulated by the FDA may
proceed with fewer clinical trials or conduct them without the assistance of
biopharmaceutical services companies if they are trying to reduce costs as a
result of budgetary limits or changing priorities. These factors may cause such
companies to cancel contracts with biopharmaceutical services companies.
THE COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE
COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED
The biopharmaceutical services industry is highly competitive, and the Company
faces numerous competitors in many areas of its business. If the Company fails
to compete effectively, the Company may lose clients, which would cause its
business to suffer.
The Company primarily competes against in-house departments of pharmaceutical
companies, other full service biopharmaceutical services companies, Contract
Research Organizations ("CROs"), small specialty CROs, and to a lesser extent,
universities, teaching hospitals, and other site organizations. Some of the
larger CROs against which the Company competes include Quintiles Transnational
Corporation, Covance, Inc. and Pharmaceutical Product Development Inc. In
addition, the Company's PCG and MMS businesses also compete with a large and
fragmented group of specialty service providers, including
advertising/promotional companies, major consulting firms with pharmaceutical
industry groups and smaller companies with pharmaceutical industry focus.
Perceptive, a majority owned subsidiary of the Company, competes primarily with
biopharmaceutical services companies, information technology companies and other
software companies. Some of these competitors, including the in-house
departments of pharmaceutical companies, have greater capital, technical and
other resources than the Company. In addition, those of the Company's
competitors that are smaller specialized companies may compete effectively
against the Company because of their concentrated size and focus.
20
THE FIXED PRICE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
Approximately 90% of the Company's contracts are at fixed prices. As a result,
the Company bears the risk of cost overruns. If the Company fails to adequately
price its contracts or if the Company experiences significant cost overruns, its
gross margins on the contract would be reduced and the Company could lose money
on contracts. In the past, the Company has had to commit unanticipated resources
to complete projects, resulting in lower gross margins on those projects. The
Company might experience similar situations in the future.
IF GOVERNMENTAL REGULATION OF THE DRUG, MEDICAL DEVICE AND BIOTECHNOLOGY
INDUSTRY WERE STREAMLINED OR RELAXED, THE NEED FOR THE COMPANY'S SERVICES COULD
DECREASE
Governmental regulation of the drug, medical device and biotechnology product
development process is complicated, extensive, and demanding. A large part of
the Company's business involves assisting pharmaceutical and biotechnology
companies through the regulatory approval process. Changes in regulations, that,
for example, streamline procedures or relax approval standards, could eliminate
or reduce the need for the Company's services. If companies needed fewer of
PAREXEL's services, the Company would have fewer business opportunities and its
revenues would decrease, possibly materially.
In the U.S., the FDA and the Congress have attempted to streamline the
regulatory process by providing for industry user fees that fund additional
reviewer hires and better management of the regulatory review process. In
Europe, governmental authorities have moved towards common standards for
clinical testing of new drugs throughout the European Union by adopting
standards for Good Clinical Practice ("GCP") and by making the clinical trial
application and approval process more uniform across member states starting in
May 2004. In the past several years, Japan also has adopted GCP. The FDA has had
GCP in place as a regulatory standard and requirement for new drug approval for
many years. The U.S., Europe and Japan have also collaborated in the
11-year-long International Conference on Harmonization ("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 for marketing
applications that eliminates the need to tailor the format to each region. Such
efforts and similar efforts in the future that streamline the regulatory process
may reduce the demand for the Company's services.
For example, parts of PAREXEL's PCG business advise clients on how to satisfy
regulatory standards for manufacturing processes and on other matters related to
the enforcement of government regulations by the FDA and other regulatory
bodies. Any reduction in levels of review of manufacturing processes or levels
of regulatory enforcement, generally, would result in fewer business
opportunities for the PCG business in this area.
IF THE COMPANY FAILS TO COMPLY WITH EXISTING REGULATIONS, ITS REPUTATION AND
OPERATING RESULTS WOULD BE HARMED
The Company's business is subject to numerous governmental regulations,
primarily relating to pharmaceutical product development and the conduct of
clinical trials. If the Company fails to comply with these governmental
regulations, it could result in the termination of the Company's ongoing
research, development or sales and marketing projects, or the disqualification
of data for submission to regulatory authorities. The Company also could be
barred from providing clinical trial services in the future or be subjected to
fines. Any of these consequences would harm the Company's reputation, its
prospects for future work and its operating results. In addition, the Company
may have to repeat research or redo trials. The Company may be contractually
required to take such action at no further cost to the customer, but at
substantial cost to the Company.
THE COMPANY MAY LOSE BUSINESS OPPORTUNITIES AS A RESULT OF HEALTH CARE REFORM
AND THE EXPANSION OF MANAGED CARE ORGANIZATIONS
Numerous governments, including the U.S. government and governments outside of
the U.S., have undertaken efforts to control growing health care costs through
legislation, regulation and voluntary agreements with medical care providers and
drug companies. If these efforts are successful, pharmaceutical, medical device
and biotechnology companies may react by spending less on research and
development. If this were to occur, the Company would have fewer business
opportunities and its revenues could decrease, possibly materially.
For instance, in the past, the U.S. Congress has entertained several
comprehensive health care reform proposals. The proposals were generally
intended to expand health care coverage for the uninsured and reduce the growth
of total health care expenditures. While the U.S. Congress has not yet adopted
any comprehensive reform proposals, members of Congress may raise similar
proposals in the future. The Company is unable to predict the likelihood that
health care reform proposals will be enacted into law.
21
In addition to health care reform proposals, the expansion of managed care
organizations in the healthcare market may result in reduced spending on
research and development. Managed care organizations' efforts to cut costs by
limiting expenditures on pharmaceuticals and medical devices could result in
pharmaceutical, biotechnology and medical device companies spending less on
research and development. If this were to occur, the Company would have fewer
business opportunities and its revenues could decrease, possibly materially.
NEW AND PROPOSED LAWS AND REGULATIONS REGARDING CONFIDENTIALITY OF PATIENT
INFORMATION COULD RESULT IN INCREASED RISKS OF LIABILITY OR INCREASED COSTS TO
THE COMPANY, OR COULD LIMIT THE COMPANY'S SERVICE OFFERINGS
The confidentiality and release of patient-specific information are subject to
government regulation. Under the Health Insurance Portability and Accountability
Act of 1996, or HIPAA, the U.S. Department of Health and Human Services has
issued regulations mandating heightened privacy and confidentiality protections.
The federal government and state governments have proposed or adopted additional
legislation governing the possession, use and dissemination of medical record
information and other personal health information. Proposals being considered by
state governments may contain privacy and security provisions that are more
burdensome than the federal regulations. In order to comply with these
regulations, the Company may need to implement new security measures, which may
require the Company to make substantial expenditures or cause the Company to
limit the products and services it offers. In addition, if the Company violates
applicable laws, regulations or duties relating to the use, privacy or security
of health information, it could be subject to civil or criminal liability.
IF THE COMPANY DOES NOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES, ITS PRODUCTS
AND SERVICES MAY BECOME LESS COMPETITIVE OR OBSOLETE, ESPECIALLY IN THE
COMPANY'S PERCEPTIVE INFORMATICS BUSINESS
The biotechnology, pharmaceutical and medical device industries generally, and
clinical research specifically, are subject to increasingly rapid technological
changes. The Company's competitors or others might develop technologies,
products or services that are more effective or commercially attractive than the
Company's current or future technologies, products or services, or render its
technologies, products or services less competitive or obsolete. If competitors
introduce superior technologies, products or services and the Company cannot
make enhancements to its technologies, products and services necessary to remain
competitive, its competitive position will be harmed. If the Company is unable
to compete successfully, it may lose customers or be unable to attract new
customers, which could lead to a decrease in revenue.
BECAUSE THE COMPANY DEPENDS ON A SMALL NUMBER OF INDUSTRIES AND CLIENTS FOR ALL
OF ITS BUSINESS, THE LOSS OF BUSINESS FROM A SIGNIFICANT CLIENT COULD HARM ITS
BUSINESS, REVENUE, AND FINANCIAL CONDITION
The loss of, or a material reduction in the business of, a significant client
could cause a substantial decrease in the Company's revenue and adversely affect
its business and financial condition, possibly materially. In the fiscal year
ended June 30, 2003, the Company's five largest clients accounted for 33% of its
consolidated service revenue, and one client, AstraZeneca, accounted for 11% of
consolidated service revenue. In the fiscal year ended June 30, 2002, the
Company's five largest clients accounted for 34% of its consolidated service
revenue, and one client, AstraZeneca, accounted for 11% of its consolidated
service revenue. The Company expects that a small number of clients will
continue to represent a significant part of its revenue. The Company's contracts
with these clients generally can be terminated on short notice. The Company has
in the past experienced contract cancellations with significant clients.
IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN
CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE,
SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS
WILL BE HARMED
The Company's Perceptive Informatics business involves collecting, managing,
manipulating and analyzing large amounts of data, and communicating data via the
Internet. Perceptive depends on the continuous, effective, reliable and secure
operation of its computer hardware, software, networks, telecommunication
networks, Internet servers and related infrastructure. If Perceptive's hardware
or software malfunctions or access to Perceptive's data by internal research
personnel or customers through the Internet is interrupted, its business could
suffer. In addition, any sustained disruption in Internet access provided by
third parties could adversely impact Perceptive's business.
22
Although Perceptive's computer and communications hardware is protected through
physical and software safeguards, it is still vulnerable to fire, storm, flood,
power loss, earthquakes, telecommunications failures, physical or software
break-ins, and similar events. In addition, Perceptive's software products are
complex and sophisticated, and could contain data, design or software errors
that could be difficult to detect and correct. If Perceptive fails to maintain
and further develop the necessary computer capacity and data to support its
customers' needs, it could result in loss of or delay in revenue and market
acceptance.
IF THE COMPANY IS UNABLE TO ATTRACT SUITABLE WILLING VOLUNTEERS FOR THE CLINICAL
TRIALS OF ITS CLIENTS, ITS CLINICAL RESEARCH SERVICES BUSINESS MAY SUFFER
One of the factors on which the Company's CRS business competes is the ability
to recruit patients for the clinical studies the Company is managing. These
clinical trials rely upon the ready accessibility and willing participation of
volunteer subjects. These subjects generally include volunteers from the
communities in which the studies are conducted. Although to date these
communities have provided a substantial pool of potential subjects for research
studies, there may not be enough patients available with the traits necessary to
conduct the studies. For example, if the Company manages a study for a treatment
of a particular type of cancer, its ability to conduct the study may be limited
by the number of patients that it can recruit that have that form of cancer. If
multiple organizations are conducting similar studies and competing for
patients, it could also make the Company's recruitment efforts more difficult.
If the Company is unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by
its CRS business, which could have a material adverse effect on its CRS
business.
IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of its Chairman and Chief Executive Officer,
Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and
expensive to find a qualified replacement with the level of specialized
knowledge of the Company's products and services and the biopharmaceutical
services industry. The Company is a party to an employment agreement with Mr.
von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach
upon notice to the other party.
In addition, in order to compete effectively, the Company must attract and
maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees, is intense. The Company may not
be successful in attracting or retaining key personnel.
THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS
AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS
The Company's Clinical Research Services business primarily involves the testing
of experimental drugs or other regulated FDA products on consenting human
volunteers pursuant to a study protocol. These services involve 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 new product by physicians. In
some cases, these patients are already seriously ill and are at risk of further
illness or death.
In order to mitigate the risk of liability, the Company seeks to include
indemnity provisions in its Clinical Research Services contracts with clients.
However, the Company is not able to include indemnity provisions in all of its
contracts. The indemnity provisions the Company includes in these contracts
would not cover its exposure if:
- the Company had to pay damages or incur defense costs in
connection with a claim that is outside the scope of an
indemnity; or
- a client failed to indemnify the Company in accordance with the
terms of an indemnity agreement because it did not have the
financial ability to fulfill its indemnification obligation or
for any other reason.
The Company also carries product liability insurance to cover its risk of
liability. However, the Company's insurance is subject to deductibles and
coverage limits and may not be adequate to cover product liability claims. In
addition, product liability coverage is expensive. In the future, the Company
may not be able to maintain or obtain product liability insurance on reasonable
terms, at a reasonable cost or in sufficient amounts to protect it against
losses due to product liability claims.
23
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS OR FINANCIAL
POSITION
The Company provides most of its services worldwide. The Company's service
revenue from non-U.S. operations represented approximately 53.7% of total
service revenue for the nine months ended March 31, 2004 and approximately 48.2%
of total service revenue for the nine-month period a year ago. In addition, the
Company's service revenue from operations in the United Kingdom represented
approximately 18.3% of total service revenue for the nine months ended March 31,
2004 and approximately 18.4% of total service revenue for the nine months ended
March 31, 2003. The Company anticipates that service revenue from international
operations may grow in the future. Accordingly, the Company's business is
subject to risks associated with doing business internationally, including:
- changes in a specific country's or region's political or economic
conditions, including Western Europe, in particular;
- potential negative consequences from changes in tax laws
affecting its ability to repatriate profits;
- difficulty in staffing and managing widespread operations;
- unfavorable labor regulations applicable to its European
operations;
- changes in foreign currency exchange rates; and
- longer payment cycles of foreign customers and difficulty of
collecting receivables in foreign jurisdictions.
THE COMPANY'S OPERATING RESULTS HAVE FLUCTUATED BETWEEN QUARTERS AND YEARS AND
MAY CONTINUE TO FLUCTUATE IN THE FUTURE, WHICH COULD AFFECT THE PRICE OF ITS
COMMON STOCK
The Company's quarterly and annual operating results have varied and will
continue to vary in the future as a result of a variety of factors. For example,
the Company's income (loss) from operations was $3.6 million for the quarter
ended June 30, 2003, $7.8 million for the quarter ended September 30, 2003, $8.2
million for the quarter ended December 31, 2003 and $(1.7) million for the
quarter ended March 31, 2004. Factors that cause these variations include:
- the timing of the initiation, progress, or cancellation of
significant project;
- exchange rate fluctuations between quarters or years;
- restructuring charges;
- the mix of services offered in a particular quarter or year;
- the timing of the opening of new offices;
- costs and the related financial impact of acquisitions;
- the level of new business authorizations in a particular quarter
or year;
- the timing of internal expansion;
- the timing and amount of costs associated with integrating
acquisitions; and
- the timing and amount of startup costs incurred in connection
with the introduction of new products, services or subsidiaries.
Many of these factors, such as the timing of cancellations of significant
projects and exchange rate fluctuations between quarters or years, are beyond
the Company's control.
Approximately 80-85% of the Company's operating costs are fixed in the short
term. In particular, a significant portion of the Company's operating costs
relate to personnel, which are estimated to have accounted for 80-85% of the
Company's total operating costs in the nine months ended March 31, 2004. As a
result, the effect on the Company's revenues of the timing of the completion,
delay or loss of contracts, or the progress of client projects, could cause its
operating results to vary substantially between reporting periods.
If the Company's operating results do not match the expectations of securities
analysts and investors as a result of these factors, the trading price of its
common stock will likely decrease.
24
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 53.7% of the Company's service revenue for the nine months ended
March 31, 2004 and 48.2% of the Company's service revenue for the nine months
ended March 31, 2003 were from non-U.S. operations. The Company's financial
statements are denominated in U.S. dollars; thus, factors associated with
international operations, including changes in foreign currency exchange rates,
could have a significant effect on its operating results. Exchange rate
fluctuations between local currencies and the U.S. dollar create risk in several
ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of
the Company's foreign operations are generally denominated in
local currencies, primarily the British pound and the Euro, and
then are translated into U.S. dollars for financial reporting
purposes. For the nine months ended March 31, 2004, approximately
18.3% of total service revenue was denominated in British pounds
and approximately 28.2% of total service revenue was denominated
in Euros. For the nine months ended March 31, 2003, approximately
18.4% of total service revenue was denominated in British pounds
and approximately 23.7% of total service revenue was denominated
in Euros.
- Foreign Currency Transaction Risk. The Company's service
contracts may be denominated in a currency other than the
functional currency in which it performs the service related to
such contracts.
Although the Company tries to limit these risks through exchange rate
fluctuation provisions stated in its service contracts, or by hedging
transaction risk with foreign currency exchange contracts, it may still
experience fluctuations in financial results from its operations outside of the
U.S., and may not be able to favorably reduce the currency transaction risk
associated with its service contracts.
THE COMPANY'S BUSINESS HAS EXPERIENCED SUBSTANTIAL EXPANSION IN THE PAST AND
SUCH EXPANSION AND ANY FUTURE EXPANSION COULD STRAIN ITS RESOURCES IF NOT
PROPERLY MANAGED
The Company has expanded its business substantially in the past. Future rapid
expansion could strain the Company's operational, human and financial resources.
In order to manage expansion, the Company must:
- continue to improve operating, administrative and information
systems;
- accurately predict future personnel and resource needs to meet
client contract commitments;
- track the progress of ongoing client projects; and
- attract and retain qualified management, sales, professional,
scientific and technical operating personnel.
If the Company does not take these actions and is not able to manage the
expanded business, the expanded business may be less successful than
anticipated, and the Company may be required to allocate additional resources to
the expanded business, which it would have otherwise allocated to another part
of its business.
The Company may face additional risks in expanding its foreign operations.
Specifically, the Company may find it difficult to:
- assimilate differences in foreign business practices, exchange
rates and regulatory requirements;
- operate amid political and economic instability;
- hire and retain qualified personnel; and
- overcome language, tariff and other barriers.
THE COMPANY MAY MAKE ACQUISITIONS IN THE FUTURE, WHICH MAY LEAD TO DISRUPTIONS
TO ITS ONGOING BUSINESS
The Company has made a number of acquisitions and will continue to review new
acquisition opportunities. If the Company is unable to successfully integrate an
acquired company, the acquisition could lead to disruptions to the business. The
success of an acquisition will depend upon, among other things, the Company's
ability to:
- assimilate the operations and services or products of the
acquired company;
- integrate acquired personnel;
- retain and motivate key employees;
- retain customers; and
- minimize the diversion of management's attention from other
business concerns.
25
Acquisitions of foreign companies may also involve additional risks, including
assimilating differences in foreign business practices and overcoming language
and cultural barriers.
In the event that the operations of an acquired business do not meet the
Company's performance expectations, the Company may have to restructure the
acquired business or write-off the value of some or all of the assets of the
acquired business.
THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS
ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND
MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT
STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of the Company's articles of organization, by-laws and its
shareholder rights plan, as well as provisions of Massachusetts law, may enable
the Company's management to resist acquisition of the Company by a third party,
or may discourage a third party from acquiring the Company. These provisions
include the following:
- the Company has divided its Board of Directors into three classes
that serve staggered three-year terms;
- the Company is subject to Section 50A of the Massachusetts
Business Corporation Law which provides that directors may only
be removed by stockholders for cause, vacancies in the Company's
Board of Directors may only be filled by a vote of the Company's
Board of Directors and the number of directors may be fixed only
by the Company's Board of Directors;
- the Company is subject to Chapter 110F of the Massachusetts
General Laws which limits its ability to engage in business
combinations with certain interested stockholders;
- the Company's stockholders are limited in their ability to call
or introduce proposals at stockholder meetings; and
- the Company's shareholder rights plan would cause a proposed
acquirer of 20% or more of the Company's outstanding shares of
common stock to suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a
change in control of the Company or a change in the Company's management that
stockholders may consider favorable or beneficial. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of the
Company's stock. In addition, the Company's Board of Directors may issue
preferred stock in the future without stockholder approval. If the Company's
Board of Directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. The Company's Board
of Directors' ability to issue the preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the Company's stock.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH
COULD LEAD TO LOSSES BY INVESTORS
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future. On April 30, 2004, the closing sale
price of the Company's common stock on the NASDAQ National Market was $19.54 per
share. During the period from January 1, 2002 to March 31, 2004, the closing
sale price of the Company's common stock ranged from a high of $18.49 per share
to a low of $8.05 per share. Investors in the Company's common stock must be
willing to bear the risk of such fluctuations in stock price and the risk that
the value of an investment in the Company's stock could decline.
The Company's stock price can be affected by quarter-to-quarter variations in:
- operating results;
- earnings estimates by analysts;
- market conditions in the industry;
- prospects of health care reform;
- changes in government regulations; and
- general economic conditions.
26
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may adversely affect the
market price of the Company's common stock. Since the Company's common stock has
traded in the past at a relatively high price-earnings multiple, due in part to
analysts' expectations of earnings growth, the price of the stock could quickly
and substantially decline as a result of even a relatively small shortfall in
earnings from, or a change in, analysts' expectations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company's
chief executive officer and chief financial officer concluded that, as of March
31, 2004, the Company's disclosure controls and procedures were (1) designed to
ensure that material information relating to the Company, including its
consolidated subsidiaries, is made known to the Company's chief executive
officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by the 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 rules and forms of the Securities and Exchange
Commission.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
nine months ended March 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(e) THE FOLLOWING TABLE PROVIDES INFORMATION ABOUT PURCHASES OF
EQUITY SECURITIES BY THE COMPANY AND ITS AFFILIATED PURCHASERS
DURING THE QUARTER ENDED MARCH 31, 2004.
(c) Total Number of (d) Maximum Number (or
Shares (or Units) Appropriate Dollar
(a) Total Number Purchased as Part Value) of Shares (or
of Shares (or (b) Average of Publicly Units) that May Yet Be
Units) Purchased Price Paid per Announced Plans or Purchased Under the
Period (1) Share (or Unit) Programs (2) Plans or Programs
- ------------------- ---------------- --------------- ------------------- -----------------------
01/01/04 - 01/31/04 56,000 $ 17.17 56,000 $10.8 million
02/01/04 - 02/29/04 193,200 $ 17.19 193,200 $ 7.5 million
03/01/04 - 03/31/04 9,400 $ 17.32 9,400 $ 7.4 million
---------------- --------------- -------------------
Total 258,600 $ 17.19 258,600
================ =============== ===================
(1) The Company purchased an aggregate of 258,600 shares of its common
stock pursuant to the repurchase plan that was publicly announced on
September 27, 1999 (the "Plan").
(2) The Company's Board of Directors approved the repurchase by the
Company of shares of its common stock having a value of up to $20.0
million in the aggregate pursuant to the Plan. Unless terminated
earlier by resolution of the Company's Board of Directors, the Plan
will expire when all shares authorized for repurchase thereunder have
been repurchased by the Company.
27
ITEM 5. OTHER INFORMATION
The Board of Directors of the Company (the "Board") formed a Nominating and
Corporate Governance Committee (the "Committee") in December 2002 and adopted a
charter for the Committee in February 2004. The Charter provides that the
Committee shall consist of two or more members of the Board, all of whom shall
be independent unless otherwise permitted by the applicable rules of NASDAQ. The
Committee has the authority and responsibility, among other things, to identify
individuals qualified to serve as members of the Board and nominate persons for
election as a director by the stockholders, and nominate persons for election by
the directors to fill vacancies on the Board. In making such nominations, the
Committee shall consider candidates proposed by stockholders of the Company. The
Committee will apply the same criteria to, and follow substantially the same
process in considering, candidates proposed by stockholders as it does with
other candidates. The Committee may from time to time adopt such procedures
regarding shareholder candidates for director as it deems appropriate.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
(b) The Company furnished a Current Report on Form 8-K on January 22, 2004
under Item 12, which included the Company's press release dated
January 22, 2004 containing financial results for the quarter ended
December 31, 2003.
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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.
PAREXEL International Corporation
Date: May 13, 2004 By: /s/ Josef H. von Rickenbach
--------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief
Executive Officer
Date: May 13, 2004 By: /s/ James F. Winschel, Jr.
--------------------------------------
James F. Winschel, Jr.
Senior Vice President and Chief
Financial Officer
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EXHIBIT INDEX
Exhibit Number Description
- -------------- ------------------------------------------------
31.1 CEO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 CFO certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 CEO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 CFO certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
30