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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, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 000-21244
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
MASSACHUSETTS 04-2776269
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
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, 2005, there were
26,099,544 shares of common stock outstanding.
1
PAREXEL INTERNATIONAL CORPORATION
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets - March 31, 2005 and June 30, 2004 3
Condensed Consolidated Statements of Operations - Three Months Ended 4
March 31, 2005 and 2004, Nine Months Ended March 31, 2005 and 2004
Condensed Consolidated Statements of Cash Flows - Nine Months Ended 5
March 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results 9
of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 26
Item 4 Controls and Procedures 26
PART II. OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 6 Exhibits 27
SIGNATURES 28
2
PART I. FINANCIAL INFORMATION PAREXEL INTERNATIONAL CORPORATION
ITEM 1. FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31,
2005 JUNE 30,
(UNAUDITED) 2004
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 67,600 $ 60,686
Marketable securities 40,022 34,921
Billed and unbilled accounts receivable, net 197,391 221,956
Prepaid expenses 11,523 11,681
Current deferred tax assets 29,835 29,710
Income tax receivable - 1,834
Other current assets 6,459 4,694
----------- ----------
Total current assets 352,830 365,482
Property and equipment, net 76,428 68,983
Goodwill 45,187 41,002
Other intangible assets, net 10,175 10,636
Non-current deferred tax assets 10,169 10,160
Other assets 6,581 6,733
----------- ----------
Total assets $ 501,370 $ 502,996
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 502 $ 768
Accounts payable 9,704 15,917
Deferred revenue 131,418 145,409
Accrued expenses 13,197 14,805
Accrued restructuring charges 3,321 5,481
Accrued employee benefits and withholdings 27,896 28,577
Current deferred tax liabilities 4,428 4,424
Income taxes payable 4,827 -
Other current liabilities 4,122 4,693
----------- ----------
Total current liabilities 199,415 220,074
Long-term debt, net of current portion 1,171 471
Non-current deferred tax liabilities 19,813 18,100
Long-term accrued restructuring charges 5,698 7,944
Other liabilities 5,094 5,886
----------- ----------
Total liabilities 231,191 252,475
----------- ----------
Minority interest in subsidiary 3,775 3,761
Stockholders' equity:
Preferred stock--$.01 par value; shares authorized: 5,000,000; Series A
junior participating preferred stock - 50,000 shares designated, none
issued and outstanding
Common stock--$.01 par value; shares authorized: 50,000,000; shares issued
26,083,540 at March 31, 2005 and 26,522,178 at June 30, 2004; shares
outstanding: 26,083,540 at March 31, 2005 and 26,077,078
at June 30, 2004 278 275
Additional paid-in capital 163,553 175,126
Treasury stock, shares at cost: 445,100 shares at June 30, 2004 - (8,056)
Retained earnings 93,249 76,908
Accumulated other comprehensive income 9,324 2,507
----------- ----------
Total stockholders' equity 266,404 246,760
----------- ----------
Total liabilities and stockholders' equity $ 501,370 $ 502,996
=========== ==========
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,
-------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- --------- ----------
Service revenue $ 137,124 $ 139,899 $ 406,548 $ 406,110
Reimbursement revenue 31,339 28,350 92,335 77,193
---------- ---------- --------- ----------
Total revenue 168,463 168,249 498,883 483,303
Costs and expenses:
Direct costs 89,698 90,762 262,236 266,317
Reimbursable out-of-pocket expenses 31,339 28,350 92,335 77,193
Selling, general and administrative 30,699 33,234 95,159 95,846
Depreciation 6,506 6,223 18,685 17,652
Amortization 529 568 1,541 1,139
Restructuring - 10,796 - 10,796
---------- ---------- --------- ----------
Total costs and expenses 158,771 169,933 469,956 468,943
---------- ---------- --------- ----------
Income (loss) from operations 9,692 (1,684) 28,927 14,360
Other loss, net (1,851) (1,468) (2,652) (1,473)
---------- ---------- --------- ----------
Income (loss) before provision for income taxes
and minority interest 7,841 (3,152) 26,275 12,887
Provision (benefit) for income taxes 3,149 (636) 9,883 5,299
Minority interest expense (benefit) 73 (32) 51 298
---------- ---------- --------- ----------
Net income (loss) $ 4,619 $ (2,484) $ 16,341 $ 7,290
========== ========== ========= ==========
Earnings (loss) per share:
Basic $ 0.18 $ (0.10) $ 0.63 $ 0.28
Diluted $ 0.17 $ (0.10) $ 0.61 $ 0.27
Weighted average shares:
Basic 26,138 26,113 26,059 25,970
Diluted 26,751 26,113 26,631 26,720
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,
-----------------------------
2005 2004
----------- -----------
Cash flow from operating activities:
Net income $ 16,341 $ 7,290
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest expense in net income of
consolidated subsidiary 51 298
Depreciation and amortization 20,226 18,791
Changes in operating assets/liabilities (494) 1,876
----------- -----------
Net cash provided by operating activities 36,124 28,255
----------- -----------
Cash flow from investing activities:
Purchases of marketable securities (56,570) (140,981)
Proceeds from sale of marketable securities 51,469 122,129
Acquisition of business (1,460) (13,457)
Purchases of property and equipment (24,619) (17,655)
Proceeds from sale of assets 320 116
----------- -----------
Net cash used in investing activities (30,860) (49,848)
----------- -----------
Cash flow from financing activities:
Proceeds from issuance of common stock 4,211 5,318
Proceeds from issuance of subsidiary common stock 18 8
Payments to repurchase common stock (7,742) (4,445)
Repayments under lines of credit and long-term debt 198 (179)
----------- -----------
Net cash (used) provided by financing activities (3,315) 702
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 4,965 3,292
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,914 (17,599)
Cash and cash equivalents at beginning of period 60,686 69,734
----------- -----------
Cash and cash equivalents at end of period $ 67,600 $ 52,135
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Net cash paid during the year for:
Interest $ 3,045 $ 3,401
Income taxes 6,153 3,241
Acquisitions, net of cash acquired:
Fair value of assets acquired and goodwill $ 2,819 $ 17,536
Liabilities assumed (1,359) (4,079)
----------- -----------
Cash paid for acquisition $ 1,460 $ 13,457
=========== ===========
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, 2005, are not necessarily indicative of the results that
may be expected for other quarters or the entire fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2004.
Effective with the September 30, 2004 reporting period, certain components of
the Company's strategic business units were reorganized to better align services
offered to clients and to ensure a more integrated selling effort. Specifically,
the Company's clinical operations were consolidated by moving Clinical
Pharmacology (Phase I) and some small parts of the Regulatory business from the
PAREXEL Consulting Group ("PCG") to Clinical Research Services ("CRS"), and
Phase IV clinical operations from Medical Marketing Services ("MMS") to CRS. The
remaining businesses of PCG and MMS were then combined to form the new PAREXEL
Consulting and Marketing Services ("PCMS") business segment. These changes
resulted in various reclassifications to the historical segment information
presented in Note 6 to the condensed consolidated financial statements in this
quarterly report, but had no impact on the Company's total revenue, expenses,
operating income, net income, or balance sheet.
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. Outstanding
options to purchase approximately 0.4 million and 0.9 million shares of common
stock were excluded from the calculation of diluted earnings per share for the
three months ended March 31, 2005 and 2004, respectively, and outstanding
options to purchase approximately 0.6 million and 1.1 million shares of common
stock were excluded from the calculation of diluted earnings per share for the
nine months ended March 31, 2005 and 2004, respectively, because they were
anti-dilutive.
The following table outlines the basic and diluted earnings per common share
computations:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ----------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2005 2004
---------- ---------- ----------- ----------
Net income (loss) attributable to common shares $ 4,619 $ (2,484) $ 16,341 $ 7,290
========= ========== =========== ==========
BASIC EARNINGS (LOSS) PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding 26,138 26,113 26,059 25,970
========= ========== =========== ==========
Basic earnings (loss) per common share $ 0.18 $ (0.10) $ 0.63 $ 0.28
========= ========== =========== ==========
DILUTED EARNINGS (LOSS) PER COMMON SHARE COMPUTATION:
Weighted average common shares outstanding:
Shares attributable to common stock outstanding 26,138 26,113 26,059 25,970
Shares attributable to common stock options 613 - 572 750
--------- ---------- ----------- ----------
26,751 26,113 26,631 26,720
========= ========== =========== ==========
Diluted earnings (loss) per common share $ 0.17 $ (0.10) $ 0.61 $ 0.27
========= ========== =========== ==========
6
NOTE 3 - COMPREHENSIVE INCOME
Comprehensive income has been calculated by the Company in accordance with
Financial Accounting Standards Board ("FASB") Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Comprehensive
income for the three months and nine months ended March 31, 2005 and 2004 were
as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------- ---------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2005 2004
----------- --------- ---------- --------
Net income $ 4,619 $ (2,484) $ 16,341 $ 7,290
Add: Foreign currency translation adjustments (6,368) 107 6,538 6,673
Unrealized gain/loss on investment (368) - 279 -
--------- --------- --------- --------
Comprehensive income (loss) $ (2,117) $ (2,377) $ 23,158 $ 13,963
========= ========= ========= ========
NOTE 4 - ACQUISITIONS
Effective October 1, 2004, the Company acquired 100% of the outstanding stock of
Integrated Marketing Concepts ("IMC"), a provider of specialty professional
marketing and communication services in Whitehall, Pennsylvania, for
approximately $1.5 million in cash. Under the agreement, the Company agreed to
make additional payments of $0.3 million and up to $2.9 million in contingent
purchase price if IMC achieves certain established financial targets through
September 30, 2007. Pro forma results of IMC have not been presented because the
effect of this acquisition is not material to the Company's results.
NOTE 5 - STOCK-BASED COMPENSATION
The Company accounts for employee stock awards using the intrinsic value based
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", as described by FASB Interpretation No. 44.
Accordingly, no compensation expense was recognized because the exercise price
of the Company's stock options was equal to the market price of the underlying
stock on the date of grant. The Company has adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation" for disclosure purposes only.
If the compensation cost for the Company's stock options and the Company's
employee stock purchase plan had been determined based on the fair value at the
date of grant, as prescribed in SFAS No. 123, the Company's net income and net
income per share would have been as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2005 2004 2005 2004
------------ ------------ ------------ ------------
Net income (loss) as reported $ 4,619 $ (2,484) $ 16,341 $ 7,290
Deduct: Effect of fair-value based
compensation, net of tax (959) (1,132) (2,934) (2,064)
------------ ------------ ------------ ------------
Pro forma net income (loss) $ 3,660 $ (3,616) $ 13,407 $ 5,226
============ ============ ============ ============
Pro forma net income (loss) per share:
Basic $ 0.14 $ (0.14) $ 0.51 $ (0.20)
Diluted $ 0.14 $ (0.14) $ 0.50 $ (0.20)
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.
See Note 9 to the condensed consolidated financial statements included in this
report for further detail regarding future Stock-Based Compensation accounting
requirements.
7
NOTE 6 - SEGMENT INFORMATION
Effective with the September 30, 2004 reporting period, certain components of
the Company's strategic business units were reorganized to better align services
offered to clients and to ensure a more integrated selling effort. See Note 1 to
the condensed consolidated financial statements included in this report for
further detail.
The Company is managed through three business segments, namely, CRS, PCMS, and
Perceptive Informatics, Inc. ("Perceptive"). CRS constitutes the Company's core
business and includes clinical trials management and biostatistics, data
management and clinical pharmacology, as well as related medical advisory and
investigator site services. PCMS provides technical expertise in such
disciplines as regulatory affairs, industry training, publishing, product
development, management consulting, registration, commercialization issues,
market development, targeted communications services in support of product
launch, as well as health policy consulting and strategic reimbursement
services. Perceptive provides information technology solutions designed to
improve clients' product development processes. Perceptive offers a portfolio of
products and services that includes medical imaging services, interactive voice
response systems ("IVRS"), clinical trials management systems ("CTMS"),
web-based portals, systems integration, and patient diary applications.
The Company evaluates its segment performance and allocates resources based on
service revenue and gross profit (service revenue less direct costs), while
other operating costs are allocated and evaluated on a geographic basis.
Accordingly, the Company does not include selling, general, and administrative
expenses, depreciation and amortization expense, other income (expense), and
income tax expense in segment profitability. The Company attributes revenue to
individual countries based upon the number of hours of services performed in the
respective countries and inter-segment transactions are not included in service
revenue. Furthermore, PAREXEL has a global infrastructure supporting its
business segments, and therefore, assets are not identified by reportable
segment.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------- --------------------------
($ IN THOUSANDS) 2005 2004 2005 2004
---------- ---------- ---------- ----------
Service revenue:
Clinical Research Services $ 96,697 $ 94,913 $ 281,508 $ 283,599
PAREXEL Consulting and
Marketing Services 28,964 35,978 93,631 96,585
Perceptive Informatics, Inc. 11,463 9,008 31,409 25,926
---------- ---------- ---------- ----------
$ 137,124 $ 139,899 $ 406,548 $ 406,110
========== ========== ========== ==========
Gross profit on service revenue:
Clinical Research Services $ 33,801 $ 34,038 $ 101,895 $ 103,682
PAREXEL Consulting and
Marketing Services 8,374 10,694 28,647 23,931
Perceptive Informatics, Inc. 5,251 4,405 13,770 12,180
---------- ---------- ---------- ----------
$ 47,426 $ 49,137 $ 144,312 $ 139,793
========== ========== ========== ==========
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 $1.3 million related to changes in assumptions for previously
abandoned leased facilities under the Company's June 2001 restructuring plan.
8
Current activity charged against the restructuring accrual in the quarter ended
March 31, 2005 (which is included in "Current Liabilities - Accrued
Restructuring Charges" and "Long-term Accrued Restructuring Charges" in the
Condensed Consolidated Balance Sheet) was as follows:
BALANCE AS OF 3RD QTR BALANCE AS OF
DECEMBER 31, PAYMENTS/ MARCH 31,
($ IN THOUSANDS) 2004 ADJUSTMENTS 2005
------------- ------------- -------------
Employee severance costs $ 910 $ (297) $ 613
Facilities-related charges 9,325 (919) 8,406
------------- ------------- -------------
$ 10,235 $ (1,216) $ 9,019
============= ============= =============
NOTE 8 - STOCKHOLDERS' EQUITY
As of July 1, 2004, all outstanding treasury stock was converted into authorized
and unissued shares as mandated by a change in Massachusetts corporate law.
On September 9, 2004, the Board of Directors approved a new stock repurchase
program authorizing the purchase of up to an additional $20.0 million of the
Company's common stock to be repurchased in the open market subject to market
conditions. Unless terminated earlier by resolution of the Company's Board of
Directors, the Plan will expire when the entire amount authorized has been fully
utilized. Through March 31, 2005, the Company had acquired 164,548 shares at a
total cost of $4.0 million under this program. During the period from April 1,
2005 to May 6, 2005, the Company acquired an additional 111,296 shares at a
total cost of $2.0 million, leaving a remaining balance on the authorization of
$14.0 million. See Part II, Item 2 of this quarterly report on Form 10-Q for
further detail.
NOTE 9 - RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)"). SFAS 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation costs relating to share-based payment
transactions be recognized in financial statements. Those costs will be measured
based on the fair value of the equity or liability instruments issued. SFAS
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS 123(R) replaces
FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees. Public entities
(other than those filing as small business issuers) will be required to apply
SFAS 123(R) as of the first interim or annual reporting period that begins after
June 15, 2005. In April 2005, the Securities and Exchange Commission ("SEC")
announced that they would allow companies to implement SFAS 123(R) at the
beginning of the annual reporting period that begins after June 15, 2005. The
Company is in the process of evaluating the impact SFAS 123(R) will have in
reducing the Company's earnings.
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.
Effective with the September 30, 2004 reporting period, certain components of
the Company's strategic business units were reorganized to better align services
offered to clients and to ensure a more integrated selling effort. See Note 1 to
the condensed consolidated financial statements included in this report for
further detail.
9
This quarterly report on Form 10-Q includes forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. For this purpose, any
statements contained in this report regarding the Company's strategy, future
operations, financial position, future revenue, projected costs, prospects,
plans and objectives of management, other than statements of historical facts,
are forward-looking statements. The words "anticipates", "believes",
"estimates", "expects", "intends", "may", "plans", "projects", "will", "would",
"targets", and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these
identifying words. The Company cannot guarantee that they actually will achieve
the plans, intentions or expectations expressed or implied in its
forward-looking statements. There are a number of important factors that could
cause actual results, levels of activity, performance or events to differ
materially from those expressed or implied in the forward-looking statements the
Company makes. These important factors include the Company's "critical
accounting estimates" and the risk factors set forth below. Although the Company
may elect to update forward-looking statements in the future, it specifically
disclaims any obligation to do so, even if its estimates change, and readers
should not rely on those forward-looking statements as representing the
Company's views as of any date subsequent to the date of this quarterly report.
OVERVIEW
The Company is a leading 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 to allow clients to better manage the
bio/pharmaceutical product lifecycle with the goal of reducing the time, risk
and cost associated with the development and commercialization of new therapies
and medical products. Since its founding in 1983, PAREXEL has developed
significant expertise in processes and technologies supporting these objectives.
The Company's product and service offerings include: clinical trials management,
data management, biostatistical analysis, medical marketing, clinical
pharmacology, patient recruitment, regulatory and medical consulting, health
policy and reimbursement, performance improvement, industry training and
publishing, medical imaging services, IVRS, CTMS, web-based portals, systems
integration, patient diary applications, and other drug development consulting
services. The Company believes that its comprehensive services, depth of
therapeutic area expertise, global footprint and related access to patients, and
sophisticated information technology, along with its experience in global drug
development and product launch services, represent key competitive strengths.
The Company is managed through three business segments, namely, CRS, PCMS, and
Perceptive. CRS constitutes the Company's core business and includes clinical
trials management and biostatistics, data management and clinical pharmacology,
as well as related medical advisory and investigator site services. PCMS
provides technical expertise in such disciplines as regulatory affairs, industry
training, publishing, product development, management consulting, registration,
commercialization issues, market development, targeted communications services
in support of product launch, as well as health policy consulting and strategic
reimbursement services. Perceptive provides information technology solutions
designed to improve clients' product development processes. Perceptive offers a
portfolio of products and services that includes medical imaging services, IVRS,
CTMS, web-based portals, systems integration, and patient diary applications.
Perceptive is a majority-owned subsidiary of the Company. As of March 31, 2005,
the Company owned approximately 97.9% of the outstanding shares of common stock
of Perceptive. On a fully diluted basis, the Company owned approximately 91.9%
of Perceptive.
The Company conducts a significant portion of its operations in foreign
countries. Approximately 61.6% of the Company's consolidated service revenue for
the nine months ended March 31, 2005 and 53.7% of the Company's consolidated
service revenue for the nine months ended March 31, 2004, were from non-U.S.
operations. Over recent quarters, the Company has noticed a growing trend toward
winning new business awards in the U.S. for projects to be completed outside of
the U.S.
Because the Company's financial statements are denominated in 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,
2005, approximately 20.7% of total consolidated service revenue was denominated
in British pounds and approximately 33.2% of total consolidated service revenue
was denominated in Euros. For the nine months ended March 31, 2004,
approximately 18.3% of total consolidated service revenue was denominated in
British pounds and approximately 28.3% of total consolidated service revenue was
denominated in Euros.
10
Approximately 85.0% of the Company's contracts are fixed rate, with some
variable components, and range in duration from a few months to several years.
Cash flows from these contracts typically consist of a down payment required to
be paid at the time of contract execution with the balance due in installments
over the contract's duration, usually on a milestone achievement basis. Revenue
from these contracts is generally recognized as work is performed. As a result,
cash receipts do not necessarily correspond to costs incurred and revenue
recognized on contracts.
Generally, the Company's clients can terminate their contracts with the Company
upon 30 to 60 days' notice or can delay execution of services. Clients may
terminate or delay contracts for a variety of reasons, including, among others:
merger or potential merger related activities involving the client, the failure
of products being tested to satisfy safety requirements or efficacy criteria,
unexpected or undesired clinical results of the product, client cost reductions
as a result of budgetary limits or changing priorities, the client's decision to
forego a particular study, insufficient patient enrollment or investigator
recruitment, or clinical drug manufacturing problems resulting in shortages of
the product.
CRITICAL ACCOUNTING POLICIES
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.
The Company regards an accounting estimate underlying its financial statements
as a "critical accounting estimate" if the nature of the estimate or assumption
is material due to the level of subjectivity and judgment involved, or the
susceptibility of such matter to change, and if the impact of the estimate or
assumption on financial condition or operating performance is material. The
Company believes that the following accounting policies are most critical to aid
in fully understanding and evaluating its reported financial results:
REVENUE RECOGNITION
Service revenue on fixed-price contracts is recognized as services are
performed. The Company measures progress for fixed-price contracts using the
concept of proportional performance based upon a unit based output method. This
method requires the Company to estimate total expected units, as well as the
costs and revenue per unit. Generally, the assigned financial manager or
financial analyst reviews contract estimates on a monthly basis. Adjustments to
contract estimates are made in the periods in which the facts that require the
revisions become known. Historically, there have not been any significant
variations between contract estimates and actual costs incurred, which were not
recovered from clients. In the event that future estimates are materially
incorrect, they could materially impact the Company's consolidated results of
operations and financial position.
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
historic collectability and specific identification of potential problem
accounts. In the event the Company is unable to collect portions of its
outstanding billed or unbilled receivables, there may be a material impact to
the Company's consolidated results of operations and financial position.
11
INCOME TAXES
The Company's global provision for corporate income taxes is calculated using
the tax accounting rules established by SFAS No. 109. 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 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 results of operations and
financial position.
GOODWILL
Goodwill represents the excess of the cost of an acquired business over the fair
value of the related net assets at the date of acquisition. Under SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill is subject to annual impairment
testing or more frequent testing if an event occurs or circumstances change that
would more likely than not reduce the carrying value of the reporting unit below
its fair value. The Company has assessed the impairment of goodwill under SFAS
No. 142 in fiscal years 2004 and 2003. The impairment testing involves
determining the fair market value of each of the reporting units with which the
goodwill was associated and comparing the value with the reporting unit's
carrying value. Based on this assessment, there was no impairment identified at
June 30, 2004 and 2003. 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,
2005 and 2004 were as follows:
FOR THE THREE MONTHS ENDED MARCH 31, FOR THE NINE MONTHS ENDED MARCH 31,
-------------------------------------- -----------------------------------------
INCREASE INCREASE
($ IN THOUSANDS) 2005 2004 (DECREASE) % 2005 2004 (DECREASE) %
-------- -------- ---------- ------ --------- --------- ----------- -------
Service revenue:
CRS $ 96,697 $ 94,913 $ 1,784 1.9% $ 281,508 $ 283,599 $ (2,091) -0.7%
PCMS 28,964 35,978 (7,014) -19.5% 93,631 96,585 (2,954) -3.1%
Perceptive 11,463 9,008 2,455 27.3% 31,409 25,926 5,483 21.1%
-------- -------- ---------- --------- --------- ----------
$137,124 $139,899 $ (2,775) -2.0% $ 406,548 $ 406,110 $ 438 0.1%
======== ======== ========== ========= ========= ==========
Direct costs:
CRS $ 62,896 $ 60,875 $ 2,021 3.3% $ 179,613 $ 179,917 $ (304) -0.2%
PCMS 20,590 25,284 (4,694) -18.6 64,984 72,654 (7,670) -10.6%
Perceptive 6,212 4,603 1,609 35.0% 17,639 13,746 3,893 28.3%
-------- -------- ---------- --------- --------- ----------
$ 89,698 $ 90,762 $ (1,064) -1.2% $ 262,236 $ 266,317 $ (4,081) -1.5%
======== ======== ========== ========= ========= ==========
Gross profit on
service revenue:
CRS $ 33,801 $ 34,038 $ (237) -0.7% $ 101,895 $ 103,682 $ (1,787) -1.7%
PCMS 8,374 10,694 (2,320) -21.7% 28,647 23,931 4,716 19.7%
Perceptive 5,251 4,405 846 19.2% 13,770 12,180 1,590 13.1%
-------- -------- ---------- --------- --------- ----------
$ 47,426 $ 49,137 $ (1,711) -3.5% $ 144,312 $ 139,793 $ 4,519 3.2%
======== ======== ========== ========= ========= ==========
12
THREE MONTHS ENDED MARCH 31, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 31,
2004:
Service revenue decreased $2.8 million, or 2.0%, to $137.1 million for the three
months ended March 31, 2005 from $139.9 million for the three months ended March
31, 2004. Service revenue was positively impacted by foreign exchange
fluctuations of approximately $3.7 million, or 2.6%. On a geographic basis,
service revenue for the three months ended March 31, 2005 was distributed as
follows: United States - $51.4 million (37.4%), Europe - $78.5 million (57.3%),
and Asia & Other - $7.2 million (5.3%). For the three months ended March 31,
2004, service revenue was distributed as follows: United States - $63.8 million
(45.6%), Europe - $70.7 million (50.5%), and Asia & Other - $5.4 million (3.9%).
The year-over-year shift of revenue from the United States to Europe was
primarily attributed to revenue weakness in the PCMS segment and an increasing
proportion of clinical business awards being won in the U.S. for work to be
conducted outside of the U.S.
On a segment basis, CRS service revenue increased by $1.8 million, or 1.9%, to
$96.7 million in the three months ended March 31, 2005 from $94.9 million in the
three months ended March 31, 2004. The year-over-year increase was driven by the
positive impact of approximately 3.5% in foreign currency fluctuations, which
was offset by a 1.6% decrease in revenue resulting from the adverse impact of
the European Clinical Trials Directive on the Phase I unit in Germany (project
delays and lower new business awards) and other project delays (including
slower-than-anticipated conversion of backlog into revenue). PCMS service
revenue decreased by $7.0 million, or 19.5%, to $29.0 in the three months ended
March 31, 2005 from $36.0 million in the three months ended March 31, 2004. The
total 19.5% decrease was primarily attributed to (1) issues related to a key
marketing services pharmaceutical client including lower levels of demand, the
inability to obtain contract signatures on a timely basis, and re-phasing of
certain work and (2) staffing shortages in the consulting business triggered by
a recent surge in demand for consulting services and higher-than-anticipated
turnover of staff. Perceptive service revenue increased by $2.5 million, or
27.3%, to $11.5 million for the three months ended March 31, 2005 from $9.0
million in the three months ended March 31, 2004 driven mainly by strong demand
for medical imaging and IVRS services.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and reimbursable by, clients. Reimbursement revenue does not yield
any gross profit to the Company, nor does it have an impact on net income.
Direct costs decreased by $1.1 million, or 1.2%, to $89.7 million for the three
months ended March 31, 2005 from $90.8 million in the three months ended March
31, 2004. Direct costs decreased as the impact of cost cutting measures more
than offset the effect of foreign exchange fluctuations. On a segment basis, CRS
direct costs increased by $2.0 million, or 3.3%, to $62.9 million for the three
months ended March 31, 2005 from $60.9 million in the three months ended March
31, 2004. The year-over-year increase in CRS direct costs was primarily due to
increased hiring and training costs, unfavorable foreign currency fluctuations,
and short term productivity challenges, which were offset to some extent by cost
reduction efforts. As a percentage of service revenue, CRS direct costs
increased by 0.9 points to 65.0% for the three months ended March 31, 2005 from
64.1% for the three months ended March 31, 2004. PCMS direct costs decreased by
$4.7 million, or 18.6%, to $20.6 million in the three months ended March 31,
2005 from $25.3 million in the three months ended March 31, 2004. The
year-over-year decrease in PCMS direct costs was primarily due to lower labor
costs associated with lower revenue levels. As a percentage of service revenue,
PCMS direct costs increased by 0.8 points to 71.1% for the three months ended
March 31, 2005 from 70.3% for the three months ended March 31, 2004. Perceptive
direct costs increased $1.6 million, or 35.0%, to $6.2 million in the three
months ended March 31, 2005 from $4.6 million in the three months ended March
31, 2004. Of the total 35.0% increase, approximately 1.9% was attributed to
foreign currency fluctuations, with the remaining 33.1% due to higher labor
costs associated with increased staffing needs to support business growth. As a
percentage of service revenue, Perceptive's direct costs increased by 3.1 points
to 54.2% in the three months ended March 31, 2005 from 51.1% in the three months
ended March 31, 2004 as a result of a less favorable revenue mix.
Selling, general and administrative ("SG&A") expenses decreased by $2.5 million,
or 7.6%, to $30.7 million in the three-month period ended March 31, 2005 from
$33.2 million in the three months ended March 31, 2004. The unfavorable 2.2%
impact of foreign exchange fluctuations was more than offset by reduced bonus
accruals, reductions of receivable loss reserves as a result of continued
improvements in receivable quality, and other cost cutting measures. As a
percentage of service revenue, SG&A expenses decreased by 1.4 points to 22.4% in
the three months ended March 31, 2005 from 23.8% in the three months ended March
31, 2004.
13
Depreciation and amortization ("D&A") expense increased by $0.2 million, or
3.6%, to $7.0 million for the three months ended March 31, 2005 from $6.8
million for the same period in the last fiscal year primarily due to an
increased level of capital expenditure spending primarily for computer software
and hardware over the past twelve months. As a percentage of service revenue,
D&A expense was 5.1% for the three months ended March 31, 2005 and 4.9% for the
three months ended March 31, 2004.
There were no restructuring charges recorded during the three months ended March
31, 2005. During the three months 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.
Other loss increased by $0.4 million, or 26.1% to $1.9 million in the three
months ended March 31, 2005 from $1.5 million in the three months ended March
31, 2004. The expenses in both periods were caused by foreign exchange losses,
which were partly offset by interest income. The current loss in other income
included a $1.1 million foreign exchange loss related to the resolution of a
customer dispute.
The Company had an effective income tax rate of 40.2% for the three months ended
March 31, 2005 and a 20.2% benefit for the three months ended March 31, 2004.
The swing in the tax rate was directly attributable to the impact of the
restructuring charge taken during the quarter ended March 31, 2004 and a
profitability shift in the various geographic taxing jurisdictions in which
PAREXEL does business. Any future changes in the mix of taxable income in the
different jurisdictions in which the Company operates could materially impact
the Company's effective tax rate and its consolidated results of operations and
financial position.
NINE MONTHS ENDED MARCH 31, 2005 COMPARED WITH NINE MONTHS ENDED MARCH 31, 2004:
Service revenue increased $0.4 million, or 0.1%, to $406.5 million for the nine
months ended March 31, 2005 from $406.1 million in the nine months ended March
31, 2004. Service revenue was positively impacted by foreign exchange
fluctuations of approximately $16.5 million, or 4.1%. On a geographic basis,
service revenue for the nine months ended March 31, 2005 was distributed as
follows: United States - $155.9 million (38.4%) Europe - $229.8 million (56.5%),
and Asia & Other - $20.8 million (5.1%). For the nine months ended March 31,
2004, service revenue was distributed as follows: United States - $187.8 million
(46.3%), Europe - $200.3 million (49.3%), and Asia & Other - $18.0 million
(4.4%). The year-over-year shift of revenue from the United States to Europe was
primarily attributed to a growing trend toward winning new business awards in
the U.S. for projects to be completed outside of the U.S. and recent softness in
the PCMS business segment.
On a segment basis, CRS service revenue decreased by $2.1 million, or 0.7%, to
$281.5 million for the nine months ended March 31, 2005 from $283.6 million for
the nine months ended March 31, 2004, as a result of several factors including
cancellations caused by drug safety issues, client driven project
start-up-delays, no current year counterpart to last year's favorable contract
close-out in Japan and the impact of the European Clinical Trials Directive on
the Phase I unit in Germany, which delayed the start up of certain Phase I
projects. These factors were substantially offset by a favorable $14.5 million
impact from foreign exchange. PCMS service revenue decreased by $3.0 million, or
3.1%, to $93.6 million in the nine months ended March 31, 2005 from $96.6
million in the nine months ended March 31, 2004. The year-over-year decrease was
primarily due to (1) issues related to a key pharmaceutical client including
lower levels of demand, the inability to obtain contract signatures on a timely
basis, and re-phasing of certain work and (2) staffing shortages in the
consulting business, slightly offset by a 1.1% increase resulting from favorable
foreign exchange fluctuations. Perceptive service revenue increased by $5.5
million, or 21.1%, to $31.4 million in the nine months ended March 31, 2005,
compared with $25.9 million in the nine months ended March 31, 2004. Of the
total 21.1% increase, approximately 3.4% was attributed to the positive impact
of foreign currency fluctuations, with the remaining 17.7% increase driven
mainly by strength in demand for medical imaging and IVRS services.
Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred
on behalf of, and reimbursable by, clients. Reimbursement revenue does not yield
any gross profit to the Company, nor does it have an impact on net income.
14
Direct costs decreased by $4.1 million, or 1.5%, to $262.2 million for the nine
months ended March 31, 2005 from $266.3 million in the nine months ended March
31, 2004 despite the increase resulting from foreign exchange fluctuations of
approximately $12.0 million, or 4.5%. On a segment basis, CRS direct costs
decreased by $0.3 million, or 0.2%, to $179.6 million for the nine months ended
March 31, 2005 from $179.9 million in the nine months ended March 31, 2004. The
year-over-year decrease in CRS direct costs was primarily due to tighter cost
controls and productivity and quality improvements, which were offset by an
increase of $9.2 million due to foreign currency fluctuations and increased
hiring and training costs. As a percentage of service revenue, CRS direct costs
increased by 0.4 point to 63.8% in the nine months ended March 31, 2005 from
63.4% in the nine months ended March 31, 2004. PCMS direct costs decreased by
$7.7 million, or 10.6%, to $65.0 million in the nine months ended March 31, 2005
from $72.7 million in the nine months ended March 31, 2004. The year-over-year
decrease in PCMS direct costs was a result of lower labor costs directly tied to
lower revenue levels, tighter cost controls, and no counterpart to a one-time
catch-up adjustment in the prior year period, which was partially offset by a
3.1% increase due to the impact of foreign currency fluctuations. As a
percentage of service revenue, PCMS direct costs decreased by 5.8 points to
69.4% for the nine months ended March 31, 2005 from 75.2% for the nine months
ended March 31, 2004 as a result of the factors previously mentioned. Perceptive
direct costs increased $3.9 million, or 28.3%, to $17.6 million in the nine
months ended March 31, 2005 from $13.7 million in the nine months ended March
31, 2004. Of the total 28.3% increase, approximately 3.6% was attributed to
foreign currency fluctuations, with the remaining 24.7% 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 increased by 3.2
points to 56.2% in the nine months ended March 31, 2005 from 53.0% in the nine
months ended March 31, 2004 as a result of a less favorable revenue mix.
SG&A expenses decreased $0.7 million, or 0.7%, to $95.1 million in the
nine-month period ended March 31, 2005 from $95.8 in the nine months ended March
31, 2004 as the impact of unfavorable foreign currency fluctuations of
approximately $3.9 million were offset by a decrease of approximately $4.6
million as a result of a reduction of bonus accruals and receivable loss
reserves, other cost cutting measures, and the favorable impact of past
restructuring activities. As a percentage of service revenue, SG&A expenses
decreased by 0.2 points to 23.4% in the nine months ended March 31, 2005 from
23.6% in the nine months ended March 31, 2004.
D&A expense increased by $1.4 million, or 7.6%, to $20.2 million for the nine
months ended March 31, 2005 from $18.8 million for the same period in the last
fiscal year primarily due to an increased level of capital expenditures
primarily for computer software and hardware and unfavorable foreign currency
fluctuations. As a percentage of service revenue, D&A expense was 5.0% for the
nine months ended March 31, 2005 and 4.6% for the nine months ended March 31,
2004.
There were no restructuring charges recorded during the nine months ended March
31, 2005. During the nine months 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.
Other loss increased by $1.2 million, or 80.0%, to $2.7 million in the nine
months ended March 31, 2005 from $1.5 million in the nine months ended March 31,
2004. The current period increase was primarily related to resolving a foreign
exchange related customer dispute.
The Company had an effective income tax rate of 37.6% for the nine months ended
March 31, 2005 and 41.1% for the nine months ended March 31, 2004. The Company's
tax rate is a function of the relative levels of profitability in the various
taxing jurisdictions in which PAREXEL does business. Any future changes in the
mix of taxable income in the different jurisdictions in which the Company
operates could materially impact the Company's effective tax rate and its
consolidated results of operations and financial position.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and growth,
including acquisitions, with cash flow from operations and proceeds from the
sale of equity securities. Investing activities primarily reflect acquisition
costs and capital expenditures for information systems enhancements and
leasehold improvements.
15
DAYS SALES OUTSTANDING
The Company's operating cash flow is heavily influenced by changes in the levels
of billed and unbilled receivables and deferred revenue. These account balances
as well as days sales outstanding ("DSO") in accounts receivable, net of
deferred revenue, can vary based on contractual milestones and the timing and
size of cash receipts. DSO was 32 days at March 31, 2005, 36 days at June 30,
2004, and 37 days at March 31, 2004. Accounts receivable, net of the allowance
for doubtful accounts was $197.4 million ($108.0 million in billed accounts
receivable and $89.4 million in unbilled accounts receivable) at March 31, 2005
and $222.0 million ($127.5 million in billed accounts receivable and $94.5
million in unbilled accounts receivable) at June 30, 2004. Deferred revenue was
$131.4 million at March 31, 2005 and $145.4 million at June 30, 2004. 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,
2005 totaled $36.1 million and was generated from $20.2 million related to
non-cash charges for depreciation and amortization expense, $16.3 million of net
income, and a $10.9 million decrease in accounts receivable (net of allowance
for doubtful accounts and deferred revenue), offset by a $6.3 million decrease
in accounts payable, a $2.7 million increase in prepaids and other assets, and a
$2.3 million decrease in liabilities and other sources. 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 other liabilities.
Net cash used in investing activities for the nine months ended March 31, 2005
totaled $30.9 million and consisted of $24.6 million used for capital
expenditures (primarily computer software and hardware), $5.1 million used in
the net purchase of marketable securities, and $1.5 million used in the
acquisition of IMC as discussed in Note 4 in the Notes to Condensed Consolidated
Financial Statements of this quarterly report on Form 10-Q, that was offset by
$0.3 million of proceeds from the sale of fixed 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
software and hardware), and $13.4 million for the acquisition of 3 Clinical
Research AG and for the purchase of additional capital stock of FARMOVS, a
majority owned subsidiary of the Company.
Net cash used in financing activities for the nine months ended March 31, 2005
totaled $3.3 million, and was generated from $7.7 million used to repurchase the
Company's common stock pursuant to its stock repurchase program, offset by $4.2
million in proceeds related to the issuance of common stock in conjunction with
the Company's stock option and employee stock purchase plans, and $0.2 million
in net borrowings. 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.
LINES OF CREDIT
The Company has a line of credit with ABN AMRO Bank, NV in the amount of Euro
12.0 million. This line of credit is not collateralized, is payable on demand,
and bears interest at a rate ranging between 3% and 5%. The line of credit may
be revoked or canceled by the bank at any time at its discretion. The Company
primarily entered into this line of credit to facilitate business transactions
with the bank. At March 31, 2005, the Company had approximately Euro 12.0
million available under this line of credit.
The Company has other foreign lines of credit with banks totaling approximately
$1.8 million. These lines of credit are used as overdraft protection and bear
interest at rates ranging from 4% to 6%. The lines of credit are payable on
demand and are supported by PAREXEL International Corporation. At March 31,
2005, the Company had approximately $1.8 million available under these
arrangements.
16
The Company has a cash pooling arrangement with ABN AMRO Bank. Pooling occurs
when debit balances are offset against credit balances and the net position is
used as a basis by the bank for calculating interest. Each legal entity owned by
the Company and party to this arrangement remains the owner of either a credit
or debit balance. Therefore, interest income is earned in legal entities with
credit balances, while interest expense is charged to legal entities with debit
balances. Based on the pool's overall balance, the Bank then (1) recalculates
the overall interest to be charged or earned, (2) compares this amount with the
sum of previously charged/earned interest amounts per account and (3)
additionally pays/charges the difference. Interest income and interest expense
are included in "other income (expense), net" in the Company's condensed
consolidated statements of operations.
FINANCING NEEDS
The Company's primary cash needs are for the payment of salaries and fringe
benefits, hiring and recruiting expenses, business development costs,
acquisition-related costs, capital expenditures, and facility-related expenses.
The Company's principal source of cash is from contracts with clients. If the
Company were unable to generate new contracts with existing and new clients or
if the level of contract cancellations increased, the Company's revenue and cash
flow would be adversely affected (see "Risk Factors" for further detail). Absent
a material adverse change in the level of the Company's new business bookings or
contract cancellations, PAREXEL believes that its existing capital resources
together with cash flow from operations and borrowing capacity under existing
lines of credit will be sufficient to meet its foreseeable cash needs over the
next twelve months and on a longer term basis.
In the future, the Company expects to acquire businesses to enhance its service
offerings, expand its therapeutic expertise, and/or increase its global
presence. Any such acquisitions may require additional external financing, and
the Company may from time to time seek to obtain funds from public or private
issuances of equity or debt securities. The Company may be unable to secure such
financing on terms acceptable to the Company.
The Company expects capital expenditures to total approximately $30.0 to $33.0
million in fiscal year 2005. As of March 31, 2005, the Company had spent $24.6
million and expects to spend an additional $5.4 million primarily for computer
software and hardware during the remainder of the fiscal year.
CONTINGENT LIABILITIES AND GUARANTEES
In connection with the IMC acquisition, as discussed in Note 4 to the condensed
consolidated financial statements in this quarterly report, the Company is
obligated to make additional payments of $0.3 million and up to $2.9 million in
contingent purchase price if IMC achieves certain established financial targets
through September 30, 2007.
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.
FOREIGN CURRENCY EXCHANGE RATES
The Company derived approximately 61.6% of its service revenue for the
nine-month period ended March 31, 2005 and 53.7% of its service revenue for the
nine months ended March 31, 2004 from operations outside of the U.S. The Company
does not have significant operations in countries in which the economy is
considered to be highly inflationary. The Company's financial statements are
denominated in U.S. dollars. Accordingly, changes in exchange rates between
foreign currencies and the U.S. dollar will affect the translation of financial
results into U.S. dollars for purposes of reporting the Company's consolidated
financial results.
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts denominated in a currency
other than the foreign subsidiary's functional (local) currency. To the extent
the Company is unable to shift the effects of currency fluctuations to its
clients, foreign exchange fluctuations as a result of currency exchange losses
could have a material effect on the Company's results of operations. The Company
implemented a derivative hedging policy during the fourth quarter of fiscal year
2004 to hedge certain foreign denominated accounts receivable and intercompany
payables. Derivatives are accounted for in accordance with FAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
17
The Company occasionally enters into other currency exchange contracts to offset
the impact of currency fluctuations. These currency exchange contracts are
entered into as economic hedges, but are not designated as hedges for accounting
purposes as defined under FAS 133. The Company does not expect gains or losses
on these contracts to have a material impact on its financial results. During
the nine-month periods ended March 31, 2005 and 2004, the Company recorded
foreign-exchange losses of $4.5 million and $2.0 million, respectively.
INFLATION
The Company believes the effects of inflation generally do not have a material
adverse impact on its operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS 123(R), "Share-Based Payment". SFAS
123(R) will provide investors and other users of financial statements with more
complete and neutral financial information by requiring that the compensation
costs relating to share-based payment transactions be recognized in financial
statements. Those costs will be measured based on the fair value of the equity
or liability instruments issued. SFAS 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. SFAS 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. Public entities (other than those filing as small business issuers)
will be required to apply SFAS 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. In April 2005, the SEC
announced that they would allow companies to implement SFAS 123(R) at the
beginning of the annual reporting period that begins after June 15, 2005. The
Company is in the process of evaluating the impact SFAS 123(R) will have in
reducing the Company's earnings.
RISK FACTORS
In addition to other information in this report, the following risk factors
should be considered carefully in evaluating the Company and its business. These
risk factors could cause actual results to differ from those indicated by
forward-looking statements made in the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other forward-looking statements that the Company may make from
time to time. If any of the following risks occur, the Company's business,
financial condition, or results of operations would likely suffer.
LOSS, MODIFICATION, OR DELAY OF LARGE OR MULTIPLE CONTRACTS MAY NEGATIVELY
IMPACT THE COMPANY'S FINANCIAL
PERFORMANCE
The Company's clients generally can terminate their contracts with the Company
upon 30 to 60 days notice or can delay the execution of services. The loss or
delay of a large contract or the loss or delay of multiple contracts could
adversely affect the Company's operating results, possibly materially. The
Company has in the past experienced contract cancellations, which have adversely
affected its operating results, including a major Phase III cancellation during
the first quarter of this fiscal year.
Clients terminate or delay their contracts for a variety of reasons, including,
but not limited to:
- merger or potential merger related activities;
- failure of products being tested to satisfy safety requirements;
- failure of products being tested to prove effective;
- products having unexpected or undesired clinical results;
- client decisions to forego a particular study, perhaps for economic
reasons;
- insufficient patient enrollment in a study;
- insufficient investigator recruitment;
- production problems which cause shortages of the product;
- product withdrawal following market launch; and
- manufacturing facility shut down.
In addition, the Company believes that companies regulated by the Food and Drug
Administration ("FDA") may proceed with fewer clinical trials or conduct them
without the assistance of bio/pharmaceutical services companies if they are
trying to reduce costs as a result of budgetary limits or changing priorities.
These factors may cause such companies to cancel contracts with
bio/pharmaceutical services companies such as the Company.
18
THE COMPANY FACES INTENSE COMPETITION IN MANY AREAS OF ITS BUSINESS; IF THE
COMPANY DOES NOT COMPETE EFFECTIVELY, ITS BUSINESS WILL BE HARMED
The bio/pharmaceutical services industry is highly competitive and the Company
faces numerous competitors in many areas of its business. If the Company fails
to compete effectively it may lose clients, which would cause its business to
suffer.
The Company primarily competes against in-house departments of pharmaceutical
companies, other full service CROs, small specialty CROs, and to a lesser
extent, universities, teaching hospitals, and other site organizations. Some of
the larger CROs against which the Company competes include Quintiles
Transnational Corporation, Covance, Inc. and Pharmaceutical Product Development
Inc. In addition, PAREXEL's PCMS business also competes with a large and
fragmented group of specialty service providers, including
advertising/promotional companies, major consulting firms with pharmaceutical
industry groups and smaller companies with pharmaceutical industry focus.
Perceptive, a majority owned subsidiary of the Company, competes primarily with
CROs, information technology companies and other software companies. Some of
these competitors, including the in-house departments of pharmaceutical
companies, have greater capital, technical and other resources than the Company.
In addition, those of the Company's competitors that are smaller specialized
companies may compete effectively against the Company because of their
concentrated size and focus.
THE FIXED RATE NATURE OF THE COMPANY'S CONTRACTS COULD HURT ITS OPERATING
RESULTS
Approximately 85.0% of the Company's contracts are at fixed rates. 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 CHANGES, THE NEED FOR THE COMPANY'S SERVICES COULD DECREASE
Governmental regulation of the drug, medical device and biotechnology product
development process is complicated, extensive, and demanding. A large part of
the Company's business involves assisting pharmaceutical and biotechnology
companies through the regulatory approval process. Changes in regulations, that,
for example, streamline procedures or relax approval standards, could eliminate
or reduce the need for the Company's services. If companies regulated by the FDA
or similar foreign regulatory authorities needed fewer of 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 approved common standards for clinical
testing of new drugs throughout the E.U. by adopting standards for good clinical
practice ("GCP") and by making the clinical trial application and approval
process more uniform across member states starting in May 2004. The FDA has had
GCP in place as a regulatory standard and requirement for new drug approval for
many years and Japan adopted GCP in 1998. The U.S., Europe and Japan have also
collaborated in the 14-year-long ICH, the purpose of which is to eliminate
duplicative or conflicting regulations in the three regions. The ICH partners
have agreed upon a common format (the Common Technical Document) for marketing
applications that eliminates the need to tailor the format to each region. Such
efforts and similar efforts in the future that streamline the regulatory process
may reduce the demand for the Company's services.
For example, parts of PAREXEL's PCMS business advises clients on how to satisfy
regulatory standards for manufacturing processes and on other matters related to
the enforcement of government regulations by the FDA and other regulatory
bodies. Any reduction in levels of review of manufacturing processes or levels
of regulatory enforcement, generally, would result in fewer business
opportunities for the PCMS business in this area. As a result of lower level of
FDA enforcement activities over the last two years, PCMS experienced a decline
in the group's GMP consulting business, which adversely affected the business
unit.
19
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.
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.
20
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, 2004, the Company's five largest clients accounted for 30% of its
consolidated service revenue, although no client accounted for 10% or more of
consolidated service revenue. In the fiscal year ended June 30, 2003, the
Company's five largest clients accounted for 32% of its consolidated service
revenue, and one client, AstraZeneca, accounted for 11% of consolidated service
revenue. The Company expects that a small number of clients will continue to
represent a significant part of its revenue. The Company's contracts with these
clients generally can be terminated on short notice. The Company has in the past
experienced contract cancellations with significant clients.
IF THE COMPANY'S PERCEPTIVE INFORMATICS BUSINESS IS UNABLE TO MAINTAIN
CONTINUOUS, EFFECTIVE, RELIABLE AND SECURE OPERATION OF ITS COMPUTER HARDWARE,
SOFTWARE AND INTERNET APPLICATIONS AND RELATED TOOLS AND FUNCTIONS, ITS BUSINESS
WILL BE HARMED
The Company's Perceptive Informatics business involves collecting, managing,
manipulating and analyzing large amounts of data, and communicating data via the
Internet. 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.
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 were unable to attract suitable and willing volunteers on a
consistent basis, it would have an adverse effect on the trials being managed by
its CRS business, which could have a material adverse effect on its CRS
business.
IF THE COMPANY'S HIGHLY QUALIFIED MANAGEMENT AND TECHNICAL PERSONNEL LEFT, ITS
BUSINESS WOULD BE HARMED
The Company relies on the expertise of its Chairman and Chief Executive Officer,
Josef H. von Rickenbach. If Mr. von Rickenbach left, it would be difficult and
expensive to find a qualified replacement with the level of specialized
knowledge of the Company's products and services and the bio/pharmaceutical
services industry. The Company is a party to an employment agreement with Mr.
von Rickenbach, which may be terminated by the Company or Mr. von Rickenbach
upon notice to the other party.
In addition, in order to compete effectively, the Company must attract and
maintain qualified sales, professional, scientific and technical operating
personnel. Competition for these skilled personnel, particularly those with a
medical degree, a Ph.D. or equivalent degrees, is intense. The Company may not
be successful in attracting or retaining key personnel.
21
THE COMPANY MAY HAVE SUBSTANTIAL EXPOSURE TO PAYMENT OF PERSONAL INJURY CLAIMS
AND MAY NOT HAVE ADEQUATE INSURANCE TO COVER SUCH CLAIMS
The Company's CRS business primarily involves the testing of experimental drugs
and medical devices on consenting human volunteers pursuant to a study protocol.
Clinical research involves a risk of liability for personal injury or death to
patients who participate in the study or who use a product approved by
regulatory authorities after the clinical research has concluded, due to, among
other reasons, possible unforeseen adverse side effects or improper
administration of the drug or device by physicians. In some cases, these
patients are already seriously ill and are at risk of further illness or death.
In order to mitigate the risk of liability, the Company seeks to include
indemnity provisions in its Clinical Research Services contracts with clients.
However, the Company is not able to include indemnity provisions in all of its
contracts. The indemnity provisions the Company includes in these contracts
would not cover its exposure if:
- the Company had to pay damages or incur defense costs in connection
with a claim that is outside the scope of an indemnity; or
- a client failed to indemnify the Company in accordance with the
terms of an indemnity agreement because it did not have the
financial ability to fulfill its indemnification obligation or for
any other reason.
The Company also carries insurance to cover its risk of liability. However, the
Company's insurance is subject to deductibles and coverage limits and may not be
adequate to cover claims. In addition, liability coverage is expensive. In the
future, the Company may not be able to maintain or obtain liability insurance on
reasonable terms, at a reasonable cost or in sufficient amounts to protect it
against losses due to claims.
THE COMPANY'S BUSINESS IS SUBJECT TO INTERNATIONAL ECONOMIC, POLITICAL AND OTHER
RISKS THAT COULD NEGATIVELY AFFECT ITS RESULTS OF OPERATIONS OR FINANCIAL
POSITION
The Company provides most of its services on a worldwide basis. The Company's
service revenue from non-U.S. operations represented approximately 61.6% of
total consolidated service revenue for the nine months ended March 31, 2005 and
approximately 53.7% of total consolidated service revenue for the nine months
ended March 31, 2004. In addition, the Company's service revenue from operations
in the United Kingdom represented approximately 20.7% of total consolidated
service revenue for the nine months ended March 31, 2005 and approximately 18.3%
of total consolidated service revenue for the nine months ended March 31, 2004.
The Company's service revenue from operations in Germany represented
approximately 18.2% of total consolidated service revenue for the nine months
ended March 31, 2005 and approximately 14.3% of total consolidated service
revenue for the nine months ended March 31, 2004. 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.
22
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 $(1.7) million for the quarter
ended March 31, 2004, $10.3 million for the quarter ended June 30, 2004, $9.6
million for the quarter ended September 30, 2004, $9.7 million for the quarter
ended December 31, 2004 and $9.7 million for the quarter ended March 31, 2005.
Factors that cause these variations include:
- the level of new business authorizations in a particular quarter or
year;
- the timing of the initiation, progress, or cancellation of
significant 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 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 65-70% of the
Company's total operating costs in fiscal year 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.
THE COMPANY'S REVENUE AND EARNINGS ARE EXPOSED TO EXCHANGE RATE FLUCTUATIONS
Approximately 61.6% of the Company's total consolidated service revenue for the
nine months ended March 31, 2005 and approximately 53.7% of the Company's total
consolidated service revenue for the nine months ended March 31, 2004 were from
non-U.S. operations. The Company's financial statements are denominated in U.S.
dollars. As a result, changes in foreign currency exchange rate, could have a
significant effect on the Company's operating results. Exchange rate
fluctuations between local currencies and the U.S. dollar create risk in several
ways, including:
- Foreign Currency Translation Risk. The revenue and expenses of the
Company's foreign operations are generally denominated in local
currencies, primarily the British pound and the Euro, and then are
translated into U.S. dollars for financial reporting purposes. For
the nine months ended March 31, 2005, approximately 20.7% of total
consolidated service revenue was denominated in British pounds and
approximately 33.2% of total consolidated service revenue was
denominated in Euros. For the nine months ended March 31, 2004,
approximately 18.3% of total consolidated service revenue was
denominated in British pounds and approximately 28.3% of total
consolidated service revenue was denominated in Euros.
- Foreign Currency Transaction Risk. The Company's service contracts
may be denominated in a currency other than the functional currency
in which it performs the service related to such contracts.
Although the Company tries to limit these risks through exchange rate
fluctuation provisions stated in its service contracts, or by hedging
transaction risk with foreign currency exchange contracts, it may still
experience fluctuations in financial results from its operations outside of the
U.S., and may not be able to favorably reduce the currency transaction risk
associated with its service contracts.
23
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.
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.
24
THE COMPANY'S CORPORATE GOVERNANCE STRUCTURE, INCLUDING PROVISIONS OF ITS
ARTICLES OF ORGANIZATION AND BY-LAWS AND ITS SHAREHOLDER RIGHTS PLAN, AND
MASSACHUSETTS LAW MAY DELAY OR PREVENT A CHANGE IN CONTROL OR MANAGEMENT THAT
STOCKHOLDERS MAY CONSIDER DESIRABLE
Provisions of the Company's articles of organization, by-laws and its
shareholder rights plan, as well as provisions of Massachusetts law, may enable
the Company's management to resist acquisition of the Company by a third party,
or may discourage a third party from acquiring the Company. These provisions
include the following:
- the Company has divided its board of directors into three classes
that serve staggered three-year terms;
- the Company is subject to Section 8.06 of the Massachusetts Business
Corporation Law which provides that directors may only be removed by
stockholders for cause, vacancies in the Company's board of
directors may only be filled by a vote of the Company's board of
directors and the number of directors may be fixed only by the
Company's board of directors;
- the Company is subject to Chapter 110F of the Massachusetts General
Laws which limits its ability to engage in business combinations
with certain interested stockholders;
- the Company's stockholders are limited in their ability to call or
introduce proposals at stockholder meetings; and
- the Company's shareholder rights plan would cause a proposed
acquirer of 20% or more of the Company's outstanding shares of
common stock to suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a
change in control of the Company or a change in the Company's management that
stockholders may consider favorable or beneficial. These provisions could also
discourage proxy contests and make it more difficult for stockholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of the
Company's stock. In addition, the Company's Board of Directors may issue
preferred stock in the future without stockholder approval. If the Company's
Board of Directors issues preferred stock, the holders of common stock would be
subordinate to the rights of the holders of preferred stock. The Company's Board
of Directors' ability to issue the preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the Company's stock.
THE COMPANY'S STOCK PRICE HAS BEEN AND MAY IN THE FUTURE BE VOLATILE, WHICH
COULD LEAD TO LOSSES BY INVESTORS
The market price of the Company's common stock has fluctuated widely in the past
and may continue to do so in the future. On May 6, 2005, the closing sale price
of the Company's common stock on the NASDAQ National Market was $18.27 per
share. During the period from April 1, 2003 to March 31, 2005, the price of the
Company's common stock ranged from a high of $25.04 per share to a low of $11.80
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 a
number of factors including:
- operating results;
- earnings estimates by analysts;
- market conditions in the industry;
- prospects of health care reform;
- changes in government regulations; and
- general economic conditions.
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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as foreign currency rates, interest rates, and other relevant
market rates or price changes. In the ordinary course of business, the Company
is exposed to market risk resulting from changes in foreign currency exchange
rates, and the Company regularly evaluates its exposure to such changes. The
Company's overall risk management strategy seeks to balance the magnitude of the
exposure and the costs and availability of appropriate financial instruments.
FOREIGN CURRENCY EXCHANGE RATES
The Company may be subjected to foreign currency transaction risk when the
Company's foreign subsidiaries enter into contracts or incur liabilities
denominated in a currency other than the foreign subsidiary's functional
currency. For the nine months ended March 31, 2005, approximately 20.7% of total
consolidated service revenue was denominated in British pounds and approximately
33.2% of total consolidated service revenue was denominated in Euros. The
Company implemented a derivative policy during the fourth quarter of fiscal year
2004 to hedge certain foreign denominated accounts receivable and intercompany
payables. Derivatives are accounted for in accordance with FAS 133.
Occasionally, the Company enters into other foreign currency exchange contracts
to offset the impact of currency fluctuations. These currency exchange contracts
are entered into as economic hedges, but are not designated as hedges for
accounting purposes as defined under FAS 133. The notional contract amount of
these outstanding currency exchange contracts was approximately $8.1 million at
March 31, 2005. The potential change in the fair value of these currency
exchange contracts that would result from a hypothetical change of 10% in
exchange rates would be approximately $0.8 million. The Company acknowledges its
exposure to additional foreign exchange risk as it relates to assets and
liabilities that are not part of the economic hedge program, but quantification
of this risk is very difficult to assess at any given point in time.
INTEREST RATE
The Company's exposure to interest rate changes is currently minimal as the
level of long-term debt the Company has is minimal. Long-term debt was
approximately $1.2 million as of March 31, 2005 and $0.5 million as of June 30,
2004.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures as of March 31, 2005. The term
"disclosure controls and procedures," as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company's
management, including its principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applies its judgment in evaluating
costs and benefits when implementing possible controls and procedures. Based on
the evaluation of the Company's disclosure controls and procedures as of March
31, 2005, the Company's chief executive officer and chief financial officer
concluded that, as of such date, the Company's disclosure controls and
procedures were effective at the reasonable assurance level.
No change in the Company's internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
three months ended March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
26
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides information about purchases of equity
securities by the Company and its affiliated purchasers during the
quarter ended March 31, 2005.
Maximum Number
Total Number of (or Appropriate
Shares (of Units) Dollar Value) of
Purchased as Shares(or Units)
Total Number Average Part of Publicly that May Yet Be
of Shares (or Price Paid Announced Purchased Under
Units) per Share (or Plans or the Plans or
Period Purchased Unit) Programs Programs (1)
01/01/05 - 01/31/05 10,800 $ 23.53 10,800 $ 19,720,576
02/01/05 - 02/28/05 152,348 $ 24.42 152,348 $ 16,000,083
03/01/05 - 03/31/05 - - - $ 16,000,083
------------- -------
Total 163,148 163,148
============= =======
(1) On September 9, 2004, the Board of Directors of the Company approved a stock
repurchase program authorizing the purchase of up to $20.0 million of the
Company's common stock to be repurchased in the open market subject to
market conditions, which was announced on September 10, 2004. Unless
terminated earlier by resolution of the Company's Board of Directors, the
Plan will expire when the entire amount authorized has been fully utilized.
ITEM 6. EXHIBITS
See the Exhibit Index on the page immediately preceding the exhibits for a
list of exhibits filed as part of this quarterly report, which Exhibit Index
is incorporated by this reference.
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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 9, 2005 By: /s/ Josef H. von Rickenbach
-------------------------------------------------
Josef H. von Rickenbach
Chairman of the Board and Chief Executive Officer
Date: May 9, 2005 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 Principal executive officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Principal financial officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Principal executive officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Principal financial officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
29