arexel expects to take a restructuring charge of around US$30 million in the second quarter of its 2010 fiscal year, “in conjunction with a realignment of our global resources”.
Announcing its first-quarter results, the US-based contract research organisation (CRO) acknowledged the “difficult market environment” but said there “appear to be promising signs of stabilisation”. Parexel continues “to believe that we are the key solution to many of the challenges that our client industries face”, commented chairman and chief executive officer Josef von Rickenbach.
The estimated hit to earnings per share (EPS) from the restructuring charge, which will consist mainly of severance and facility restructuring costs, will be US$0.30, assuming a tax rate of around 41.0%. Once implemented, the charge should benefit EPS by roughly US$0.22 per year, Parexel said, adding that savings would start to feed through during the third quarter of FY 2010.
“After many years, we have achieved our goal of establishing a comprehensive global presence to better serve our clients,” von Rickenbach stated. “As part of our ongoing efforts to leverage these resources more strategically, we will be realigning our global cost structure to further capitalise upon the value that is inherent in our worldwide infrastructure. We believe that these steps will strengthen the Company and optimally position us for future growth.”
Parexel also lowered its guidance for consolidated service revenues in fiscal year 2010 after first-quarter revenues dipped by 1.2% year on year to US$259.8 million. At the same time, the CRO raised its guidance for full-year diluted EPS (ignoring the restructuring charge), despite reporting an 8.7% decline in diluted earnings per share to US$0.21 for the first quarter. Operating income dropped by 16.0% against the first quarter of FY 2009, to US$18.5 million.
The revenue and income figures were complicated by the accounting adjustments reported by Parexel last August when it announced its financial results for the fourth quarter of fiscal 2009.
These related to ClinPhone, the UK-based clinical technology specialist acquired by Parexel in August 2008. The CRO had been recognising revenues and direct costs for contracts won by the ClinPhone Interactive Voice Response (IVR) part of its technology division, Perceptive Informatics, during the ‘start-up’ period for these contracts, rather than the estimated ‘hosting’ period for each study once an application went live.
This meant certain IVR-related start-up revenues and costs originally recorded during the first three quarters of fiscal 2009, as well as amounts expected to be recorded during the fourth quarter, needed to be deferred. The adjustments reduced consolidated service revenues by US$16.9 million, costs by US$4.9 million and operating income by US$12.0 million in the fourth quarter of fiscal 2009 and the full year.
In the latest quarter, Parexel explained, the reported year-before service revenues of US$263.0 million would have been US$257.3 million had the results taken into account the US$5.7 million in service revenue that was subsequently reversed in the fourth quarter of fiscal 2009 due to the accounting adjustments. On this basis, consolidated service revenues grew by around 1% year on year in the first quarter of FY 2010.
By the same token, stripping out the US$4.7 million net revenue and cost impact due to the accounting adjustments would have reduced operating income for the first quarter of FY 2009 from the reported US$22.0 million to US$17.2 million. As such, operating income for the latest quarter was 7.6% higher year on year rather than 16.0% lower as noted above.
Segment by segment, first-quarter service revenues for Clinical Research Services were down marginally year on year to US$202.3 million, while gross profit in the segment improved by 3.0% to US$73.0 million.
Parexel Consulting & Medical Communications Services saw its service revenues also drop slightly (-0.2%), to US$28.8 million, and its gross profit rise by 4.4% to US$10.4 million. Service revenues in the Perceptive Informatics segment were 5.0% lower at US$28.6 million and gross profit slipped by 12.1% to US$9.5 million.
Backlog at the end of September 2009 was around US$2.16 billion, up by 4.7% year on year. It included gross new business wins of US$322.1 million, cancellations of US$100.7 million, a positive impact of US$21.7 million from currency translation and a negative impact of US$2.4 million from other adjustments.
The net book-to-bill ratio, defined as gross new business wins minus cancellations and divided by service revenues, was about 0.85 to 1 for the quarter. Von Rickembach noted that client mergers and re-organisations of product portfolios had “created some unevenness in the demand for our services, as reflected in project proposal flow and time to award”.
Parexel expects consolidated service revenues for FY 2010 to be in the range of US$1.105 billion to US$1.125 billion, based on recent exchange rates. Its previous guidance was for full-year revenues of US$1.120 to US$1.150 billion.
The forecast for adjusted earnings per diluted share in fiscal year 2010 (excluding the second-quarter restructuring charge) was raised from US$0.85-US$0.95 to a range of US$0.87-US$$0.97. With the restructuring charge, full-year diluted EPS are projected at US$0.57-US$0.67.