SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 000-23019
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KENDLE INTERNATIONAL INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1274091
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
441 Vine Street, Suite 1200, Cincinnati, Ohio 45202
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (513) 381-5550
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(Former name or former address, if changed since last report)
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 and 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 12,373,082 shares of Common
Stock, no par value, as of October 31, 2001.
1
KENDLE INTERNATIONAL INC.
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3
Condensed Consolidated Statements of Operations - Three
Months Ended September 30, 2001 and 2000; Nine Months
Ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Comprehensive Income (Loss) -
Three Months Ended September 30, 2001 and 2000; Nine
Months Ended September 30, 2001 and 2000 5
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Part II. Other Information 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
2
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) September 30, December 31,
2001 2000
--------- ---------
(unaudited) (note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 5,726 $ 6,709
Available for sale securities 18,607 17,851
Accounts receivable 49,608 40,817
Unreimbursed investigator and project costs 5,797 5,426
Other current assets 5,237 7,052
--------- ---------
Total current assets 84,975 77,855
--------- ---------
Property and equipment, net 15,842 15,103
Goodwill, net 84,092 73,077
Other assets 11,116 10,484
--------- ---------
Total assets $ 196,025 $ 176,519
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases $ 555 $ 674
Amounts outstanding under credit facilities 16,079 1,600
Trade payables 4,759 5,268
Advances against investigator and project costs 2,490 1,736
Advance billings 13,679 16,342
Other accrued liabilities 11,286 12,839
--------- ---------
Total current liabilities 48,848 38,459
--------- ---------
Obligations under capital leases, less current portion 909 472
Other noncurrent liabilities 5,870 4,718
--------- ---------
Total liabilities 55,627 43,649
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock -- no par value; 100,000 shares authorized; no shares
issued and outstanding
Common stock -- no par value; 45,000,000 shares authorized;
12,379,822 and 11,763,307 shares issued and 12,362,542 and 11,763,307
outstanding at September 30, 2001 and December 31, 2000, respectively 75 75
Additional paid in capital 128,686 122,725
Retained earnings 15,429 13,116
Accumulated other comprehensive income:
Net unrealized holding gains (losses) on available for sale securities 42 (117)
Foreign currency translation adjustment (3,484) (2,929)
--------- ---------
Total accumulated other comprehensive loss (3,442) (3,046)
Less: Cost of common stock held in treasury, 17,280 and 0 shares at
September 30, 2001 and December 31, 2000, respectively (350) --
--------- ---------
Total shareholders' equity 140,398 132,870
--------- ---------
Total liabilities and shareholders' equity $ 196,025 $ 176,519
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data) For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues $ 39,439 $ 27,153 $ 110,353 $ 91,453
--------- --------- --------- ---------
Costs and expenses:
Direct costs 23,641 16,851 67,284 55,540
Selling, general and
administrative expenses 11,350 9,536 32,008 30,378
Depreciation and amortization 2,535 2,158 7,335 5,749
Employee severance and other costs -- -- -- 2,980
--------- --------- --------- ---------
37,526 28,545 106,627 94,647
--------- --------- --------- ---------
Income (loss) from operations 1,913 (1,392) 3,726 (3,194)
Other income (expense):
Interest income 217 275 721 748
Interest expense (238) (179) (617) (476)
Other 215 (88) 253 (14)
--------- --------- --------- ---------
Income (loss) before income taxes 2,107 (1,384) 4,083 (2,936)
Income tax expense (benefit) 934 (540) 1,770 (1,172)
--------- --------- --------- ---------
Net income (loss) $ 1,173 $ (844) $ 2,313 $ (1,764)
========= ========= ========= =========
Income (loss) per share data:
Basic:
Net income (loss) per share $ 0.09 $ (0.07) $ 0.19 $ (0.15)
========= ========= ========= =========
Weighted average shares 12,350 11,751 12,210 11,691
Diluted:
Net income (loss) per share $ 0.09 $ (0.07) $ 0.18 $ (0.15)
========= ========= ========= =========
Weighted average shares 13,044 11,751 12,803 11,691
The accompanying notes are an integral part of these condensed consolidated
financial statements
4
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands) For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------- ------- ------- -------
Net income (loss) $ 1,173 $ (844) $ 2,313 $(1,764)
------- ------- ------- -------
Other comprehensive income:
Foreign currency translation adjustment 943 (1,147) (555) (2,081)
Net unrealized holding gains on
available for sale securities arising
during the period, net of tax 34 84 154 121
Reclassification adjustment for holding
(gains) losses included in net income, net of tax (21) 33 5 33
------- ------- ------- -------
Net change in unrealized holding gains
on available for sale securities 13 117 159 154
------- ------- ------- -------
Comprehensive income (loss) $ 2,129 $(1,874) $ 1,917 $(3,691)
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
KENDLE INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) For the Nine Months Ended
September 30,
----------------------
2001 2000
-------- --------
Net cash provided by operating activities $ 3,670 $ 15,188
-------- --------
Cash flows from investing activities:
Proceeds from sales and maturities of available for sale securities 34,276 2,100
Purchases of available for sale securities (34,824) --
Acquisitions of property and equipment (3,173) (3,715)
Additions to software costs (2,356) (1,567)
Other investments (5) (732)
Acquisition of business, less cash acquired (10,789) (1,812)
Contingent purchase price paid in connection with prior acquisition (2,144) (2,680)
-------- --------
Net cash used in investing activities (19,015) (8,406)
-------- --------
Cash flows from financing activities:
Net proceeds (repayments) under credit facilities 14,450 (4,300)
Net proceeds (repayments) - book overdraft 393 (1,420)
Proceeds from exercise of stock options 458 20
Payments on capital lease obligations (667) (561)
Other (14) --
-------- --------
Net cash provided by (used in) financing activities 14,620 (6,261)
-------- --------
Effects of exchange rates on cash and cash equivalents (258) (336)
Net increase (decrease) in cash and cash equivalents (983) 185
Cash and cash equivalents:
Beginning of period 6,709 5,720
-------- --------
End of period $ 5,726 $ 5,905
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock in connection with contingent
purchase price relating to prior acquisition $ 796 $ 1,040
======== ========
Issuance of Common Stock in connection with Employee
Stock Purchase Plan $ 388 $ 313
======== ========
Acquisition of Businesses:
Fair value of assets acquired $ 16,474 $ 3,172
Fair value of liabilities assumed (1,812) (618)
Common Stock issued (3,873) (742)
-------- --------
Net cash payments $ 10,789 $ 1,812
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
KENDLE INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions to 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 (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for
the three months and nine months ended September 30, 2001 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2001. For further information, refer to the
consolidated financial statements and notes thereto included in the Form
10-K for the year ended December 31, 2000 filed by Kendle International
Inc. ("the Company") with the Securities and Exchange Commission.
The condensed consolidated balance sheet at December 31, 2000 has been
derived from the audited financial statements at that date but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
2. NET INCOME PER SHARE DATA:
Net income per basic share is computed using the weighted average
common shares outstanding. Net income per diluted share is computed using
the weighted average common shares and potential common shares outstanding.
The weighted average shares used in computing net income per diluted
share have been calculated as follows:
(in thousands) Three Months Ended Three Months Ended
September 30, 2001 September 30, 2000
------------------ -------------------
Weighted average common shares
outstanding 12,350 11,751
Stock options 663 --
Contingently issuable shares 31 --
------ ------
Weighted average shares 13,044 11,751
7
(in thousands) Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
---------- ------------------
Weighted average common shares
outstanding 12,210 11,691
Stock options 583
Contingently issuable shares 10 --
------ ------
Weighted average shares 12,803 11,691
Options to purchase approximately 581,000 and 712,000 shares of common
stock were outstanding during the three and nine months ended September 30,
2001 respectively, but were not included in the computation of earnings per
diluted share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would
be antidilutive.
Options to purchase approximately 1,700,000 shares of common stock
(approximately 400,000 shares of common stock equivalents) were outstanding
during the three and nine months ended September 30, 2000 but were not
included in the computation of earnings per diluted share because the
effect would be antidilutive.
3. ACQUISITIONS:
Details of the Company's acquisitions in 2000 and 2001 are listed
below. The acquisitions have been accounted for using the purchase method
of accounting, with goodwill as a result of the transactions being
amortized over 30 years. The escrow accounts referred to have been
established at acquisition date to provide indemnification of sellers'
representations and warranties.
Valuation of Common Stock issued in the acquisitions was based on the
market price of the shares discounted for lock-up restrictions and lack of
registration of the shares. The results of operations are included in the
Company's results from the respective dates of acquisition.
In February 2001, the Company acquired AAC Consulting Group, Inc., a
full service regulatory consulting firm with offices in Rockville,
Maryland. Total acquisition costs consisted of approximately $10.9 million
in cash and 374,665 shares of the Company's Common Stock. Of the total
shares, 124,888 shares were placed in an escrow account, 38,899 of which
were released in August 2001 and the remainder to be released in February
2002.
In April 2000, the Company acquired SYNERmedica Pty Ltd., a contract
research organization with offices in Melbourne and Sydney, Australia.
Total acquisition costs consisted of approximately $2.2 million in cash and
78,500 shares of the Company's Common Stock. The shares were placed in an
escrow account, 52,595 of which were released in May 2001 and the remainder
to be released in April 2002.
8
The following unaudited pro forma results of operations assume the
acquisitions occurred at the beginning of 2000:
(in thousands) Nine Months Ended Nine Months Ended
September 30, 2001 September 30, 2000
----------------- --------------------
Net revenues $ 112,233 $ 99,658
Net income (loss) $ 2,440 $ (1,498)
Net income (loss) per diluted share $ 0.19 $ (0.12)
Weighted average shares 13,164 12,108
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the acquisitions been
consummated as of January 1, 2000, nor are they necessarily indicative of
future operating results.
4. EMPLOYEE SEVERANCE AND OTHER COSTS:
In order to bring its cost structure more in line with revenue
projections, in the second quarter of 2000 the Company announced a plan to
eliminate approximately 125 full-time positions globally. Through September
30, 2001, the Company has eliminated approximately 120 of these positions.
In connection with the workforce reduction, the Company recorded a pre-tax
charge of approximately $3.0 million ($1.8 million net of tax) in the
second quarter of 2000, consisting primarily of severance, outplacement,
other employee benefit costs and facility related charges. As of September
30, 2001, $1.1 million remains accrued and is reflected in Other Accrued
Liabilities in the Company's Balance Sheet. The amounts accrued as employee
severance and other costs are detailed as follows:
(in thousands) Employee
Severance and
Outplacement Facilities Other Total
-------------------- --------------- --------- -------------
Liability at December 31, 2000 $ 443 $ 627 $ 404 $ 1,474
Payments/Write-Offs 47 187 96 330
-------------------- -------------- --------- -------------
Liability at September 30, 2001 $ 396 $440 $ 308 $ 1,144
5. SEGMENT INFORMATION:
The Company is managed through two reportable segments, namely, the
contract research services group and the medical communications group. The
contract research services group constitutes the Company's core business
and includes clinical trial management, clinical data management,
statistical analysis, medical writing, and regulatory consultation,
including current Good Manufacturing Practice compliance and validation
services. The medical communications group, which includes only Health Care
Communications Inc. (HCC), provides organizational, meeting management and
publication services to professional organizations and pharmaceutical
companies. Overhead costs are included in the contract research services
group and have not been allocated.
9
(in thousands) Contract
Research Medical
Services Communications Total
--------- --------- ---------
Three Months Ended September 30, 2001
Net revenues $ 37,955 $ 1,484 $ 39,439
Net income 733 440 1,173
Three Months Ended September 30, 2000
Net revenues $ 25,517 $ 1,636 $ 27,153
Net income (loss) (1,346) 502 (844)
Nine Months Ended September 30, 2001
Net revenues $ 105,544 $ 4,809 $ 110,353
Net income 1,099 1,214 2,313
Nine Months Ended September 30, 2000
Net revenues $ 87,115 $ 4,338 $ 91,453
Net income (loss) (3,004) 1,240 (1,764)
September 30, 2001
Identifiable Assets $ 172,025 $ 24,000 $ 196,025
6. DEBT:
The Company has two Senior Credit Facilities (the Credit Facilities).
The Credit Facilities are composed of a $35.0 million revolving credit loan
and a $5.0 million Multicurrency Facility that is used in connection with
the Company's European operations. The $35.0 million facility bears
interest at a rate equal to either (a) LIBOR plus the Applicable Margin (as
defined) or (b) the higher of the Bank's prime rate or the Federal Funds
rate plus 0.50%, plus the Applicable Margin. The $5.0 million facility is
composed of a euro overdraft facility up to the equivalent of $3.0 million
and a sterling overdraft facility up to the equivalent of $2.0 million.
This Multicurrency Facility bears interest at a rate equal to either (a)
the rate published by the European Central Bank plus a margin (as defined)
or (b) the bank's Base Rate (as determined by the bank having regard to
prevailing market rates) plus a margin (as defined). The facilities contain
various restrictive financial covenants, including the maintenance of
certain fixed coverage and leverage ratios as well as minimum net worth
levels. At September 30, 2001, $11.2 million was outstanding under the
Company's $35 million revolving credit loan and $4.9 million was
outstanding under the $5.0 million Multicurrency Facility. Interest is
payable on the $11.2 million outstanding at a weighted average rate of 4.8%
and on the $4.9 million at a weighted average rate of 5.3%.
10
7. NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" that requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The Company has
adopted SFAS No. 141 and the adoption did not have an impact on the
Company's results of operations or its financial position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets" that requires that all intangible assets determined to
have an indefinite useful life no longer be amortized but instead be
reviewed at least annually for impairment. The Company will adopt SFAS No.
142 as of January 1, 2002, as required. The adoption of SFAS No. 142 is
expected to reduce goodwill amortization expense by approximately $3.2
million annually ($2.5 million on an after-tax basis), and result in
additional earnings per share of approximately $0.20. The Company is in the
process of assessing the impact of any impairment under the new tests
prescribed by the standard.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
of" and certain provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The statement is effective for fiscal years beginning after
December 15, 2001. The Company is in the process of assessing the
provisions of this standard to determine any impact on the Company's
results of operations or its financial position.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information discussed below is derived from the Condensed Consolidated
Financial Statements included in this Form 10-Q for the three and nine months
ended September 30, 2001 and should be read in conjunction therewith. The
Company's results of operations for a particular quarter may not be indicative
of results expected during subsequent quarters or for the entire year.
COMPANY OVERVIEW
Kendle International Inc. ("the Company") is an international contract
research organization (CRO) that provides integrated clinical research services
including clinical trial management, clinical data management, statistical
analysis, medical writing, and regulatory consultation, including current Good
Manufacturing Practice compliance and validation services, on a contract basis
to the pharmaceutical and biotechnology industries. Kendle also provides
organizational, meeting management and publication services to professional
associations and pharmaceutical companies through its subsidiary, Health Care
Communications Inc. (HCC). The Company is managed through two reportable
segments, the contract research services group and the medical communications
group. The medical communications group includes only HCC.
The Company's contracts are generally fixed price, with some variable
components, and range in duration from a few months to several years. A portion
of the contract fee is typically required to be paid at the time the contract is
entered into and the balance is received in installments over the contract's
duration, in most cases on a milestone achievement basis. Net revenues from
contracts are generally recognized on the percentage of completion method,
measured principally by the total costs incurred as a percentage of estimated
total costs for each contract. The estimated total costs of contracts are
reviewed and revised periodically throughout the lives of the contracts with
adjustments to revenues resulting from such revisions being recorded on a
cumulative basis in the period in which the revisions are made. The Company also
performs work under time-and-materials contracts, recognizing revenue as hours
are worked based on the hourly billing rates for each contract. Additionally,
the Company incurs costs, in excess of contract amounts, in subcontracting with
third-party investigators. Such costs, which are reimbursable by its customers,
are generally excluded from direct costs and net revenues. In certain contracts,
however, these costs are fixed by the contract terms. In these instances, the
Company recognizes these costs as direct costs with corresponding net revenues.
Direct costs consist of compensation and related fringe benefits for
project-related associates, unreimbursed project-related costs and indirect
costs including facilities, information systems and other costs. Selling,
general and administrative expenses consist of compensation and related fringe
benefits for sales and administrative associates and professional services, as
well as unallocated costs related to facilities, information systems and other
costs.
The Company's results are subject to volatility due to such factors as the
commencement, completion, cancellation or delay of contracts; the progress of
ongoing projects; cost overruns; the Company's sales cycle; or the ability to
maintain large customer contracts or to enter into new contracts. In addition,
the Company's aggregate backlog is not necessarily a meaningful indicator of
future results. Accordingly, no assurance can be given that the Company will be
able to realize the net revenues included in the backlog.
12
ACQUISITIONS
In February 2001, the Company acquired AAC Consulting Group, Inc., a
regulatory consulting firm based in Rockville, Maryland. Total acquisition costs
consisted of approximately $10.9 million in cash and 374,665 shares of the
Company's Common Stock.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Net revenues increased by 45% in the third quarter of 2001 compared to the
third quarter of 2000. The increase in net revenues was composed of growth from
acquisitions of 10% and growth in organic revenues of 35%. The growth in organic
revenues is primarily attributable to the increased level of clinical
development activity in 2001. Revenue in the third quarter of 2001 was
negatively impacted by approximately $281,000 compared to the same period in
2000 due to the effect of foreign currency fluctuations related to the
strengthening of the U.S. dollar. By geographic region, North America accounted
for approximately 71% of net revenues during the quarter, Europe 27% and
Asia-Pacific 2%, compared to 63%, 35%, and 2%, respectively, in the third
quarter of 2000. The top five customers based on net revenues contributed
approximately 47% of net revenues during the quarter. Net revenues from
Pharmacia Inc. and Pfizer Inc. accounted for approximately 14% and 11%,
respectively, of total third quarter 2001 net revenues.
Direct costs increased by 40% from the third quarter of 2000 to the third
quarter 2001. The 40% increase in direct costs is composed of a 31% increase in
organic direct costs and a 9% increase in direct costs due to the impact of
acquisitions. The increase in organic direct costs is primarily a result of an
increase in certain project-related costs. These project-related costs are
normally billed back to the customer as a "pass-through" expense and are
excluded from costs and revenues. However, in a small number of the Company's
contracts, these costs are fixed by the contract terms and have been recorded as
direct costs and net revenues, producing a zero profit margin. Direct costs
expressed as a percentage of net revenues were 59.9% for the three months ended
September 30, 2001 compared to 62.1% for the three months ended September 30,
2000. The decrease in these costs as a percentage of net revenues is due to a
higher level of revenue per billable employee resulting from increased
utilization of billable employees.
Selling, general and administrative expenses increased by 19% in the third
quarter of 2001 compared to 2000. The 19% increase in selling, general and
administrative expenses is composed of a 13% increase in organic SG&A costs and
a 6% increase in SG&A costs due to the impact of acquisitions. The increase in
organic SG&A costs is primarily due to increased employee-related costs such as
accrued bonus, recruiting costs and other employee costs incurred to support the
larger revenue base. Selling, general and administrative expenses expressed as a
percentage of net revenues were 28.8% for the three months ended September 30,
2001 compared to 35.1% for the corresponding 2000 period. The decrease in these
costs as a percentage of net revenues is primarily due to efficiencies realized
from the workforce reduction program that was implemented in the second quarter
of 2000.
Depreciation and amortization expense increased by 17% in the third quarter
of 2001 compared to the third quarter of 2000. The increase is due to increased
amortization of goodwill as a result of the Company's acquisitions and increased
depreciation expense as a result of the Company's capital expenditures.
13
Net income for the third quarter of 2001 was $1.2 million compared to a net
loss of $844,000 for the corresponding period of 2000.
The Company's effective tax rate was 44.3% for the three months ended
September 30, 2001 as compared to 39.0% for the three months ended September 30,
2000. The increase in the effective tax rate is primarily due to the larger
impact of non-deductible goodwill amortization in 2001 and increased investment
in taxable rather than tax-exempt securities in 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Net revenues increased by 21% in the first nine months of 2001 compared to
the same period of 2000. The 21% increase in net revenues was composed of
organic growth of 12% and growth from acquisitions of 9%. The growth in organic
revenues is primarily attributable to the increased level of clinical
development activity in 2001. Revenue in the first nine months of 2001 was
negatively impacted by approximately $2.4 million due to the effect of foreign
currency fluctuations related to the strengthening of the U.S. dollar. By
geographic region, North America accounted for approximately 69% of the
Company's nine months ended September 30, 2001 net revenues, Europe 29% and
Asia-Pacific 2%, compared to 63%, 36%, and 1%, respectively, in the first nine
months of 2000. The top five customers based on net revenues accounted for
approximately 45% of total nine month 2001 net revenues. Net revenues from
Pfizer Inc. and Pharmacia Inc. accounted for approximately 12% and 11%,
respectively, of total nine month 2001 net revenues.
Direct costs increased by 21% for the nine months ended September 30, 2001
compared to the corresponding period in 2000. The 21% increase in direct costs
is composed of a 15% increase in organic direct costs and a 6% increase in
direct costs due to the impact of acquisitions. The increase in organic direct
costs is primarily a result of an increase in certain project-related costs.
These project-related costs are normally billed back to the customer as a
"pass-through" expense and are excluded from costs and revenues. However, in a
small number of the Company's contracts, these costs are fixed by the contract
terms and have been recorded as direct costs and net revenues, producing a zero
profit margin. Direct costs expressed as a percentage of net revenues were 61.0%
for the nine months ended September 30, 2001 compared to 60.7% for the nine
months ended September 30, 2000.
Selling, general and administrative expenses increased by 5% in the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000. The 5% increase in SG&A expenses is composed almost entirely of an
increase in costs due to the impact of acquired companies. Selling, general and
administrative expenses expressed as a percentage of net revenues decreased to
29% for the nine months ended September 30, 2001 from 33% for the nine months
ended September 30, 2000. The decrease in these costs as a percentage of net
revenues is primarily due to efficiencies realized from the workforce reduction
program that was implemented in the second quarter of 2000.
Depreciation and amortization expense increased by 28% in the nine months
ended September 30, 2001 compared to the nine months ended September 30, 2000.
The increase is due to increased amortization of goodwill as a result of the
Company's acquisitions and increased depreciation expense as a result of the
Company's capital expenditures.
14
Net income for the nine months ended September 30, 2001 was $2.3 million
compared to a net loss for the nine months ended September 30, 2000 of $1.8
million, inclusive of the $1.8 million after tax charge relating to the
workforce reduction program. Excluding the effect of this charge, net income
would have been approximately $56,000 for the nine months of 2000.
The Company's effective tax rate was 43.4% for the nine months ended
September 30, 2001 as compared to 39.9% for the nine months ended September 30,
2000. The increase in the effective tax rate is primarily due to the larger
impact of non-deductible goodwill amortization in 2001 and increased investment
in taxable rather than tax-exempt securities in 2001
SEGMENT INFORMATION
The Company is managed through two reportable segments, the contract
research services group and the medical communications group. The medical
communications group includes only HCC. Overhead costs are included in the
contract research services group and have not been allocated.
Net revenues from the contract research services group increased to $37.9
million for the third quarter of 2001 from $25.6 million for the third quarter
of 2000. Net income from the contract research services group was $0.7 million
for the third quarter of 2001 compared to a net loss of $1.3 million for the
third quarter of 2000.
Net revenues from the medical communications group decreased to $1.5
million for the third quarter of 2001 compared to $1.6 million for the third
quarter of 2000. Net income from the medical communications group decreased to
$0.4 million in the quarter ended September 30, 2001 compared to $0.5 million
for the corresponding period of 2000. Net revenues and profitability vary
according to the mix of contracts and the timing of work completed in the
medical communications group.
Net revenues from the contract research services group increased to $105.6
million for the nine months ended September 30, 2001 compared to $87.2 million
for the nine months ended September 30, 2000. Net income from the contract
research services group was $1.1 million for the nine months ended September 30,
2001 compared to a net loss of $3.0 million for the nine months ended September
30, 2000.
Net revenues from the medical communications group increased to $4.8
million for the nine months ended September 30, 2001 compared to $4.3 million
for the corresponding period in 2000. Net income from the medical communications
group was $1.2 million for each period.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.0 million for the nine months
ended September 30, 2001 primarily as a result of cash provided by operating and
financing activities of $3.7 million and $14.6 million, respectively, offset by
cash used in investing activities of $19.0 million. Net cash provided by
operating activities primarily resulted from net income
15
adjusted for non-cash activity offset by an increase in accounts receivable and
a decrease in advance billings. Fluctuations in accounts receivable and advance
billings occur on a regular basis as services are performed, milestones or other
billing criteria are achieved, invoices are sent to customers, and payments for
outstanding accounts receivable are collected from customers. Such activity
varies by individual customer and contract.
Investing activities for the nine months ended September 30, 2001 consisted
primarily of costs incurred related to the Company's acquisition of $10.8
million, net of cash acquired, capital expenditures of approximately $5.5
million, and cash paid for contingent purchase price of $2.1 million.
Financing activities for the nine months ended September 30, 2001 consisted
primarily of net borrowings of $14.5 million under the Company's credit
facilities.
The Company had available for sale securities totaling $18.6 million at
September 30, 2001.
The Company has two Senior Credit Facilities (the Credit Facilities). The
Credit Facilities are composed of a $35.0 million revolving credit loan that
expires in October 2003 and a $5.0 million Multicurrency Facility that is
renewable annually that is used in connection with the Company's European
operations. The $35.0 million facility bears interest at a rate equal to either
(a) LIBOR plus the Applicable Margin (as defined) or (b) the higher of the
Bank's prime rate or the Federal Funds rate plus 0.50%, plus the Applicable
Margin. The $5.0 million facility is composed of a euro overdraft facility up to
the equivalent of $3.0 million and a sterling overdraft facility up to the
equivalent of $2.0 million. This Multicurrency Facility bears interest at a rate
equal to either (a) the rate published by the European Central Bank plus a
margin (as defined) or (b) the bank's Base Rate (as determined by the bank
having regard to prevailing market rates) plus a margin (as defined). The
facilities contain various restrictive financial covenants, including the
maintenance of certain fixed coverage and leverage ratios as well as minimum net
worth levels. At September 30, 2001, $11.2 million was outstanding under the
Company's $35 million revolving credit loan and $4.9 million was outstanding
under the $5 million Multicurrency Facility. Interest is payable on the $11.2
million outstanding at a weighted average rate of 4.8% and on the $4.9 million
at a weighted average rate of 5.3%.
The Company's primary cash needs on both a short-term and long-term basis
are for the payment of salaries and fringe benefits, hiring and recruiting
expenses, business development costs, capital expenditures, acquisitions, and
facility related expenses. The Company believes that its existing capital
resources, together with cash flows from operations and borrowing capacity under
its Credit Facilities, will be sufficient to meet its foreseeable cash needs. In
the future, the Company will continue to consider acquiring businesses to
enhance its service offerings, therapeutic base and 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 issuance of equity or
debt securities. There can be no assurance that such financing will be available
on terms acceptable to the Company.
16
MARKET RISK
Interest Rates
The Company is exposed to changes in interest rates on its available for
sale securities and amounts outstanding under its Credit Facilities.
Available-for-sale securities are recorded at fair value in the financial
statements. These securities are exposed to market price risk, which also takes
into account interest rate risk. At September 30, 2001, the potential loss in
fair value resulting from a hypothetical decrease of 10% in quoted market price
would be approximately $1.9 million. The Company is also exposed to interest
rate changes on its variable rate borrowings. Based on the Company's September
30, 2001 amounts outstanding under Credit Facilities, a one percent change in
the weighted average interest rate would change the Company's annual interest
expense by approximately $160,000.
Foreign Currency
The Company operates on a global basis and is therefore exposed to various
types of currency risks. Two specific transaction risks arise from the nature of
the contracts the Company executes with its customers since from time to time
contracts are denominated in a currency different than the particular
subsidiary's local currency. This contract currency denomination issue is
applicable only to a portion of the contracts executed by the Company's foreign
subsidiaries. The first risk occurs as revenue recognized for services rendered
is denominated in a currency different from the currency in which the
subsidiary's expenses are incurred. As a result, the subsidiary's net revenues
and resultant net income can be affected by fluctuations in exchange rates.
Historically, fluctuations in exchange rates from those in effect at the time
contracts were executed have not had a material effect upon the Company's
consolidated financial results.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, the Company recognizes a receivable at the
time of invoicing at the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
until the payment from the customer is received will result in the Company
receiving either more or less in local currency than the local currency
equivalent of the invoice amount at the time the invoice was prepared and the
receivable established. This difference is recognized by the Company as a
foreign currency transaction gain or loss, as applicable, and is reported in
other income (expense) in the consolidated statements of income.
The Company's consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
consolidated financial statements. The Company's foreign subsidiaries translate
their financial results from local currency into U.S. dollars as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the shareholders' equity
account, referred to as the foreign currency translation adjustment account.
This account exists only in the foreign subsidiary's U.S. dollar balance sheet
and is necessary to keep the foreign balance sheet stated in U.S. dollars in
balance. Foreign currency translation adjustments, reported as a separate
component of shareholders' equity were $(3.5) million at September 30, 2001
compared to $(2.9) million at December 31, 2000.
17
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" that requires all business combinations initiated after June 30,
2001 to be accounted for using the purchase method. The Company has adopted SFAS
No. 141, and the adoption did not have an impact on the Company's results of
operations or its financial position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" that requires that all intangible assets determined to have an
indefinite useful life no longer be amortized, but instead be reviewed at least
annually for impairment. The Company will adopt SFAS No. 142 as of January 1,
2002, as required. The adoption of SFAS No. 142 is expected to reduce goodwill
amortization expense by approximately $3.2 million annually ($2.5 million on an
after-tax basis), and result in additional earnings per share of approximately
$0.20. The Company is in the process of assessing the impact of any impairment
under the new test prescribed by the standard.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" and
certain provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." The statement is
effective for fiscal years beginning after December 15, 2001. The Company is in
the process of assessing the provisions of this standard to determine any impact
on the Company's results of operations or its financial position.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain statements contained in this Form 10-Q that are not historical
facts constitute forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995, and are intended to be covered by the
safe harbors created by that Act. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to differ materially from those expressed or implied. Any
forward-looking statement speaks only as of the date made. The Company
undertakes no obligation to update any forward-looking statements to reflect
events or circumstances arising after the date on which they are made.
Statements concerning expected financial performance, on-going business
strategies and possible future action which the Company intends to pursue to
achieve strategic objectives constitute forward-looking information.
Implementation of these strategies and the achievement of such financial
performance are each subject to numerous conditions, uncertainties and risk
factors. Factors which could cause actual performance to differ materially from
these forward-looking statements include, without limitation, factors discussed
in conjunction with a forward-looking statement, changes in general economic
conditions, competitive factors, outsourcing trends in the pharmaceutical
industry, the Company's ability to manage growth and to continue to attract and
retain qualified personnel, the Company's ability to complete additional
acquisitions and to integrate newly acquired businesses, the Company's ability
to penetrate new markets, competition and consolidation within the industry, the
ability of joint venture businesses to be integrated with the Company's
operations, the fixed price nature of contracts or the loss of large contracts,
cancellation or delay of contracts, the progress of ongoing projects, cost
18
overruns, the Company's sales cycle, the ability to maintain large customer
contracts or to enter into new contracts, the effects of exchange rate
fluctuations, and the other risk factors set forth in the Company's SEC filings,
copies of which are available upon request from the Company's investor relations
department. No assurance can be given that the Company will be able to realize
the net revenues included in backlog and verbal awards. The Company believes
that its aggregate backlog and verbal awards are not necessarily meaningful
indicators of future results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - Not applicable
Item 3. Defaults upon Senior Securities - Not applicable
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - Not applicable
Item 6. Exhibits and Reports on Form 8-K -- None
(a) Exhibits
(b) No reports on Form 8-K were filed during the quarter.
20
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 hereunto duly authorized.
KENDLE INTERNATIONAL INC.
By: /s/ Candace Kendle
-----------------------------------
Date: November 14, 2001 Candace Kendle
Chairman of the Board and Chief
Executive Officer
By: /s/ Timothy M. Mooney
-------------------------------
Date: November 14, 2001 Timothy M. Mooney
Executive Vice President -
Chief Financial Officer
21
KENDLE INTERNATIONAL INC.
EXHIBIT INDEX
Exhibits Description
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