Kendle International Inc. (KNDL) filed Quarterly Report for the period ended 2009-09-30.
Kendle International Inc. is a contract research organization that provides a broad range of Phase I through IV clinical research and drug development services to the pharmaceutical and biotechnology industries. They augment the research and development activities of pharmaceutical and biotechnology companies by offering high quality, value added clinical research services and proprietary information technology designed to reduce drug development time and expense. Kendle International Inc. has a market cap of $227.5 million; its shares were traded at around $15.3 with a P/E ratio of 7.89 and P/S ratio of 0.34. Kendle International Inc. had an annual average earning growth of 11.4% over the past 10 years. GuruFocus rated Kendle International Inc. the business predictability rank of 2.5-star.
Highlight of Business Operations:
New business authorizations, representing new sales of our services, are added to backlog when the Company enters into a contract, letter of intent or other forms of commitments. Authorizations can vary significantly from quarter to quarter and contracts generally have terms ranging from several months to several years. The Company’s new business authorizations for the three months ended September 30, 2009 and 2008 were approximately $137 million and $212 million, respectively. New business authorizations for the nine months ended September 30, 2009 and 2008 were approximately $350 million and $597 million, respectively.
In the fourth quarter of 2008, the Company identified a programming issue unique to one study and one customer that required the Company to rework a large portion of the project and additionally, to bear costs that would, under normal circumstances, be absorbed by the customer. The Company accrued $4.9 million related to these costs in the fourth quarter of 2008 and, based on revised estimates, an additional $1.0 million in the first quarter of 2009. In the third quarter of 2009, as a result of ongoing discussions with the customer and the insurance provider, the Company increased the accrual for direct costs by $1.6 million to a total of $7.5 million and recorded a receivable for the insurance claim recovery of $5.0 million. The net reduction in direct costs in the third quarter of 2009 related to this programming issue and the insurance claim recovery was approximately $3.4 million.
Selling, general and administrative (SG&A) expenses decreased approximately $4.8 million for the quarter ended September 30, 2009 compared to the corresponding period of 2008 and $12.9 million for the nine month period of 2009 compared to 2008. As a percentage of net service revenues, SG&A expenses were 34.3% for the three month period of 2009 and 34.1% for the nine month period of 2009 compared to 32.6% and 33.3% for the same periods a year ago, respectively. Approximately $1.9 million of the third quarter and $9.9 million of the nine month decrease resulted from changes in foreign currency exchange rate fluctuations (calculated using 2009 actual costs at 2008 exchange rates). The remainder of the decrease in selling, general and administrative expenses relates primarily to the cost-savings initiatives in the second quarter of 2009, as discussed in more detail below. These actions reduced SG&A expenses from last year for both the quarter and the nine months.
In the second quarter of 2009, the Company commenced several initiatives to optimize its workforce and capacity and to reduce operating expenses. These activities included a reduction of discretionary spending, limiting previously planned headcount additions, delay or elimination of merit increases, reduction or elimination of other benefits, workforce reductions or furloughs, and other potential cost savings in an attempt to reduce expenses. The Company recorded a charge in the second quarter of 2009 for severance-related and other expenses (primarily related to facility closures), of approximately $6.0 million. In the third quarter of 2009, the Company revised its estimate of severance costs and expensed an additional $380,000. These measures are expected to result in $19 million to $22 million in cost savings in 2009. As of September 30, 2009, the Company remains on track regarding its restructuring plans. Since the bulk of the Company’s expenses are typically incurred in the Late Stage and Support and Other reportable segments, the majority of the costs removed from the business also affect those two segments.
Depreciation and amortization expense decreased by $0.3 million in the third quarter of 2009 compared to the third quarter of 2008. The decrease is mainly due to decreased amortization expense on finite-lived intangible assets. Finite-lived intangible assets are amortized in a manner consistent with the underlying expected future cash flows from the customers, resulting in higher amortization expense in the initial year of acquisition. For the nine months ended September 30 2009, depreciation and amortization expense increased by approximately $0.6 million over last year primarily as a result of a full nine months of amortization expense in 2009 on a customer relationship asset from the Kendle Toronto (DecisionLine) acquisition versus four months in 2008.
Late Stage segment income from operations declined by $3.7 million for the quarter ended September 30, 2009 and $16.9 million for the nine months ended September 30, 2009 as compared to last year. Operating margin for the Late Stage segment was 25.1% for the three month period in 2009 and 22.2% for the nine month period in 2009 compared to 24.1% for both periods in 2008. The decline in the Late Stage operating margin was due partially to a drop in net service revenues, primarily in the North American and European regions, driven by decreased utilization of billable associates and excess capacity. Additionally, for the nine month period the decline in Late Stage operating margin was due to the accrual of costs related to the workforce capacity optimization as discussed above.
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