SFBC INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————

FORM 10-Q

———————

ý Quarterly Report Under Section 13 or 15(d) of

the Securities Exchange Act of 1934.

For the quarterly period ended: March 31, 2005

Commission File No. 1-16119

SFBC INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

59-2407464

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

11190 Biscayne Blvd., Miami, FL 33181

(Address of principal executive offices) (Zip code)

(305) 895-0304

(Registrant’s telephone number, including area code)

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. ý Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý Yes ¨ No

The registrant has 18,277,692 shares of common stock outstanding as of April 30, 2005.

INDEX

	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004	1

Condensed Consolidated Statements of Earnings for the three months ended March 31, 2005 and 2004	2

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004	3-4

Notes to Condensed Consolidated Financial Statements	5-13

Item 2. Management’s Discussion and Analysis of Interim Financial Condition and Results of Operations	14-25

Item 3. Quantitative and Qualitative Disclosures About Market Risk	26

Item 4. Controls and Procedures	27

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	28

Item 2. Change in Securities and Use of Proceeds	28

Item 3. Defaults upon Senior Securities	28

Item 4. Submission of Matters to a Vote of Security Holders	28

Item 5. Other Information	28

Item 6. Exhibits and Reports on Form 8-K	29

SIGNATURES	30

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2005 AND DECEMBER 31, 2004

	(Unaudited) March 31, 2005		December 31, 2004
ASSETS
Current Assets
Cash and cash equivalents	55,595,703		24,908,585
Investment in marketable securities	9,736,808		9,735,708
Accounts receivable, net	96,462,992		98,067,099
Income tax receivable	5,717,798		6,996,120
Loans receivable from stockholders	212,219		207,288
Deferred income taxes	3,557,873		3,562,407
Prepaids and other current assets	9,549,152		6,788,903
Total current assets	180,832,545		150,266,110
Loans receivable from stockholders	200,000		200,000
Property and equipment, net	65,056,503		63,906,271
Goodwill, net	296,693,505		292,672,986
Other intangibles, net	35,103,516		38,421,973
Other assets, net	10,141,861		12,719,770
Total assets	588,027,930		558,187,110
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	10,236,399		15,203,741
Accrued liabilities	13,669,328		15,589,798
Purchase consideration due to stockholders	10,066,439		10,266,357
Client advances, current	19,144,046		23,309,597
Line of credit, current portion	5,000,000		5,000,000
Capital lease obligations and notes payable	2,977,386		3,257,288
Long term debt, current portion	4,687,500		10,000,000
Total current liabilities	65,781,098		82,626,781
Client advances	26,438,770		27,359,504
Deferred income taxes	16,046,620		16,165,895
Capital lease obligations and notes payable	4,808,796		5,510,022
Long term debt	44,270,833		110,000,000
2.25% Convertible senior notes payable, due 2024	143,750,000		143,750,000
Minority interest in joint venture	401,155		359,581
Commitments	—		—
Stockholders' equity
Preferred stock. $0.10 par value, 5,000,000 shares authorized, none issued
Common stock, $0.001 par value, 40,000,000 shares authorized, 18,277,692 shares and 15,053,888 shares issued and outstanding as of March 31, 2005 and December 31, 2004	18,278		15,054
Additional paid-in capital	232,993,018		123,005,497
Retained earnings	49,367,526		43,882,030
Deferred compensation	(73,033	)	(83,467	)
Accumulated other comprehensive earnings	4,224,869		5,596,213
Total stockholders' equity	286,530,658		172,415,327
Total liabilities and stockholders' equity	588,027,930		558,187,110

The accompanying notes are an integral part of these financial statements.

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

FOR THE THREE MONTHS ENDED March 31, 2005

	Three Months Ended March 31,
	2005			2004
Net revenue
Direct revenue	$	77,915,576		$	30,120,094
Reimbursed out-of-pockets		19,136,369			3,365,445
Total net revenue		97,051,945			33,485,539
Costs and expenses
Direct costs		43,894,723			15,398,503
Reimbursable out-of-pocket expenses		19,136,369			3,365,445
Selling, general and administrative expenses		21,578,083			10,034,111
Total costs and expenses		84,609,175			28,798,059
Earnings from operations		12,442,770			4,687,480
Other income (expense)
Interest income		397,556			172,686
Interest expense		(5,511,083	)		(105,548	)
Total other income (expense)		(5,113,527	)		67,138
Earnings before income taxes		7,329,243			4,754,618
Income tax expense		1,786,065			1,028,310
Earnings before minority interest in joint venture		5,543,178			3,726,308
Minority interest in joint venture		57,682			—
Net earnings	$	5,485,496		$	3,726,308

Earnings per share:
Basic	$	0.35		$	0.25
Diluted	$	0.33		$	0.24
Shares used in computing earnings per share:
Basic		15,784,111			14,982,494
Diluted		16,507,924			15,743,943

The accompanying notes are an integral part of these financial statements.

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED March 31, 2005 AND 2004

	2005			2004

Cash flows from operating activities
Net earnings		5,485,496			3,726,308
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Depreciation and amortization		4,303,823			1,427,191
Amortization of deferred debt issuance costs		2,684,866			—
Minority interest		57,682			—
Common stock options issued as compensation		10,434			42,112
Changes in assets and liabilities
Accounts receivable		1,604,107			(813,384	)
Income tax receivable		1,278,322			860,041
Prepaid expenses and other current assets		(2,760,249	)		(90,246	)
Other assets		(106,957	)		(189,796	)
Accounts payable		(4,967,342	)		(1,600,702	)
Accrued liabilities		(1,920,470	)		179,327
Client advances		(5,086,285	)		415,432
Deferred income taxes		(2,123,475	)		(324,213	)
Total adjustments		(7,025,544	)		(94,238	)
Net cash (used in) provided by operating activities		(1,540,048	)		3,632,070
Cash flows from investing activities
Additional purchase price considerations from prior acquisitions		(1,179,994	)		(1,355,709	)
Purchase of property and equipment		(4,614,646	)		(14,404,181	)
Change in long term investments and marketable securities		(1,100	)		(1,509,434	)
Net cash used in investing activities		(5,795,740	)		(17,269,324	)
Cash flows from financing activities
Borrowings on lines of credit		—			10,000,000
Payments on lines of credit		—			(1,000,000	)
Principal payments on long term debt		(71,041,667	)		—
Change in capital lease obligations and notes payable		(981,128	)		627,953
Proceeds from stock issued under employee stock purchase and option plans		864,315			402,616
Net proceeds from secondary public stock offering		108,213,048			—
Net cash provided by financing activities		37,054,568			10,030,569
Net effect of exchange rate changes on cash		968,338			(3,975	)
Net increase (decrease) in cash and cash equivalents		30,687,118			(3,610,660	)
Cash and cash equivalents at beginning of period		24,908,585			56,020,452
Cash and cash equivalents at end of period	$	55,595,703		$	52,409,792

The accompanying notes are an integral part of these financial statements.

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE THREE MONTHS ENDED March 31, 2005 AND 2004

	2005		2004
Supplemental disclosures:
Interest paid	$	5,511,083	$	105,548
Income taxes paid	$	783,205	$	—
Supplemental disclosures of non-cash investing and finance activities:
Common stock options issued as compensation	$	10,434	$	42,112
Capital lease obligations	$	35,975	$	1,345,400
Additional purchase considerations related to the acquisition of businesses	$	—	$	4,095,462
Change in the valuation of identifiable intangible assets related to the acquisition of businesses	$	2,142,000	$	—

The accompanying notes are an integral part of these financial statements.

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the 49%-owned Spanish joint venture. All financial information presented in this report relating to foreign subsidiaries has been converted to United States dollars. All significant intercompany balances and transactions have been eliminated in consolidation.

On July 25, 2004, the Company acquired Taylor Technology, Inc., based in Princeton, NJ. See Note 3 to the Condensed Consolidated Financial Statements.

On December 22, 2004 the Company acquired PharmaNet, Inc., based in Princeton, NJ. See Note 3 to the Condensed Consolidated Financial Statements.

Unless the context otherwise requires, all references in this Report to “we,” “us,” “our,” “SFBC International,” “SFBC,” or the “Company” refer to SFBC International, Inc. and its subsidiaries and predecessors as a combined entity.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been made. Operating results for the three month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the remaining quarters and for the year ending December 31, 2005.

Effective as of the close of business on May 19, 2004, we effected a three-for-two stock split. All historical earnings per share numbers, references to numbers of shares outstanding, references to our shares of common stock used in acquisitions, and other references, appearing in this Report have been retroactively adjusted as required by applicable accounting standards, except where we disclose that no adjustment has been made.

Certain prior period amounts have been reclassified to conform to the current period’s presentation.

SFBC INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying condensed consolidated financial statements have been prepared in accordance with the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and should be read in conjunction with the consolidated financial statements and notes which appear in that Report. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenue and expenses during the period. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to our financial statements. Management continually evaluates its estimates and assumptions, which are based on historical experience and other factors that are believed to be reasonable under the circumstances. These estimates and the Company’s actual results are subject to the risk factors referred to and incorporated by reference listed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements.”

Net Earnings Per Share

The Company applies Statement of Financial Accounting Standards No. 128, “Earnings Per Share” which requires dual presentation of net earnings per share; Basic and Diluted. Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by increasing the denominator to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Included in diluted shares