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EX-31.1 - EXHIBIT 31.1 - PAREXEL INTERNATIONAL CORPprxl31103312015.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
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
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
195 West Street
Waltham, Massachusetts
 
02451
(Address of principal executive offices)
 
(Zip Code)
(781) 487-9900
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.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
 
Non-accelerated Filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 29, 2015, there were 55,169,257 shares of common stock outstanding.




PAREXEL INTERNATIONAL CORPORATION
INDEX
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited): March 31, 2015 and June 30, 2014
 
 
 
 
Condensed Consolidated Statements Of Cash Flows (Unaudited): Nine Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands)
 
March 31, 2015
 
June 30, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
295,351

 
$
188,171

Marketable securities

 
95,641

Billed and unbilled accounts receivable, net
705,741

 
722,623

Prepaid expenses
18,098

 
13,641

Deferred tax assets
57,093

 
54,061

Income taxes receivable
4,875

 

Other current assets
43,861

 
47,995

Total current assets
1,125,019

 
1,122,132

Property and equipment, net
213,704

 
234,164

Goodwill
323,769

 
329,520

Other intangible assets, net
82,992

 
91,855

Non-current deferred tax assets
8,503

 
6,669

Long-term income taxes receivable
10,575

 
13,406

Other assets
34,247

 
36,254

Total assets
$
1,798,809

 
$
1,834,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
5,000

 
$
12,501

Accounts payable
60,340

 
66,483

Deferred revenue
383,863

 
422,441

Accrued expenses
38,089

 
52,034

Accrued employee benefits and withholdings
142,812

 
175,840

Current deferred tax liabilities
12,468

 
16,592

Income taxes payable

 
19,384

Other current liabilities
35,318

 
5,957

Total current liabilities
677,890

 
771,232

Long-term debt, net of current portion
377,049

 
334,443

Non-current deferred tax liabilities
33,123

 
32,598

Long-term income tax liabilities
27,886

 
29,525

Long-term deferred revenue
39,179

 
44,523

Other liabilities
39,919

 
43,998

Total liabilities
1,195,046

 
1,256,319

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
551

 
547

Additional paid-in capital
29,570

 

Retained earnings
688,687

 
575,044

Accumulated other comprehensive (loss) income
(115,045
)
 
2,090

Total stockholders’ equity
603,763

 
577,681

Total liabilities and stockholders’ equity
$
1,798,809

 
$
1,834,000


The accompanying notes are an integral part of the condensed consolidated financial statements.


2



PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except per share data) 
 
Three Months Ended

Nine Months Ended
 
March 31, 2015

March 31, 2014

March 31, 2015

March 31, 2014
Service revenue
$
502,033

 
$
492,375

 
$
1,492,998

 
$
1,428,765

Reimbursement revenue
74,382

 
85,543

 
232,151

 
252,453

Total revenue
576,415

 
577,918

 
1,725,149

 
1,681,218

Direct costs
337,954

 
323,149

 
984,094

 
950,850

Reimbursable out-of-pocket expenses
74,382

 
85,543

 
232,151

 
252,453

Selling, general and administrative
88,427

 
96,528

 
286,135

 
276,968

Depreciation
17,934

 
16,802

 
51,644

 
48,848

Amortization
3,489

 
3,725

 
10,532

 
11,383

Total costs and expenses
522,186

 
525,747

 
1,564,556

 
1,540,502

Income from operations
54,229

 
52,171

 
160,593

 
140,716

Interest expense, net
(1,820
)
 
(2,072
)
 
(5,392
)
 
(7,342
)
Miscellaneous income (expense), net
1,314

 
(292
)
 
7,594

 
(1,694
)
Total other (expense) income
(506
)
 
(2,364
)
 
2,202

 
(9,036
)
Income before income taxes
53,723

 
49,807

 
162,795

 
131,680

Provision for income taxes
15,982

 
15,068

 
49,152

 
42,658

Net income
$
37,741


$
34,739

 
$
113,643


$
89,022

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.61

 
$
2.07

 
$
1.58

Diluted
$
0.68

 
$
0.60

 
$
2.04

 
$
1.55

Shares used in computing earnings per common share
 
 
 
 
 
 
 
Basic
54,930

 
56,713

 
54,830

 
56,494

Diluted
55,838

 
57,673

 
55,769

 
57,486

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
37,741

 
$
34,739

 
$
113,643

 
$
89,022

Unrealized (loss) gain on derivative instruments, net of taxes
(867
)
 
(176
)
 
(12,132
)
 
4,750

Foreign currency translation adjustment
(36,056
)
 
(686
)
 
(105,003
)
 
22,256

Total comprehensive income (loss)
$
818

 
$
33,877

 
$
(3,492
)
 
$
116,028


The accompanying notes are an integral part of the condensed consolidated financial statements.


3



PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 
 
Nine Months Ended
 
March 31, 2015
 
March 31, 2014
Cash flow from operating activities:
 
 
 
Net income
$
113,643

 
$
89,022

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
62,176

 
60,231

Stock-based compensation
13,181

 
10,880

Excess tax benefit from stock-based compensation
(7,570
)
 
(3,467
)
Deferred income taxes
(5,501
)
 
(11,927
)
Other non-cash items
(4,355
)
 
(134
)
Changes in operating assets and liabilities, net of effects from acquisitions
(72,972
)
 
44,094

Net cash provided by operating activities
98,602

 
188,699

Cash flow from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
(10,880
)
 
(150
)
Purchase of marketable securities

 
(154,691
)
Proceeds from sale and maturity of marketable securities
88,564

 
291,824

Purchase of property and equipment
(45,607
)
 
(49,730
)
Net cash provided by investing activities
32,077

 
87,253

Cash flow from financing activities:
 
 
 
Proceeds from issuance of common stock, net
8,822

 
3,869

Excess tax benefit from stock-based compensation
7,570

 
3,467

Payments for share repurchase

 
(4,906
)
Borrowings under credit agreement/facility
342,500

 
345,000

Repayments under credit agreement/facility
(307,500
)
 
(482,500
)
Borrowings under factoring agreement

 
4,497

Payments for debt issuance costs
(684
)
 
(671
)
Net cash provided by (used in) financing activities
50,708

 
(131,244
)
Effect of exchange rate changes on cash and cash equivalents
(74,207
)
 
9,920

Net increase in cash and cash equivalents
107,180

 
154,628

Cash and cash equivalents at beginning of period
188,171

 
144,027

Cash and cash equivalents at end of period
$
295,351

 
$
298,655

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Non-cash debt settlement under factoring agreement
$

 
$
14,359

Cash paid during the period for:
 
 
 
Interest
$
8,891

 
$
10,957

Income taxes, net of refunds
$
61,511

 
$
44,775


The accompanying notes are an integral part of the condensed consolidated financial statements.


4



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,” the “Company,” “we,” “our” or “us”) have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information in the United States and 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 of the Company’s financial position as of March 31, 2015, results of operations for the three and nine months ended March 31, 2015 and 2014 have been included. Operating results for the three and nine months ended March 31, 2015 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 audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014 (the “2014 10-K”) filed with the Securities and Exchange Commission on August 20, 2014.
Recently Adopted Accounting Standards
In March 2013, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. We adopted ASU 2013-05 beginning in our fiscal quarter ended September 30, 2014. The adoption of ASU 2013-05 did not impact our consolidated financial statements.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption is not permitted. We are assessing the impact of adopting ASU No. 2014-09 on our consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification (“ASC”) 718, Compensation—Stock Compensation, as it relates to such awards. ASU 2014-12 will be effective in the first quarter of our fiscal year ending June 30, 2017 with early adoption permitted using either of two methods: (1) prospective to all awards granted or modified after the effective date; or (2) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all awards granted or modified thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. We do not expect the adoption of ASU No. 2014-12 to have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU No. 2015-02 amended the process that a reporting entity must follow to determine whether it should consolidate certain types of legal entities. ASU 2015-02 is effective for fiscal years and interim periods within those years ending after December 15, 2015. Early application is permitted. We do not expect the adoption of ASU 2015-02 to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, and amortization of those costs should be reported as interest expense. This ASU is effective for financial statements issued for annual and interim periods beginning after December 15, 2015, and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. We do not expect the adoption of ASU 2015-03 to have a material impact on our consolidated financial statements.
 

5



NOTE 2 – ACQUISITIONS
Our condensed consolidated financial statements include the operating results of acquired entities from their respective dates of acquisition. Transaction costs associated with the acquisitions of ATLAS Medical Services ("ATLAS") and ClinIntel Limited ("ClinIntel") for the nine months ended March 31, 2015 were not material and were recognized as incurred.
We accounted for these acquisitions as business combinations in accordance with FASB ASC Topic 805, "Business Combinations." We allocate the amounts that we pay for each acquisition to the assets we acquire and liabilities we assume based on their fair values at the dates of acquisition, including identifiable intangible assets. We base the fair value of identifiable intangible assets acquired in a business combination on detailed valuations that use information and assumptions determined by management and that consider management's best estimates of inputs and assumptions that a market participant would use. We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, and estimated useful lives, could result in different purchase price allocations and amortization expense in current and future periods.
ClinIntel
On October 3, 2014, we acquired all of the outstanding equity securities of privately-owned ClinIntel, a provider of clinical Randomization and Trial Supply Management (RTSM) services, based in the United Kingdom. ClinIntel’s offerings have been combined into the ClinPhone® RTSM suite and are designed to make patient randomization and clinical supply chain solutions more efficient. Capabilities include advanced RTSM technologies for planning, forecasting and supply chain eLogistics. The business has been integrated into the PAREXEL Informatics ("PI") segment.

The purchase price for the acquisition was approximately $8.8 million, plus the potential to pay up to an additional $16.2 million over a twenty-one month period following the acquisition date if ClinIntel achieves certain financial targets. We funded the acquisition with existing cash.
The components of the consideration transferred in conjunction with the ClinIntel acquisition and the preliminary allocation of that consideration is as follows (in thousands):
Total Consideration transferred:
 
 
    Cash paid, net of cash acquired
 
$
8,780

    Fair value of contingent consideration
 
9,882

Net purchase price
 
$
18,662

Preliminary Allocation of consideration transferred:
 
 
    Accounts receivable
 
$
460

    Definite-lived intangible assets
 
6,200

    Goodwill
 
12,137

          Total assets acquired
 
18,797

    Current liabilities
 
135

         Total liabilities assumed
 
135

Net assets acquired:
 
$
18,662

The amounts above represent our preliminary fair value estimates as of March 31, 2015 and may be subject to subsequent adjustment as we obtain additional information during the measurement period and finalize our fair value estimates. We expect to complete our accounting for the ClinIntel acquisition by the end of Fiscal Year 2015.
The goodwill of $12.1 million arising from the ClinIntel acquisition largely reflects the potential synergies and expansion of our service offerings across products and markets complementary to our existing service offering and markets.
The following are the preliminary identifiable intangible assets acquired and their respective estimated useful lives, as determined based on preliminary valuations (dollars in thousands):
 
 
Amount
 
Estimated Useful Life (Years)
Customer relationships
 
$
2,300

 
10
Technology
 
3,900

 
8
   Total
 
$
6,200

 
 
ATLAS

6



On July 1, 2014, we acquired all of the outstanding equity securities of ATLAS, a provider of clinical research services in Turkey, the Middle East, and North Africa, for approximately $2.1 million. ATLAS provides services across all phases of clinical development, has broad therapeutic expertise, and provides clinical trial-related services from study planning and feasibility, through site selection, data management and medical writing. The business has been integrated into our Clinical Research Services business. The acquisition was funded with existing cash.
Quantum Solutions India
On April 13, 2015, we acquired all of the business assets of privately-owned Quantum Solutions India ("QSI"), a leading provider of specialized pharmacovigilance services, based in Chandigarh, India. Pharmacovigilance is the collection, detection, assessment, monitoring, and prevention of adverse effects associated with pharmaceutical products.
We paid approximately $96.3 million for the assets of QSI. We funded the acquisition through use of existing cash held outside of the United States. We will include QSI results of operations in our CRS segment. Due to the limited time since the acquisition date, we have not yet completed the initial accounting for this business combination.
NOTE 3 – EQUITY AND EARNINGS PER SHARE
We have authorized five million shares of preferred stock at $0.01 par value. As of March 31, 2015 and June 30, 2014, we had no shares of preferred stock issued and outstanding.
We have authorized 150 million shares of common stock at $0.01 par value. As of March 31, 2015 and June 30, 2014, respectively, we had 55,134,643 and 54,661,877 shares of common stock issued and outstanding.
We compute basic earnings per share by dividing net income for the period by the weighted average number of common shares outstanding during the period. We compute diluted earnings per share by dividing net income by the weighted average number of common shares plus the dilutive effect of outstanding stock options and restricted stock awards and units. The following table outlines the basic and diluted earnings per share computations:
 (in thousands, except per share data)
Three Months Ended

Nine Months Ended
 
March 31, 2015

March 31, 2014

March 31, 2015

March 31, 2014
Net income attributable to common stock
$
37,741

 
$
34,739

 
$
113,643

 
$
89,022

Weighted average number of shares outstanding, used in computing basic earnings per share
54,930

 
56,713

 
54,830

 
56,494

Dilutive common stock equivalents
908

 
960

 
939

 
992

Weighted average number of shares outstanding used in computing diluted earnings per share
55,838

 
57,673

 
55,769

 
57,486

Basic earnings per share
$
0.69

 
$
0.61

 
$
2.07

 
$
1.58

Diluted earnings per share
$
0.68

 
$
0.60

 
$
2.04

 
$
1.55

Anti-dilutive equity instruments (excluded from the calculation of diluted earnings per share)
940

 
798

 
723

 
439

Share Repurchase Plan
Fiscal Year 2014 Share Repurchase
On June 2, 2014, we announced that our Board of Directors approved a share repurchase program (the “2014 Program”) authorizing the repurchase of up to $150.0 million of our common stock to be financed with cash on hand, cash generated from operations, existing credit facilities, or new financing.  On June 13, 2014, we entered into an agreement (the “2014 Agreement”) to purchase shares of our common stock from Goldman Sachs & Co. (“GS”), for an aggregate purchase price of $150.0 million pursuant to an accelerated share purchase program. Pursuant to the 2014 Agreement, in June 2014, we paid $150.0 million to GS and received from GS 2,284,844 shares of our common stock, representing 80% of the shares to be repurchased by us under the 2014 Agreement. The shares were repurchased at a price of $52.52 per share, which was the closing price of our common stock on the Nasdaq Global Select Market on June 13, 2014. These shares were canceled and restored to the status of authorized and unissued shares. As of June 30, 2014, we recorded the $150.0 million payment to GS as a decrease to equity in our consolidated balance sheet, consisting of decreases in common stock and additional paid-in capital. As additional paid-in capital was reduced to zero, the remainder was applied as a reduction in retained earnings.
On October 31, 2014, we received 345,165 shares representing the final settlement of the 2014 Agreement and the 2014 Program was completed. Pursuant to the 2014 Program, we repurchased 2,630,009 shares of our common stock at an average price of $57.03 per share from June 2014 to October 2014.

7



Fiscal Year 2013 Share Repurchase
In August 2012, our Board of Directors approved a share repurchase program (the “2013 Program”) authorizing the repurchase of up to $200.0 million of our common stock to be financed with cash on hand, cash generated from operations, existing credit facilities, or new financing.  During the fiscal year ended June 30, 2013, we repurchased $197.6 million of our common stock. We repurchased the remaining $2.4 million of our common stock in July 2013. The 2013 Program repurchases were effected pursuant to two separate $50.0 million accelerated share repurchase agreements (“ASR Agreements”) and two separate $50.0 million open market agreements (“Open Market Agreements”) entered into in September 2012 and March 2013. Pursuant to the 2013 Program, we repurchased 5,458,285 shares of our common stock at an average price of $36.64 per share from September 2012 to July 2013. The buyback activity also resulted in a reduction of our stockholders’ equity of $200.0 million for the value of shares that we repurchased and retired.
In July 2013, we purchased 51,071 shares under our March 2013 Open Market Agreement and received 101,247 shares representing the final settlement of our March 2013 ASR Agreement. With the completion of our March 2013 Open Market Agreement and the final settlement of the March 2013 ASR Agreement, the 2013 Program was completed.
NOTE 4 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table reflects the activity for the components of accumulated other comprehensive income (loss), net of tax, for the nine months ended March 31, 2015:
(in thousands)
 
Foreign Currency
 
Unrealized Gain/Loss on Derivatives
 
Total
Balance as of June 30, 2014
 
$
(2,088
)
 
$
4,178

 
$
2,090

Other comprehensive loss before reclassifications
 
(105,003
)
 
(5,098
)
 
(110,101
)
Loss reclassified from accumulated other comprehensive income
 

 
(7,034
)
 
(7,034
)
Net current-period other comprehensive loss
 
$
(105,003
)
 
$
(12,132
)
 
$
(117,135
)
Balance as of March 31, 2015
 
$
(107,091
)

$
(7,954
)
 
$
(115,045
)
The details regarding pre-tax gain (loss) on derivative instruments reclassified to net income from accumulated other comprehensive income (loss) for the three and nine months ended March 31, 2015 and 2014 are presented below:
 
 
Three Months Ended
 
Affected Line in the Consolidated Statements of Income
(in thousands)
 
March 31, 2015
 
March 31, 2014
 
Interest rate contracts
 
$
(324
)
 
$
(440
)
 
Interest expense, net
Foreign exchange contracts
 
(1,372
)
 

 
Service Revenue
Foreign exchange contracts
 
(6,148
)
 
1,366

 
Direct Costs
Total
 
$
(7,844
)
 
$
926

 
 
 
 
Nine Months Ended
 
Affected Line in the Consolidated Statements of Income
(in thousands)
 
March 31, 2015
 
March 31, 2014
 
Interest rate contracts
 
$
(1,076
)
 
$
(1,308
)
 
Interest expense, net
Foreign exchange contracts
 
(2,074
)
 

 
Service Revenue
Foreign exchange contracts
 
(8,025
)
 
854

 
Direct Costs
Cross-currency swap contracts
 
184

 
114

 
Miscellaneous income (expense), net
Total
 
$
(10,991
)
 
$
(340
)
 
 
The amounts of gain (loss) reclassified from accumulated other comprehensive income into net income are net of taxes of $2.8 million and $4.0 million, respectively, for the three and nine months ended March 31, 2015.
The amounts of gain (loss) reclassified from accumulated other comprehensive income into net income are net of taxes of $0.4 million and $0.2 million for the three and nine months ended March 31, 2014, respectively.

8



NOTE 5 – STOCK-BASED COMPENSATION
We account for stock-based compensation according to FASB ASC 718, “Compensation—Stock Compensation.” The classification of compensation expense within the consolidated statements of income is presented in the following table:
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
Direct costs
$
1,299

 
$
878

 
$
3,300

 
$
2,212

Selling, general and administrative
3,446

 
3,034

 
9,881

 
8,668

Total stock-based compensation
$
4,745

 
$
3,912

 
$
13,181

 
$
10,880

NOTE 6 – SEGMENT INFORMATION
We have three reporting segments: Clinical Research Services (“CRS”), PAREXEL Consulting Services (“PC”), and PAREXEL Informatics (“PI”).
CRS constitutes our core business and includes all phases of clinical research from Early Phase (encompassing the early stages of clinical testing that range from first-in-man through proof-of-concept studies) to Phase II-III and Phase IV, which we call Peri/Post-Approval Services, formerly known as Peri Approval Clinical Excellence. Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, clinical supply and drug logistics, pharmacovigilance, and investigator site services. We aggregate Early Phase with Phase II-III and Peri/Post-Approval Services due to economic similarities in these operating segments.
PC provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PC consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.
PI provides information technology solutions designed to help improve clients’ product development and regulatory submission processes. PI offers a portfolio of products and services that includes medical imaging services, ClinPhone® RTSM, IMPACT® clinical trials management systems (“CTMS”), DataLabs® electronic data capture, web-based portals, systems integration, electronic patient reported outcomes, and LIQUENT InSight® Regulatory Information Management ("RIM") solutions. These services are often bundled together and integrated with other applications to provide eClinical solutions for our clients.
In February 2014, we announced the launch of PAREXEL Regulatory Outsourcing Services (“PROS”), a service line designed to provide a focused, market-driven approach to regulatory outsourcing services in the life science industry, with a primary emphasis on post-approval regulatory activities. Effective July 1, 2014, the operating results of PROS are included in the PC segment. This service line offering was previously included within LIQUENT RIM solutions and reported within the PI segment. For the three and nine months ended March 31, 2015, we included the operating results of PROS within the PC segment and retroactively restated the three and nine months ended March 31, 2014 to reflect this presentation change.
We evaluate our segment performance and allocate 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, we do not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income tax expense in segment profitability. We attribute revenue to individual countries based upon the revenue earned in the respective countries; however, inter-segment transactions are not included in service revenue. Furthermore, we have a global infrastructure supporting our business segments, and therefore do not identify assets by reportable segment.

9



Our segment results were as follows:
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
Service revenue
 
 
 
 
 
 
 
CRS
$
384,779

 
$
373,216

 
$
1,131,994

 
$
1,069,675

PC
50,070

 
55,302

 
162,495

 
171,523

PI
67,184

 
63,857

 
198,509

 
187,567

Total service revenue
$
502,033

 
$
492,375

 
$
1,492,998

 
$
1,428,765

Direct costs
 
 
 
 
 
 
 
CRS
$
274,053

 
$
255,244

 
$
791,418

 
$
748,663

PC
28,645

 
32,833

 
90,760

 
101,463

PI
35,256

 
35,072

 
101,916

 
100,724

Total direct costs
$
337,954

 
$
323,149

 
$
984,094

 
$
950,850

Gross profit
 
 
 
 
 
 
 
CRS
$
110,726

 
$
117,972

 
$
340,576

 
$
321,012

PC
21,425

 
22,469

 
71,735

 
70,060

PI
31,928

 
28,785

 
96,593

 
86,843

Total gross profit
$
164,079

 
$
169,226

 
$
508,904

 
$
477,915

NOTE 7 – INCOME TAXES
We determine our global provision for corporate income taxes in accordance with FASB ASC 740, “Income Taxes.” We recognize our deferred tax assets and liabilities based upon the effect of temporary differences between the book and tax basis of recorded assets and liabilities. Further, we follow a methodology in which we identify, recognize, measure and disclose in our financial statements the effects of any uncertain tax return reporting positions that we have taken or expect to take. The methodology is based on the presumption that all relevant tax authorities possess full knowledge of those tax reporting positions, as well as all of the pertinent facts and circumstances. Our quarterly effective income tax rate reflects management’s estimates of our annual projected profitability in the various taxing jurisdictions in which we operate. Since the statutory tax rates differ in the jurisdictions in which we operate, changes in the distribution of profits and losses may have a significant impact on our effective income tax rate.
As of March 31, 2015, we had $37.1 million of gross unrecognized tax benefits, of which $24.2 million would impact the effective tax rate if recognized. As of June 30, 2014, we had $41.5 million of gross unrecognized tax benefits, of which $25.4 million would impact the effective tax rate if recognized. The reserves for unrecognized tax positions primarily relate to exposures for income tax matters such as changes in the jurisdiction in which income is taxable. The $4.4 million net decrease in gross unrecognized tax benefits is primarily attributable to currency translation adjustments.
As of March 31, 2015, we anticipate that the liability for unrecognized tax benefits for uncertain tax positions could decrease by approximately $10.7 million over the next 12 months primarily as a result of the expiration of statutes of limitations and settlements with tax authorities.
We recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2015 and June 30, 2014, $5.3 million and $5.5 million, respectively of gross interest and penalties were included in the liability for unrecognized tax benefits. For the nine month periods ended March 31, 2015 and 2014, expenses of $0.7 million and $0.8 million, respectively, were recorded for interest and penalties related to tax matters.
We are subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. All material U.S. federal, state and local income tax matters have been concluded with the respective taxing authority through 2005. Substantially all material foreign income tax matters have been concluded for all years through 2000.
For the three and nine months ended March 31, 2015, we had effective income tax rates of 29.7% and 30.2%, respectively. The tax rates for these periods were lower than the expected statutory rate of 35% primarily as a result of the favorable effect of statutory tax rates applicable to income earned outside the United States.
For the three and nine months ended March 31, 2014, we had effective income tax rates of 30.3% and 32.4%, respectively. The tax rates for these periods were lower than the expected statutory rate of 35% primarily as a result of the favorable effect of statutory rates applicable to income earned outside the United States on the projected annual effective tax rate.

10



NOTE 8 CREDIT AGREEMENTS
2014 Credit Agreement
On October 15, 2014, we, certain of our subsidiaries, Bank of America, N.A. (“Bank of America”), as Administrative Agent, Swingline Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”), J.P. Morgan Securities LLC (“JPM Securities”), HSBC Bank USA, National Association (“HSBC”) and U.S. Bank, National Association (“US Bank”), as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank N.A. (“JPMorgan”), HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto entered into an amended and restated credit agreement (the “2014 Credit Agreement”) providing for a five-year term loan and revolving credit facility in the principal amount of up to $500.0 million (collectively, the “Loan Amount”), plus additional amounts of up to $300.0 million of loans to be made available upon request of the Company subject to specified terms and conditions.
The 2014 Credit Agreement amends and restates the amended and restated credit agreement dated as of March 22, 2013, by and among us, certain of our subsidiaries, Bank of America, as Administrative Agent, Swingline Lender and L/C Issuer, MLPFS, JPM Securities, HSBC, and US Bank as Joint Lead Arrangers and Joint Book Managers, JPMorgan, HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto (the “2013 Credit Agreement”).
The loan facility available under the 2014 Credit Agreement consists of a term loan facility and a revolving credit facility. The principal amount of up to $200.0 million of the Loan Amount is available through the term loan facility, and the principal amount of up to $300.0 million of the Loan Amount is available through the revolving credit facility. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $100.0 million and for the issuance of standby letters of credit of up to a sublimit of $10.0 million.
The 2014 Credit Agreement is intended to provide funds for (i) stock repurchases, (ii) the issuance of letters of credit and (iii) our and our subsidiaries' other general corporate purposes, including permitted acquisitions.
As of March 31, 2015, we had $85.0 million of principal borrowed under the revolving credit facility and $200.0 million of principal borrowed under the term loan. The outstanding amounts are presented net of debt issuance cost of approximately $2.6 million in our consolidated balance sheets. As of March 31, 2015, we had borrowing availability of $215.0 million under the revolving credit facility.
The obligations under the 2014 Credit Agreement are guaranteed by certain of our material domestic subsidiaries, and the obligations, if any, of any foreign designated borrower are guaranteed by us and certain of our material domestic subsidiaries.
Borrowings (other than swingline loans) under the 2014 Credit Agreement bear interest, at our determination, at a rate based on either (a) LIBOR plus a margin (not to exceed a per annum rate of 1.750%) based on a ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (the “Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 0.500%, and (iii) the one month LIBOR rate plus 1.000% (such highest rate, the “Alternate Base Rate”), plus a margin (not to exceed a per annum rate of 0.750%) based on the Leverage Ratio. Swingline loans in U.S. dollars bear interest calculated at the Alternate Base Rate plus a margin (not to exceed a per annum rate of 0.750%). Loans outstanding under the 2014 Credit Agreement may be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any, subject to the terms and conditions contained in the 2014 Credit Agreement. The 2014 Credit Agreement terminates and any outstanding loans under it mature and must be repaid on October 15, 2019.
Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on October 15, 2019. A swingline loan under the 2014 Credit Agreement generally must be paid ten business days after the loan is made. Repayment of principal borrowed under the term loan facility is as follows, with the final payment of all amounts outstanding, plus accrued interest, being due on October 15, 2019:

1.25% by quarterly term loan amortization payments to be made commencing December 2015 and made on or prior to September 30, 2017;
2.50% by quarterly term loan amortization payments to be made after September 30, 2017, but on or prior to September 30, 2018;
5.00% by quarterly term loan amortization payments to be made after September 30, 2018, but prior to October 15, 2019; and
60.00% on October 15, 2019.
Interest due under the revolving credit facility (other than a swingline loan) and the term loan facility must be paid quarterly for borrowings with an interest rate determined with reference to the Alternate Base Rate. Interest must be paid on the last day of the interest period selected by the Company for borrowings determined with reference to LIBOR; provided that for interest periods of longer than three months, interest is required to be paid every three months. Interest under U.S. dollar swingline loans at the alternate base rate is payable quarterly.

11



Our obligations under the 2014 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2014 Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to material indebtedness, defaults relating to such matters as ERISA and judgments, and a change of control default.
The 2014 Credit Agreement contains negative covenants applicable to us and our subsidiaries, including financial covenants requiring us to comply with maximum leverage ratios and minimum interest coverage ratios, as well as restrictions on liens, investments, indebtedness, fundamental changes, acquisitions, dispositions of property, making specified restricted payments (including stock repurchases that would result in us exceeding an agreed-to leverage ratio), transactions with affiliates, and other restrictive covenants. As of March 31, 2015, we were in compliance with all covenants under the 2014 Credit Agreement.
In connection with the 2014 Credit Agreement, we agreed to pay a commitment fee on the revolving loan commitment calculated as a percentage of the unused amount of the revolving loan commitment at a per annum rate of up to 0.300% (based on the Leverage Ratio). To the extent there are letters of credit outstanding under the 2014 Credit Agreement, we will pay letter of credit fees plus a fronting fee and additional charges. We agreed to pay Bank of America (i) for its own account, an arrangement fee, (ii) for the account of each of the lenders, an upfront fee and (iii) for its own account, an annual agency fee.
Note Purchase Agreement
On July 25, 2013, we issued $100.0 million principal amount of 3.11% senior notes due July 25, 2020 (the “Notes”) for aggregate gross proceeds of $100.0 million in a private placement solely to accredited investors. The Notes were issued pursuant to a Note Purchase Agreement entered into by us with certain institutional investors on June 25, 2013 (the “Note Purchase Agreement”). Proceeds from the Notes were used to pay down $100.0 million of principal borrowed under the revolving credit facility of the 2013 Credit Agreement, as described below. We will pay interest on the outstanding balance of the Notes at a rate of 3.11% per annum, payable semi-annually on January 25 and July 25 of each year until the principal on the Notes shall have become due and payable. We may, at our option, upon notice and subject to the terms of the Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding, plus a Make-Whole Amount (as defined in the Note Purchase Agreement). The Notes become due and payable on July 25, 2020, unless payment is required to be made earlier under the terms of the Note Purchase Agreement.
The Note Purchase Agreement includes operational and financial covenants, with which we are required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. As of March 31, 2015, we were in compliance with all covenants under the Note Purchase Agreement.
In connection with the Note Purchase Agreement, certain of our subsidiaries entered into a Subsidiary Guaranty, pursuant to which such subsidiaries guaranteed our obligations under the Notes and the Note Purchase Agreement.
As of March 31, 2015, there was $100.0 million in aggregate principal amount outstanding under the Notes. The outstanding amounts are presented net of debt issuance cost of approximately $0.3 million in our consolidated balance sheets.
Receivable Purchase Agreement
On February 19, 2013, we entered into a receivables purchase agreement (the “Receivable Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”). Under the Receivable Agreement, we sell to JPMorgan or other investors on an ongoing basis certain of our trade receivables, together with ancillary rights and the proceeds thereof, which arise under contracts with a client, or its subsidiaries or affiliates. The Receivable Agreement includes customary representations and covenants on behalf of us, and may be terminated by either us or JPMorgan upon five business days advance notice. The Receivable Agreement provides a mechanism for accelerating the receipt of cash due on outstanding receivables. We account for the transfer of our receivables with respect to which we have satisfied the applicable revenue recognition criteria in accordance with FASB ASC 860, “Transfers and Servicing.” If we have not satisfied the applicable revenue recognition criteria for the underlying sales transaction, the transfer of the receivable is accounted for as a financing activity in accordance with FASB ASC 470, “Debt.” The accounts receivable and short-term debt balances are derecognized from our consolidated balance sheets at the earlier of the factored receivable’s due date or when all of the revenue recognition criteria are met for those billed services. During the nine months ended March 31, 2015, we transferred approximately $90.4 million of trade receivables. As of March 31, 2015 and June 30, 2014, no transfers were accounted for as a financing activity.
2013 Credit Agreement
The 2013 Credit Agreement provided for a five-year term loan of $200.0 million and a revolving credit facility in the amount of up to $300.0 million, plus additional amounts of up to $200.0 million of loans to be made available upon our request subject to specified terms and conditions. A portion of the revolving credit facility was available for swingline loans of up to a sublimit of $75.0 million and for the issuance of standby letters of credit of up to a sublimit of $10.0 million. The 2013 Credit Agreement was amended and restated on October 15, 2014 as discussed above.

12



Our obligations under the 2013 Credit Agreement were guaranteed by certain of our material domestic subsidiaries, and the obligations, if any, of any foreign designated borrower were guaranteed by us and certain of our material domestic subsidiaries.
Borrowings (other than swingline loans) under the 2013 Credit Agreement bore interest, at our determination, at a rate based on either (i) LIBOR plus a margin (not to have exceeded a per annum rate of 1.750%) based on the Leverage Ratio or (ii) the Alternate Base Rate, plus a margin (not to have exceeded a per annum rate of 0.750%) based on the Leverage Ratio. Swingline loans in U.S. dollars bore interest calculated at the Alternate Base Rate plus a margin (not to have exceeded a per annum rate of 0.750%).
In September 2011, we entered into an interest rate swap agreement which hedged $75.0 million of principal under our prior debt obligations and carries a fixed interest rate of 1.30% plus an applicable margin. In May 2013, we entered into another interest rate swap agreement and hedged an additional principal amount of $100.0 million under the 2013 Credit Agreement with a fixed interest rate of 0.73% plus an applicable margin. Both interest rate swap agreements now hedge $150.0 million of principal under our 2014 Credit Agreement. As of March 31, 2015, our debt under the 2014 Credit Agreement, including the $150.0 million of principal hedged with both interest swap agreements, carried an average annualized interest rate of 1.68%. These interest rate hedges were deemed to be fully effective in accordance with FASB ASC 815, “Derivatives and Hedging” (“ASC 815”) and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income in our consolidated balance sheets.
In September 2011, we also entered into an interest rate cap agreement. The interest rate cap agreement hedged $25.0 million of principal under our 2013 Credit Agreement with an interest rate cap of 2.00% plus an applicable margin. In March 2014, the interest rate cap agreement matured and the related accumulated other comprehensive income was reclassified to net income during the three months ended March 31, 2014.
Additional Lines of Credit
We have an unsecured line of credit with JP Morgan UK in the amount of $4.5 million that bears interest at an annual rate ranging from 2.00% to 4.00%. We entered into this line of credit to facilitate business transactions. At March 31, 2015, we had $4.5 million available under this line of credit.
We have a cash pool facility with RBS Nederland, NV in the amount of 4.0 million Euros that bears interest at an annual rate ranging between 2.00% and 4.00%. We entered into this line of credit to facilitate business transactions. At March 31, 2015, we had 4.0 million Euros available under this line of credit.
NOTE 9 – DEBT, COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of March 31, 2015, our future minimum debt obligations related to the 2014 Credit Agreement and the Notes described in Note 8 above are as follows:
(in thousands)
 
FY 2015
 
FY 2016
 
FY 2017
 
FY 2018
 
FY 2019
 
Thereafter
 
Total
Debt obligations (principal)
 
$

 
$
7,500

 
$
10,000

 
$
17,500

 
$
35,000

 
$
315,000

 
$
385,000

We have letter-of-credit agreements with banks totaling approximately $9.6 million guaranteeing performance under various operating leases and vendor agreements. Additionally, the borrowings under the 2014 Credit Agreement and the Notes are guaranteed by certain of our U.S. subsidiaries.
We periodically become involved in various claims and lawsuits that are incidental to our business. We are also regularly subject to, and are currently undergoing, audits by tax authorities in the United States and foreign jurisdictions for prior tax years. Although we believe our tax estimates are reasonable, and we intend to defend our positions through litigation if necessary, the final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Adverse outcomes of tax audits could also result in assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits.
We believe, after consultation with counsel or other experts, that no matters currently pending would, in the event of an adverse outcome, either individually or in the aggregate, have a material impact on our consolidated financial position, results of operations, or liquidity.
NOTE 10 – DERIVATIVES
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and foreign currency exchange rate risk. Accordingly, we have instituted interest rate and foreign currency hedging programs that are accounted for in accordance with ASC 815.
Our interest rate hedging program is a cash flow hedge program designed to minimize interest rate volatility. We swap the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount, at specified intervals. We also employed an interest rate cap, which matured in March 2014, that

13



compensated us if variable interest rates rose above a pre-determined rate. Our interest rate contracts are designated as hedging instruments.
Our foreign currency hedging program is a cash flow hedge program designed to mitigate foreign currency exchange rate volatility due to the foreign currency exchange exposure related to intercompany and significant external transactions. This program also intends to reduce the impact of foreign exchange rate risk on our direct costs. In the third quarter of our fiscal year ended June 30, 2014 (“Fiscal Year 2014”), we further expanded the program to reduce the foreign exchange rate risk on our service revenues. We primarily utilize forward currency exchange contracts and cross-currency swaps with maturities of no more than 12 months. These contracts are designated as hedging instruments.
We also enter into other economic hedges to mitigate foreign currency exchange risk related to intercompany and significant external transactions. These contracts are not designated as hedges in accordance with ASC 815.
The following table presents the notional amounts and fair values of our derivatives as of March 31, 2015 and June 30, 2014. The gross position of all asset and liability amounts is reported in other current assets, other assets, other current liabilities, and other liabilities in our consolidated balance sheets.
(in thousands)
March 31, 2015
 
June 30, 2014
 
Notional
Amount
 
Asset
(Liability)
 
Notional
Amount
 
Asset
(Liability)
Derivatives designated as hedging instruments under ASC 815
 
 
Derivatives in an asset position:
 
 
 
 
 
 
 
Interest rate contracts
$
100,000

 
$
732

 
$
100,000

 
$
2,049

Foreign exchange contracts
28,941

 
740

 
154,845

 
5,375

Cross-currency swap contracts

 

 
25,560

 
528

Derivatives in a liability position:
 
 
 
 
 
 
 
Interest rate contracts
50,000

 
(202
)
 
100,000

 
(1,469
)
Foreign exchange contracts
172,533

 
(14,622
)
 
37,736

 
(369
)
Cross-currency swap contracts
18,303

 
(3,154
)
 

 

Total designated derivatives
$
369,777

 
$
(16,506
)
 
$
418,141

 
$
6,114

Derivatives not designated as hedging instruments under ASC 815
Derivatives in an asset position:
 
 
 
 
 
 
 
Foreign exchange contracts
$
93,010

 
$
677

 
$
100,849

 
$
1,062

Derivatives in a liability position:
 
 
 
 
 
 
 
Foreign exchange contracts
95,414

 
(3,680
)
 
49,863

 
(133
)
Total non-designated derivatives
$
188,424

 
$
(3,003
)
 
$
150,712

 
$
929

Total derivatives
$
558,201

 
$
(19,509
)
 
$
568,853

 
$
7,043

Under certain circumstances, such as the occurrence of significant differences between actual cash payments and forecasted cash payments, the ASC 815 programs could be deemed ineffective. We record the effective portion of any change in the fair value of derivatives designated as hedging instruments under ASC 815 to other accumulated comprehensive income (loss) in our consolidated balance sheets, net of deferred taxes, and any ineffective portion to miscellaneous income (expense), net in our consolidated statements of income. During the three months ended March 31, 2015 and 2014, we recorded losses of $0.7 million and gains of $0.2 million, respectively, in miscellaneous income (expense), net in our consolidated statements of income to reflect ineffective portions of hedges. During the nine months ended March 31, 2015 and 2014, the amounts recorded in miscellaneous (expense) income, net in our consolidated statements of income to reflect ineffective portions of any hedges were losses of $2.2 million and zero, respectively.

14



The amounts recognized in other comprehensive (loss) income, net of taxes, are presented below: 
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
Derivatives designated as hedging instruments under ASC 815
 
 
Interest rate contracts
$
(283
)
 
$
(195
)
 
$
(24
)
 
$
(152
)
Foreign exchange contracts
(552
)
 
(10
)
 
(12,113
)
 
4,987

Cross-currency swap contracts
(32
)
 
29

 
5

 
(85
)
Total designated derivatives
$
(867
)
 
$
(176
)
 
$
(12,132
)
 
$
4,750

The unrealized gain (loss) on derivative instruments is net of $0.4 million and $0.2 million taxes, respectively, for the three months ended March 31, 2015 and 2014. The unrealized gain (loss) on derivative instruments is net of $6.7 million and $3.1 million taxes, respectively, for the nine months ended March 31, 2015 and 2014. The estimated net amount of the existing losses that are expected to be reclassified into earnings within the next twelve months is $14.1 million.
The change in the fair value of derivatives not designated as hedging instruments under ASC 815 is recorded to miscellaneous (expense) income, net in our consolidated statements of income. The total gains and losses related to foreign exchange contracts not designated as hedging instruments were losses of $5.7 million and $2.0 million for the three months ended March 31, 2015 and 2014, respectively. The total gains and losses related to foreign exchange contracts not designated as hedging instruments were a loss of $20.9 million and a gain of $0.4 million for the nine months ended March 31, 2015 and 2014, respectively. The unrealized (loss) gain recognized are presented below:
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2015
 
March 31, 2014
 
March 31, 2015
 
March 31, 2014
Derivatives not designated as hedging instruments under ASC 815
 
 
Cross-currency interest rate swap contracts
$

 
$
3,431

 
$

 
$
1,910

Foreign exchange contracts
(813
)
 
736

 
(3,932
)
 
1,467

Total non-designated derivative unrealized (loss) gain, net
$
(813
)
 
$
4,167

 
$
(3,932
)
 
$
3,377


NOTE 11 FAIR VALUE MEASUREMENTS
We apply the provisions of FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value and provides guidance for measuring fair value and expands disclosures about fair value measurements. ASC 820 seeks to enable the reader of financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 – Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
quoted prices for similar assets and liabilities in active markets
quoted prices for identical or similar assets or liabilities in markets that are not active
observable inputs other than quoted prices that are used in the valuation of the asset or liabilities (e.g., interest rate and yield curve quotes at commonly quoted intervals)
inputs that are derived principally from or corroborated by observable market data by correlation or other means
Level 3 – Unobservable inputs for the assets or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of March 31, 2015:

15



(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Contingent consideration
$

 
$

 
$
(9,218
)
 
$
(9,218
)
Interest rate derivative instruments

 
530

 

 
530

Foreign currency exchange contracts

 
(20,039
)
 

 
(20,039
)
Total
$

 
$
(19,509
)
 
$
(9,218
)
 
$
(28,727
)
The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of June 30, 2014: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Contingent consideration
$

 
$

 
$
(5,152
)
 
$
(5,152
)
Interest rate derivative instruments

 
580

 

 
580

Foreign currency exchange contracts

 
6,463

 

 
6,463

Total
$

 
$
7,043

 
$
(5,152
)
 
$
1,891

Level 1 Estimates
Cash equivalents are measured at quoted prices in active markets. These investments are considered cash equivalents due to the short maturity (less than 90 days) of the investments.
Marketable securities are held in foreign government treasury certificates that are actively traded and have original maturities over 90 days but less than one year. As of March 31, 2015, we did not hold any marketable securities. As of June 30, 2014, we held marketable securities with a carrying value of $95.6 million. Our marketable securities are classified as held-to-maturity based on our intent and ability to hold the securities to maturity and are recorded at amortized cost, which is not materially different than fair value. Interest and dividends related to these securities are reported as a component of interest income in our consolidated statements of income.
Level 2 Estimates
Interest rate derivative instruments are measured at fair value using a market approach valuation technique. The valuation is based on an estimate of net present value of the expected cash flows using relevant mid-market observable data inputs and based on the assumption of no unusual market conditions or forced liquidation.
Foreign currency exchange contracts are measured at fair value using a market approach valuation technique. The inputs to this technique utilize current foreign currency exchange forward market rates published by leading third-party financial news and data providers. This is observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions so they are classified as Level 2.
Level 3 Estimates
Contingent consideration liabilities are re-measured to fair value each reporting period using projected financial targets, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected financial targets are based on our most recent internal operational budgets and may take into consideration of alternate scenarios that could result in more or less profitability for the respective service line. Increases or decreases in projected financial targets and probabilities of payment may result in significant changes in the fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.
We acquired HERON Group LTD (“HERON”) in April 2013. The $22.8 million purchase price included the potential for us to pay up to an additional $14.2 million over the twenty-six month period following the acquisition date if HERON achieves specific financial targets. We determined the fair value of the contingent consideration at the date of the acquisition to be $5.9 million. Contingent consideration related to the HERON acquisition is measured at fair value using an income approach valuation technique. For the three months ended March 31, 2015, we determined that it is remote that HERON would achieve the specific financial targets associated with the contingent consideration.
As described in Note 2 above, the purchase price for the ClinIntel acquisition was approximately $8.8 million, plus the potential to pay up to an additional $16.2 million over a twenty-one month period following the acquisition date if ClinIntel achieves specific financial targets. The contingent consideration related to the ClinIntel acquisition is measured at fair value using an income approach valuation technique, specifically with probability weighted and discounted cash flows. Increases or decreases in the fair value of our contingent consideration liability is primarily impacted by the likelihood of achieving financial targets, but also from changes in discount periods and rates.
The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:

16



 
 
ClinIntel
Unobservable Input
 
Range
Discount rate
 
4%
Probability of achieving financial targets
 
12.5% to 75%
Projected period of payment
 
August 2016

The following table provides a summary of the change in our valuation of the fair value of the contingent consideration, which was determined by Level 3 inputs:
(in thousands)
Fair Value
Balance at June 30, 2014
$
5,152

Additions of contingent consideration due to acquisitions
9,882

Change in fair value of contingent consideration
(4,964
)
Effect of changes in exchange rates used for translation
(852
)
Balance at March 31, 2015
$
9,218


For the three and nine months ended March 31, 2015, the change in fair value of contingent consideration of $2.0 million and $5.0 million was recorded in selling, general and administrative expense, respectively.
For the nine months ended March 31, 2015, there were no transfers among Level 1, Level 2, or Level 3 categories. Additionally, there were no changes in the valuation techniques used to determine the fair values of our Level 2 or Level 3 assets or liabilities.
The fair value of the debt under the Notes was estimated to be $98.0 million as of March 31, 2015, and was determined using U.S. government treasury rates and Level 3 inputs, including a credit risk adjustment.
The carrying value of our current and long-term debt under the 2014 Credit Agreement approximates fair value because all of the debt bears variable rate interest.


17



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 in this Quarterly Report on Form 10-Q. The financial information set forth and discussed below is unaudited but, in the opinion of our management, includes all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair presentation of such information. Our results of operations for a particular quarter may not be indicative of results expected during subsequent fiscal quarters or for the entire fiscal year.

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 (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained in this Quarterly Report on Form 10-Q regarding our 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,” “appears,” “intends,” “may,” “plans,” “projects,” “would,” “could,” “should,” “targets,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in our 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 we make. These important factors are described under the heading “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014, filed with the Securities and Exchange Commission (the “SEC”) on August 20, 2014 (the “2014 10-K”), and under “Risk Factors” set forth in Part II, Item 1A below. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and our actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.
OVERVIEW
We are a leading biopharmaceutical outsourcing services company, providing a broad range of expertise in clinical research, clinical logistics, medical communications, consulting, commercialization and advanced technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. Our primary objective is to provide quality solutions for managing the biopharmaceutical product lifecycle with the goal of reducing the time, risk, and cost associated with the development and commercialization of new therapies. Since our incorporation in 1983, we have developed significant expertise in processes and technologies supporting this strategy. Our product and service offerings include: clinical trials management, observational studies and patient/disease registries, data management, biostatistical analysis, epidemiology, health economics / outcomes research, pharmacovigilance, medical communications, clinical pharmacology, patient recruitment, clinical supply and drug logistics, post-marketing surveillance, regulatory and product development and commercialization consulting, health policy and reimbursement and market access consulting, medical imaging services, regulatory information management (“RIM”) solutions, ClinPhone randomization and trial supply management services (“RTSM”), electronic data capture systems (“EDC”), clinical trial management systems (“CTMS”), web-based portals, systems integration, patient diary applications, and other product development tools and services. We believe that our comprehensive services, depth of therapeutic area expertise, global footprint and related access to patients, and sophisticated information technology, along with our experience in global drug development and product launch services, represent key competitive strengths.
We have three reporting segments: Clinical Research Services (“CRS”), PAREXEL Consulting Services (“PC”), and PAREXEL Informatics (“PI”).
CRS constitutes our core business and includes all phases of clinical research from Early Phase (encompassing the early stages of clinical testing that range from first-in-man through proof-of-concept studies) to Phase II-III and Phase IV, which we call Peri/Post-Approval Services, formerly known as Peri-Approval Clinical Excellence. Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, clinical supply and drug logistics, pharmacovigilance, and investigator site services. We aggregate Early Phase with Phase II-III and Peri/Post-Approval Services due to economic similarities in these operating segments.
PC provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PC consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.

18



PI provides information technology solutions designed to help improve clients’ product development and regulatory submission processes. PI offers a portfolio of products and services that includes medical imaging services, ClinPhone® RTSM, IMPACT® CTMS, DataLabs® EDC, web-based portals, systems integration, electronic patient reported outcomes (“ePRO”) and LIQUENT InSight® RIM platform. These services are often bundled together and integrated with other applications to provide an eClinical solution for our clients.
In February 2014, we announced the launch of PAREXEL Regulatory Outsourcing Services (“PROS”), a service line designed to provide a focused, market-driven approach to regulatory outsourcing services in the life science industry, with a primary emphasis on post-approval regulatory activities. Effective July 1, 2014, the operating results of PROS are included in the PC segment. This service line offering was previously included within LIQUENT RIM solutions and reported within the PI segment. For the three and nine months ended March 31, 2015, we included the operating results of PROS within the PC segment and retroactively restated the three and nine months ended March 31, 2014 to reflect this presentation change.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and other financial information. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.
For further information on our other critical accounting policies, please refer to the consolidated financial statements and footnotes thereto included in the 2014 10-K.

19



RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
We evaluate our segment performance and allocate 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, we do not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income tax expense in segment profitability. We attribute revenue to individual countries based upon external and internal contractual arrangements. Inter-segment transactions are not included in service revenue. Furthermore, we have a global infrastructure supporting our business segments, and therefore, we do not identify assets by reportable segment. Our segment results are as follows:
(dollar amounts in thousands)
Three Months Ended
 
 
 
 
 
March 31, 2015
 
March 31, 2014
 
Increase/(Decrease) $
 
 Increase/(Decrease)%
Service revenue
 
 
 
 
 
 
 
CRS
$
384,779

 
$
373,216

 
$
11,563

 
3.1
 %
PC
50,070

 
55,302

 
(5,232
)
 
(9.5
)%
PI
67,184

 
63,857

 
3,327

 
5.2
 %
Total service revenue
$
502,033

 
$
492,375

 
$
9,658

 
2.0
 %
Direct costs
 
 
 
 

 

CRS
$
274,053

 
$
255,244

 
$
18,809

 
7.4
 %
PC
28,645

 
32,833

 
(4,188
)
 
(12.8
)%
PI
35,256

 
35,072

 
184

 
0.5
 %
Total direct costs
$
337,954

 
$
323,149

 
$
14,805

 
4.6
 %
Gross profit
 
 
 
 

 

CRS
$
110,726

 
$
117,972

 
$
(7,246
)
 
(6.1
)%
PC
21,425

 
22,469

 
(1,044
)
 
(4.6
)%
PI
31,928

 
28,785

 
3,143

 
10.9
 %
Total gross profit
$
164,079

 
$
169,226

 
$
(5,147
)
 
(3.0
)%
(dollar amounts in thousands)
Nine Months Ended
 
 
 
 
 
March 31, 2015
 
March 31, 2014
 
Increase/(Decrease) $
 
 Increase/(Decrease)%
Service revenue
 
 
 
 
 
 
 
CRS
1,131,994

 
$
1,069,675

 
$
62,319

 
5.8
 %
PC
162,495

 
171,523

 
(9,028
)
 
(5.3
)%
PI
198,509

 
187,567

 
10,942

 
5.8
 %
Total service revenue
$
1,492,998

 
$
1,428,765

 
$
64,233

 
4.5
 %
Direct costs

 

 
 
 
 
CRS
$
791,418

 
$
748,663

 
$
42,755

 
5.7
 %
PC
90,760

 
101,463

 
(10,703
)
 
(10.5
)%
PI
101,916

 
100,724

 
1,192

 
1.2
 %
Total direct costs
$
984,094

 
$
950,850

 
$
33,244

 
3.5
 %
Gross profit

 

 
 
 
 
CRS
$
340,576

 
$
321,012

 
$
19,564

 
6.1
 %
PC
71,735

 
70,060

 
1,675

 
2.4
 %
PI
96,593

 
86,843

 
9,750

 
11.2
 %
Total gross profit
$
508,904

 
$
477,915

 
$
30,989

 
6.5
 %




20




Three Months Ended March 31, 2015 Compared With Three Months Ended March 31, 2014:
Revenue
Service revenue increased by $9.7 million, or 2.0%, to $502.0 million for the three months ended March 31, 2015 from $492.4 million for the same period in 2014.
On a segment basis, CRS service revenue increased by $11.6 million, or 3.1%, to $384.8 million for the three months ended March 31, 2015 from $373.2 million for the same period in 2014. CRS service revenue increases were due to higher levels of backlog and our ability to convert backlog into revenue through the efforts of our employee base.
PC service revenue decreased by $5.2 million, or 9.5%, to $50.1 million for the three months ended March 31, 2015 from $55.3 million for the same period in 2014. The decreases were due to delayed start dates of a few large projects in our consulting business.
PI service revenue increased by $3.3 million, or 5.2%, to $67.2 million for the three months ended March 31, 2015 from $63.9 million for the three months ended March 31, 2014. The growth was primarily driven by our medical imaging and platform solutions businesses related to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships.
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 us, nor does it have an impact on our net income.
Direct Costs
Direct costs increased by $14.8 million, or 4.6%, to $338.0 million for the three months ended March 31, 2015 from $323.1 million for the three months ended March 31, 2014. As a percentage of total service revenue, direct costs increased to 67.3% from 65.6% for the respective periods. The gross margin decrease was mainly driven by higher costs in the CRS segment, partially offset by the margin expansion in PC and PI segments.
On a segment basis, CRS direct costs increased by $18.8 million, or 7.4%, to $274.1 million for the three months ended March 31, 2015 from $255.2 million for the three months ended March 31, 2014. This increase resulted primarily from increased labor costs associated with headcount growth in CRS to match the demand of higher levels of clinical trial activity. As a percentage of CRS service revenue, CRS direct costs increased to 71.2% for the three months ended March 31, 2015 from 68.4% for the same period in 2014 due primarily to the need to hire staff in response to recent business wins.
PC direct costs decreased by $4.2 million, or 12.8%, to $28.6 million for the three months ended March 31, 2015 from $32.8 million for the three months ended March 31, 2014 largely due to a reduction in labor costs. As a percentage of PC service revenue, direct costs decreased to 57.2% from 59.4% for the respective periods due primarily to the more favorable revenue mix and a higher utilization rate of resources.
PI direct costs increased slightly by $0.2 million, or 0.5%, to $35.3 million for the three months ended March 31, 2015 from $35.1 million for the three months ended March 31, 2014. As a percentage of PI service revenue, PI direct costs decreased to 52.5% for the three months ended March 31, 2015 from 54.9% for the same period in 2014 primarily due to improved productivity and changes in revenue mix.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expense decreased by $8.1 million, or 8.4%, to $88.4 million for the three months ended March 31, 2015 from $96.5 million for the three months ended March 31, 2014. This decrease was primarily due to the favorable impact of foreign currency exchange rate movements, the effect of efficiency initiatives for our support functions, and the change in fair value of contingent consideration. As a percentage of service revenue, SG&A expense decreased to 17.6% of service revenue for the three months ended March 31, 2015 from 19.6% of service revenue for the three months ended March 31, 2014. This decrease was largely due to, foreign currency exchange rate movements and effective cost management, leveraged against our revenue growth.
Depreciation and Amortization
Depreciation and amortization expense increased by $0.9 million, or 4.4%, to $21.4 million for the three months ended March 31, 2015 from $20.5 million for the same period in 2014. The increase in depreciation expense was primarily attributable to higher capital spending. As a percentage of service revenue, depreciation and amortization expense was 4.3% for the three months ended March 31, 2015 compared with 4.2% for the same period in 2014.

21



Income from Operations
Income from operations increased to $54.2 million for the three months ended March 31, 2015 from $52.2 million for the same period in 2014. Income from operations as a percentage of service revenue, or operating margin, increased to 10.8% from 10.6% for the respective periods. This increase in both income from operations and operating margin was due primarily to lower SG&A expenses, partially offset by the decrease in gross margin.
Other Income (Expense)
We recorded net other expense of $0.5 million for the three months ended March 31, 2015 compared with net other expense of $2.4 million for the three months ended March 31, 2014. The $1.9 million decrease in net other expense was primarily due to a $1.6 million increase in miscellaneous income and a $0.3 million reduction in net interest expense. Net foreign currency exchange losses were recorded during the three months ended March 31, 2014 as compared to a minimal net foreign currency gain recorded during three months ended March 31, 2015. The current quarter results reflect the strengthening of the U.S. dollar against most major currencies throughout the world compared to the same period in 2014. Net interest expense decreased as a result of lower interest rates during the three months ended March 31, 2015.
Taxes
For the three months ended March 31, 2015 and 2014, we had effective income tax rates of 29.7% and 30.3%, respectively. Each of the three month periods benefited from a favorable distribution of taxable income amongst lower tax rate jurisdictions.
Nine Months Ended March 31, 2015 Compared With Nine Months Ended March 31, 2014:
Revenue
Service revenue increased by $64.2 million, or 4.5%, to $1,493.0 million for the nine months ended March 31, 2015 from $1,428.8 million for the same period in 2014.
On a segment basis, CRS service revenue increased by $62.3 million, or 5.8%, to $1,132.0 million for the nine months ended March 31, 2015 from $1,069.7 million for the same period in 2014. CRS service revenue increases were primarily due to higher levels of backlog and our ability to convert backlog into revenue through the efforts of our employee base. The increases were partially offset by the negative impact of foreign currency exchange rate movements.
PC service revenue declined by $9.0 million, or 5.3%, to $162.5 million for the nine months ended March 31, 2015 from $171.5 million for the same period in 2014. The lower service revenue was primarily attributable to a large, non performance-related contract cancellation in our Strategic Compliance business which occurred during the fiscal quarter ended March 31, 2014 and delayed start dates of a few large projects in our consulting business.
PI service revenue increased by $10.9 million, or 5.8%, to $198.5 million for the nine months ended March 31, 2015 from $187.6 million for the same period in 2014. The continued growth in PI service revenue was primarily due to strength in our medical imaging, RTSM, and platform solutions businesses related to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships.
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 us, nor does it have an impact on net income.
Direct Costs
Direct costs increased by $33.2 million, or 3.5%, to $984.1 million for the nine months ended March 31, 2015 from $950.9 million for the same period in 2014. As a percentage of total service revenue, direct costs decreased to 65.9% from 66.6% for the respective periods due to the impact of revenue mix and various productivity and efficiency initiatives.
On a segment basis, CRS direct costs increased by $42.8 million, or 5.7%, to $791.4 million for the nine months ended March 31, 2015 from $748.7 million for the same period in 2014. This increase resulted primarily from headcount growth in CRS due to higher levels of clinical trial activity and in response to staffing needs for recent new business wins. As a percentage of CRS service revenue, CRS direct costs decreased slightly to 69.9% from 70.0%.
PC direct costs decreased by $10.7 million, or 10.5%, to $90.8 million for the nine months ended March 31, 2015 from $101.5 million for the same period in 2014 primarily due to a reduction in labor costs. As a percentage of PC service revenue, PC direct costs decreased to 55.9% from 59.2% for the respective periods due to the more favorable revenue mix and a higher utilization rate of resources.
PI direct costs increased by $1.2 million, or 1.2%, to $101.9 million for the nine months ended March 31, 2015 from $100.7 million for the same period in 2014. The increase resulted primarily from headcount growth related to the growth in revenue. As a percentage of PI service revenue, PI direct costs decreased to 51.3% from 53.7% for the respective periods due to improved productivity and changes in revenue mix.

22



Selling, General and Administrative
SG&A expense increased to $286.1 million for the nine months ended March 31, 2015 from $277.0 million for the same period in 2014. This $9.2 million increase was due primarily to an increase in fixed and variable compensation costs attributable to the larger employee base needed to support business growth, an increase in expenses for professional fees, and fees for legal settlements, offset in part by the change in fair value of contingent consideration. As a percentage of service revenue, SG&A expense decreased to 19.2% of service revenue for the nine months ended March 31, 2015 compared with 19.4% of service revenue for the nine months ended March 31, 2014. This decrease was due to effective cost management, leveraged against our revenue growth.
Depreciation and Amortization
Depreciation and amortization expense increased by $2.0 million to $62.2 million for the nine months ended March 31, 2015 from $60.2 million for the same period in 2014. As a percentage of service revenue, depreciation and amortization expense was 4.2% for both the nine months ended March 31, 2015 and 2014.
Income from Operations
Income from operations increased to $160.6 million for the nine months ended March 31, 2015 from $140.7 million for the same period in 2014. Income from operations as a percentage of service revenue, or operating margin, increased to 10.8% from 9.8% for the respective periods. This increase in both income from operations and operating margin was due primarily to revenue growth and gross margin expansion in all of our reportable segments.
Other Income (Expense)
We recorded net other income of $2.2 million for the nine months ended March 31, 2015 compared with net other expense of $9.0 million for the same period in 2014. The $11.2 million change was primarily due to a $9.3 million increase in miscellaneous income, mainly as a result of net foreign currency exchange gains recorded during the nine months ended March 31, 2015 reflecting the strengthening of the U.S. dollar against most major currencies throughout the world, compared with net foreign currency exchange losses during the nine months ended March 31, 2014. The change also resulted from a decrease in net interest expense of $2.0 million resulting from lower average debt balances and lower interest rates during the nine months ended March 31, 2015.
Taxes
For the nine months ended March 31, 2015 and 2014, we had effective income tax rates of 30.2% and 32.4%, respectively. The tax rate for the nine months ended March 31, 2015 was reduced by the effect of the reinstatement of the “look-through” provisions of the U.S. tax code on the projected annual effective tax rate and a favorable distribution of taxable income amongst lower tax rate jurisdictions.




23



LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations and growth with cash flow from operations, proceeds from the sale of equity securities, and credit facilities. Investing activities primarily reflect the costs of capital expenditures for property and equipment as well as the funding of business acquisitions and the purchases of marketable securities. As of March 31, 2015, we had cash and cash equivalents of approximately $295.4 million. The majority of our cash and cash equivalents is held in foreign countries because excess cash generated in the United States is primarily used to repay our debt obligations. Foreign cash balances include unremitted foreign earnings, which are invested indefinitely outside of the United States. In April 2015, we paid $96.3 million for our acquisition of Quantum Solutions India ("QSI") using foreign cash balances. For more information on our acquisition of QSI, please see Note 2. Our cash and cash equivalents are held in deposit accounts, which provide us with immediate and unlimited access to the funds. Repatriation of funds to the United States from non-U.S. entities may be subject to taxation or certain legal restrictions. Nevertheless, most of our cash resides in countries with few or no such legal restrictions.
DAYS SALES OUTSTANDING
Our 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. We calculate DSO by adding the end-of-period balances for billed and unbilled account receivables, net of deferred revenue (short-term and long-term) and the provision for losses on receivables, 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. The following table presents the DSO, accounts receivable balances, and deferred revenue as of and for the three months ended March 31, 2015 and June 30, 2014:
(in millions)
March 31, 2015
 
June 30, 2014
Billed accounts receivable, net
$
447.3

 
$
497.1

Unbilled accounts receivable, net
258.4

 
225.5

Total accounts receivable
705.7

 
722.6

Deferred revenue
423.0

 
467.0

Net receivables
$
282.7

 
$
255.6

 
 
 
 
DSO (in days)
38

 
32

The increase in DSO for the three months ended March 31, 2015 compared with the three months ended June 30, 2014, was largely due to client and revenue mix, as well as a decrease on project related advances.
CASH FLOWS
Operating Activities
Net cash provided by operating activities was $98.6 million for the nine months ended March 31, 2015 and $188.7 million for the nine months ended March 31, 2014. The $90.1 million decrease in operating cash flows resulted primarily from a $117.1 million decrease in net change in working capital, a $4.2 million increase in non-cash gains and a $4.1 million increase in excess tax benefit from stock-based compensation, partially offset by a $24.6 million of higher net income, an increase of $6.4 million resulting from the impact of changes in deferred taxes and an increase of $4.3 million in depreciation, amortization and stock-based compensation expenses.
Investing Activities
Net cash provided by investing activities was $32.1 million for the nine months ended March 31, 2015 and $87.3 million for the nine months ended March 31, 2014.
During the nine months ended March 31, 2015, we received $88.6 million in proceeds from the sale of marketable securities, which was partially offset by $45.6 million in capital expenditures and $10.9 million in cash used for business acquisitions.
During the nine months ended March 31, 2014, we received $137.1 million in net proceeds from the sale of marketable securities, which was partially offset by $49.7 million in capital expenditures.
Financing Activities
Net cash provided by financing activities was $50.7 million for the nine months ended March 31, 2015 compared with net cash used in financing activities of $131.2 million for the nine months ended March 31, 2014.

24



During the nine months ended March 31, 2015, we borrowed $35.0 million under the 2014 Credit Agreement (as defined below), received $16.4 million in proceeds related to employee stock purchases, which were partially offset by debt issuance costs of $0.7 million related to the 2014 Credit Agreement.
During the nine months ended March 31, 2014, we made net payments of $137.5 million under the 2013 Credit Agreement (as defined below), paid $4.9 million related to share repurchases and $0.7 million debt issuance costs, which were partially offset by $4.5 million in proceeds received from our receivable factoring and $7.3 million in proceeds received related to employee stock purchases.
CREDIT AGREEMENTS
2014 Credit Agreement
On October 15, 2014, we, certain of our subsidiaries, Bank of America, N.A. (“Bank of America”), as Administrative Agent, Swingline Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”), J.P. Morgan Securities LLC (“JPM Securities”), HSBC Bank USA, National Association (“HSBC”) and U.S. Bank, National Association (“US Bank”), as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank N.A. (“JPMorgan”), HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto entered into an amended and restated credit agreement (the “2014 Credit Agreement”) providing for a five-year term loan and revolving credit facility in the principal amount of up to $500.0 million (collectively, the “Loan Amount”), plus additional amounts of up to $300.0 million of loans to be made available upon request of the Company subject to specified terms and conditions.
The 2014 Credit Agreement amends and restates the amended and restated credit agreement dated as of March 22, 2013, by and among us, certain of our subsidiaries, Bank of America, as Administrative Agent, Swingline Lender and L/C Issuer, MLPFS, JPM Securities, HSBC, and US Bank as Joint Lead Arrangers and Joint Book Managers, JPMorgan, HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto (the “2013 Credit Agreement”).
The loan facility available under the 2014 Credit Agreement consists of a term loan facility and a revolving credit facility. The principal amount of up to $200.0 million of the Loan Amount is available through the term loan facility, and the principal amount of up to $300.0 million of the Loan Amount is available through the revolving credit facility. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $100.0 million and for the issuance of standby letters of credit of up to a sublimit of $10.0 million.
The 2014 Credit Agreement is intended to provide funds for (i) stock repurchases, (ii) the issuance of letters of credit and (iii) our and our subsidiaries' other general corporate purposes, including permitted acquisitions.
As of March 31, 2015, we had $85.0 million of principal borrowed under the revolving credit facility and $200.0 million of principal borrowed under the term loan. The outstanding amounts are presented net of debt issuance cost of approximately $2.6 million in our consolidated balance sheets. As of March 31, 2015, we had borrowing availability of $215.0 million under the revolving credit facility.
The obligations under the 2014 Credit Agreement are guaranteed by certain of our material domestic subsidiaries, and the obligations, if any, of any foreign designated borrower are guaranteed by us and certain of our material domestic subsidiaries.
Borrowings (other than swingline loans) under the 2014 Credit Agreement bear interest, at our determination, at a rate based on either (a) LIBOR plus a margin (not to exceed a per annum rate of 1.750%) based on a ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) (the “Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 0.500%, and (iii) the one month LIBOR rate plus 1.000% (such highest rate, the “Alternate Base Rate”), plus a margin (not to exceed a per annum rate of 0.750%) based on the Leverage Ratio. Swingline loans in U.S. dollars bear interest calculated at the Alternate Base Rate plus a margin (not to exceed a per annum rate of 0.750%). Loans outstanding under the 2014 Credit Agreement may be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any, subject to the terms and conditions contained in the 2014 Credit Agreement. The 2014 Credit Agreement terminates and any outstanding loans under it mature and must be repaid on October 15, 2019.
Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on October 15, 2019. A swingline loan under the 2014 Credit Agreement generally must be paid ten business days after the loan is made. Repayment of principal borrowed under the term loan facility is as follows, with the final payment of all amounts outstanding, plus accrued interest, being due on October 15, 2019:

1.25% by quarterly term loan amortization payments to be made commencing December 2015 and made on or prior to September 30, 2017;
2.50% by quarterly term loan amortization payments to be made after September 30, 2017, but on or prior to September 30, 2018;

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5.00% by quarterly term loan amortization payments to be made after September 30, 2018, but prior to October 15, 2019; and
60.00% on October 15, 2019.
Interest due under the revolving credit facility (other than a swingline loan) and the term loan facility must be paid quarterly for borrowings with an interest rate determined with reference to the Alternate Base Rate. Interest must be paid on the last day of the interest period selected by the Company for borrowings determined with reference to LIBOR; provided that for interest periods of longer than three months, interest is required to be paid every three months. Interest under U.S. dollar swingline loans at the alternate base rate is payable quarterly.
Our obligations under the 2014 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2014 Credit Agreement, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, cross defaults to material indebtedness, defaults relating to such matters as ERISA and judgments, and a change of control default.
The 2014 Credit Agreement contains negative covenants applicable to us and our subsidiaries, including financial covenants requiring us to comply with maximum leverage ratios and minimum interest coverage ratios, as well as restrictions on liens, investments, indebtedness, fundamental changes, acquisitions, dispositions of property, making specified restricted payments (including stock repurchases that would result in us exceeding an agreed-to leverage ratio), transactions with affiliates, and other restrictive covenants. As of March 31, 2015, we were in compliance with all covenants under the 2014 Credit Agreement.
In connection with the 2014 Credit Agreement, we agreed to pay a commitment fee on the revolving loan commitment calculated as a percentage of the unused amount of the revolving loan commitment at a per annum rate of up to 0.300% (based on the Leverage Ratio). To the extent there are letters of credit outstanding under the 2014 Credit Agreement, we will pay letter of credit fees plus a fronting fee and additional charges. We agreed to pay Bank of America (i) for its own account, an arrangement fee, (ii) for the account of each of the lenders, an upfront fee and (iii) for its own account, an annual agency fee.
Note Purchase Agreement
On July 25, 2013, we issued $100.0 million principal amount of 3.11% senior notes due July 25, 2020 (the “Notes”) for aggregate gross proceeds of $100.0 million in a private placement solely to accredited investors. The Notes were issued pursuant to a Note Purchase Agreement entered into by us with certain institutional investors on June 25, 2013 (the “Note Purchase Agreement”). Proceeds from the Notes were used to pay down $100.0 million of principal borrowed under the revolving credit facility of the 2013 Credit Agreement, as described below. We will pay interest on the outstanding balance of the Notes at a rate of 3.11% per annum, payable semi-annually on January 25 and July 25 of each year until the principal on the Notes shall have become due and payable. We may, at our option, upon notice and subject to the terms of the Note Purchase Agreement, prepay at any time all or part of the Notes in an amount not less than 10% of the aggregate principal amount of the Notes then outstanding, plus a Make-Whole Amount (as defined in the Note Purchase Agreement). The Notes become due and payable on July 25, 2020, unless payment is required to be made earlier under the terms of the Note Purchase Agreement.
The Note Purchase Agreement includes operational and financial covenants, with which we are required to comply, including, among others, maintenance of certain financial ratios and restrictions on additional indebtedness, liens and dispositions. As of March 31, 2015, we were in compliance with all covenants under the Note Purchase Agreement.
In connection with the Note Purchase Agreement, certain of our subsidiaries entered into a Subsidiary Guaranty, pursuant to which such subsidiaries guaranteed our obligations under the Notes and the Note Purchase Agreement.
As of March 31, 2015, there was $100.0 million in aggregate principal amount outstanding under the Notes. The outstanding amounts are presented net of debt issuance cost of approximately $0.3 million in our consolidated balance sheets.
Receivable Purchase Agreement
On February 19, 2013, we entered into a receivables purchase agreement (the “Receivable Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan”). Under the Receivable Agreement, we sell to JPMorgan or other investors on an ongoing basis certain of our trade receivables, together with ancillary rights and the proceeds thereof, which arise under contracts with a client, or its subsidiaries or affiliates. The Receivable Agreement includes customary representations and covenants on behalf of us, and may be terminated by either us or JPMorgan upon five business days advance notice. The Receivable Agreement provides a mechanism for accelerating the receipt of cash due on outstanding receivables. We account for the transfer of our receivables with respect to which we have satisfied the applicable revenue recognition criteria in accordance with FASB ASC 860, “Transfers and Servicing.” If we have not satisfied the applicable revenue recognition criteria for the underlying sales transaction, the transfer of the receivable is accounted for as a financing activity in accordance with FASB ASC 470, “Debt.” The accounts receivable and short-term debt balances are derecognized from our consolidated balance sheets at the earlier of the factored receivable’s due date or when all of the revenue recognition criteria are met for those billed services. During the

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nine months ended March 31, 2015, we transferred approximately $90.4 million of trade receivables. As of March 31, 2015 and June 30, 2014, no transfers were accounted for as a financing activity.
2013 Credit Agreement
The 2013 Credit Agreement provided for a five-year term loan of $200.0 million and a revolving credit facility in the amount of up to $300.0 million, plus additional amounts of up to $200.0 million of loans to be made available upon our request subject to specified terms and conditions. A portion of the revolving credit facility was available for swingline loans of up to a sublimit of $75.0 million and for the issuance of standby letters of credit of up to a sublimit of $10.0 million. The 2013 Credit Agreement was amended and restated on October 15, 2014 as discussed above.
Our obligations under the 2013 Credit Agreement were guaranteed by certain of our material domestic subsidiaries, and the obligations, if any, of any foreign designated borrower were guaranteed by us and certain of our material domestic subsidiaries.
Borrowings (other than swingline loans) under the 2013 Credit Agreement bore interest, at our determination, at a rate based on either (i) LIBOR plus a margin (not to have exceeded a per annum rate of 1.750%) based on the Leverage Ratio or (ii) the Alternate Base Rate, plus a margin (not to have exceeded a per annum rate of 0.750%) based on the Leverage Ratio. Swingline loans in U.S. dollars bore interest calculated at the Alternate Base Rate plus a margin (not to have exceeded a per annum rate of 0.750%).
In September 2011, we entered into an interest rate swap agreement which hedged $75.0 million of principal under our prior debt obligations and carries a fixed interest rate of 1.30% plus an applicable margin. In May 2013, we entered into another interest rate swap agreement and hedged an additional principal amount of $100.0 million under the 2013 Credit Agreement with a fixed interest rate of 0.73% plus an applicable margin. Both interest rate swap agreements now hedge $150.0 million of principal under our 2014 Credit Agreement. As of March 31, 2015, our debt under the 2014 Credit Agreement, including the $150.0 million of principal hedged with both interest swap agreements, carried an average annualized interest rate of 1.68%. These interest rate hedges were deemed to be fully effective in accordance with FASB ASC 815, “Derivatives and Hedging” (“ASC 815”) and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income in our consolidated balance sheets.
In September 2011, we also entered into an interest rate cap agreement. The interest rate cap agreement hedged $25.0 million of principal under our 2013 Credit Agreement with an interest rate cap of 2.00% plus an applicable margin. In March 2014, the interest rate cap agreement matured and the related accumulated other comprehensive income was reclassified to net income during the three months ended March 31, 2014.
Additional Lines of Credit
We have an unsecured line of credit with JP Morgan UK in the amount of $4.5 million that bears interest at an annual rate ranging from 2.00% to 4.00%. We entered into this line of credit to facilitate business transactions. At March 31, 2015, we had $4.5 million available under this line of credit.
We have a cash pool facility with RBS Nederland, NV in the amount of 4.0 million Euros that bears interest at an annual rate ranging between 2.00% and 4.00%. We entered into this line of credit to facilitate business transactions. At March 31, 2015, we had 4.0 million Euros available under this line of credit.


DEBT, COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of March 31, 2015, our future minimum debt obligations related to the 2014 Credit Agreement and the Notes described above under “Credit Agreements”are as follows:
(in thousands)
 
FY 2015
 
FY 2016
 
FY 2017
 
FY 2018
 
FY 2019
 
Thereafter
 
Total
Debt obligations (principal)
 
$

 
$
7,500

 
$
10,000

 
$
17,500

 
$
35,000

 
$
315,000

 
$
385,000

We have letter-of-credit agreements with banks totaling approximately $9.6 million guaranteeing performance under various operating leases and vendor agreements. Additionally, the borrowings under the 2014 Credit Agreement and the Notes are guaranteed by certain of our U.S. subsidiaries.
We periodically become involved in various claims and lawsuits that are incidental to our business. We are also regularly subject to, and are currently undergoing, audits by tax authorities in the United States and foreign jurisdictions for prior tax years. Although we believe our tax estimates are reasonable, and we intend to defend our positions through litigation if necessary, the final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Adverse outcomes of tax audits could also result in assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits.

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We believe, after consultation with counsel or other experts, that no matters currently pending would, in the event of an adverse outcome, either individually or in the aggregate, have a material impact on our consolidated financial position, results of operations, or liquidity.
FINANCING NEEDS
Our primary cash needs are for operating expenses (such as salaries and fringe benefits, hiring and recruiting, business development and facilities), business acquisitions, capital expenditures, and repayment of principal and interest on our borrowings.
Credit Agreements and Note Purchase Agreement
In July 2013, we issued $100.0 million principal amount of 3.11% senior notes due July 25, 2020 for aggregate gross proceeds of $100.0 million in a private placement solely to accredited investors. We utilized the proceeds from the private placement to repay debt outstanding under our 2013 Credit Agreement. The Note Purchase Agreement permits the proceeds from the private placement to be used for working capital purposes, stock repurchase financing, debt refinancing, and for general corporate purposes including the financing of acquisitions, subject in each case to the terms of the Note Purchase Agreement.
Our requirements for cash to pay principal and interest on our borrowings will increase significantly in future periods based on amounts borrowed under our 2014 Credit Agreement and the Notes. Our primary committed external source of funds is the 2014 Credit Agreement. Our principal source of cash is from the performance of services under contracts with our clients. If we are unable to generate new contracts with existing and new clients or if the level of contract cancellations increases, our revenue and cash flow would be adversely affected (see Part II, Item 1A “Risk Factors” for further detail on these risks). Absent a material adverse change in the level of our new business bookings or contract cancellations, we believe that our existing capital resources together with cash flow from operations and borrowing capacity under existing credit facilities will be sufficient to meet our foreseeable cash needs over the next twelve months and on a longer term basis. Depending upon our revenue and cash flow from operations, it is possible that we will require external funds to repay amounts outstanding under our 2014 Credit Agreement upon its maturity in 2019.
We expect to continue to acquire businesses that enhance our service and product offerings, expand our therapeutic expertise, and/or increase our global presence. Depending on their size, any future acquisitions may require additional external financing, and we may from time to time seek to obtain funds from public or private issuances of equity or debt securities. We may be unable to secure such financing at all or on terms acceptable to us, as a result of our outstanding borrowings, including our outstanding borrowings under the 2014 Credit Agreement.
Under the terms of the 2014 Credit Agreement, interest rates are fixed based on market indices at the time of borrowing and, depending upon the interest mechanism selected by us, may float thereafter. As a result, the amount of interest payable by us on our borrowings may increase if market interest rates change. However, we expect to mitigate the risk of increasing market interest rates with our hedging programs described below under Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Exchange Rates and Interest Rates.”
Capital Expenditures
We made capital expenditures of approximately $45.6 million during the nine months ended March 31, 2015, primarily for computer software (including internally developed software), hardware, and leasehold improvements.
Fiscal Year 2014 Share Repurchase
On June 2, 2014, we announced that our Board of Directors approved a share repurchase program (the “2014 Program”) authorizing the repurchase of up to $150.0 million of our common stock to be financed with cash on hand, cash generated from operations, existing credit facilities, or new financing.  On June 13, 2014, we entered into an agreement (the “2014 Agreement”) to purchase shares of our common stock from Goldman Sachs & Co. (“GS”), for an aggregate purchase price of $150.0 million pursuant to an accelerated share purchase program. Pursuant to the 2014 Agreement, in June 2014, we paid $150.0 million to GS and received from GS 2,284,844 shares of our common stock, representing 80% of the shares to be repurchased by us under the 2014 Agreement. The shares were repurchased at a price of $52.52 per share, which was the closing price of our common stock on the Nasdaq Global Select Market on June 13, 2014. These shares were canceled and restored to the status of authorized and unissued shares. As of June 30, 2014, we recorded the $150.0 million payment to GS as a decrease to equity in our consolidated balance sheet, consisting of decreases in common stock and additional paid-in capital. As additional paid-in capital was reduced to zero, the remainder was applied as a reduction in retained earnings.
On October 31, 2014, we received 345,165 shares representing the final settlement of the 2014 Agreement and the 2014 Program was completed. Pursuant to the 2014 Program, we repurchased 2,630,009 shares of our common stock at an average price of $57.03 per share from June 2014 to October 2014.

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OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
INFLATION
We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition.
RECENTLY IMPLEMENTED AND ISSUED ACCOUNTING STANDARDS
See Note 1 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on recently implemented and issued accounting standards.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rates or price changes. In the ordinary course of business, we are exposed to market risk resulting from changes in foreign currency exchange rates and interest rates, and we regularly evaluate our exposure to such changes. Our 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 AND INTEREST RATES
For the nine months ended March 31, 2015 and 2014, we derived approximately 52.2% and 53.7% of our consolidated service revenue, respectively, from operations outside of the United States. In addition, for the nine months ended March 31, 2015 and 2014, our Euro denominated service revenue accounted for 12.4% and 13.8% of our consolidated service revenue, respectively. We have no significant operations in countries in which the economy is considered to be highly inflationary. Our 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 our consolidated financial results.
It is our policy to mitigate the risks associated with fluctuations in foreign exchange rates and in market rates of interest. Accordingly, we have instituted foreign currency hedging programs and an interest rate swap program. See Note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on our hedging programs and interest rate swap program. Our foreign currency hedging program was expanded in the first quarter of fiscal year ended June 30, 2013 in order to reduce the impact of foreign currency exchange rate risk on our gross margin.
As of March 31, 2015, the programs with derivatives designated as hedging instruments under ASC 815 were deemed effective and the notional values of the derivatives were approximately $369.8 million, including two interest rate swap agreements with a total notional value of $150.0 million that hedge borrowings under our 2014 Credit Agreement. Under certain circumstances, such as the occurrence of significant differences between actual cash receipts and forecasted cash receipts, the ASC 815 programs could be deemed ineffective. In such an event, the unrealized gains and losses related to these derivatives, which are currently reported in accumulated other comprehensive income in our consolidated balance sheets, would be recognized in earnings. As of March 31, 2015, the estimated amount that could be recognized in earnings was a loss of approximately $8.0 million, net of tax.
As of March 31, 2015, the notional value of derivatives that were not designated as hedging instruments under ASC 815 was approximately $188.4 million.
During the nine months ended March 31, 2015 and 2014, we recorded net foreign currency exchange gains of $6.2 million and net foreign currency exchange losses of $2.2 million, respectively. We also have exposure to additional foreign currency exchange rate risk as it relates to assets and liabilities that are not part of the economic hedge or designated hedging programs, but that risk is difficult to quantify at any given point in time.
Our exposure to changes in interest rates relates primarily to the amount of our long-term debt. The current portion of our long-term debt was $5.0 million at March 31, 2015 and $12.5 million at June 30, 2014. Long-term debt was $380.0 million at March 31, 2015 and $337.5 million at June 30, 2014. As of March 31, 2015, $150.0 million of borrowings under our 2014 Credit Agreement were hedged under two interest rate swap agreements and $100.0 million in aggregate principal amount outstanding under the Notes carry a fixed interest rate of 3.11%. We did not have a material exposure to changes in interest rate as of March 31, 2015. Based on average total debt for the nine months ended March 31, 2015, an increase in the average interest rate of 100 basis points would reduce our pre-tax earnings and cash flows by approximately $1.4 million on an annual basis.


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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ( 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 the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
We periodically become involved in various claims and lawsuits that are incidental to our business. We believe, after consultation with counsel, that no matters currently pending would, in the event of an adverse outcome, have a material impact on our consolidated financial statements.
ITEM 1A. RISK FACTORS
In addition to other information in this Quarterly Report on Form 10-Q, the following risk factors should be considered carefully in evaluating our company and our business. These important factors could cause our actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q, including in the section of this Quarterly Report on Form 10-Q entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other forward-looking statements that we may make from time to time. If any of the following risks occur, our business, financial condition, or results of operations would likely suffer.
The following discussion includes seven amendments to the risk factors included in the 2014 10-K:
“Our business is subject to international economic, political, and other risks that could negatively affect our results of operations or financial position;”
“Our operating results have fluctuated between quarters and years and may continue to fluctuate in the future, which could affect the price of our common stock;”
“Our revenue and earnings are exposed to exchange rate fluctuations, which has substantially affected our operating results;”
“Our results of operations may be adversely affected if our goodwill and intangible assets are impaired;”
"If we are unable to successfully execute our acquisition strategies, our business, results of operations and financial condition could be adversely impacted;"
“Our indebtedness may limit cash flow available to invest in the ongoing needs of our business;” and
“Our stock price has been, and may in the future be volatile, which could lead to losses by investors.”
Additional risks not currently known to us or other factors not perceived by us to present significant risk to our business at this time also may impair our business operations.
Risks Associated with our Business and Operations
The loss, modification, or delay of large or multiple contracts may negatively impact our financial performance.
Our clients generally can terminate their contracts with us 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 our operating results, possibly materially. We have in the past experienced large contract cancellations and delays, which have adversely affected our operating results. The loss of a strategic partner could potentially have a material adverse effect on our business and financial statements.
Clients may terminate or delay their contracts for a variety of reasons, including:
failure of products being tested to satisfy safety requirements;
failure of products being tested to satisfy efficacy criteria;
products having unexpected or undesired clinical results;
client cost reductions as a result of budgetary limits or changing priorities;
client decisions to forego a particular study, perhaps for economic reasons;
merger or potential merger related activities involving the client;
insufficient patient enrollment in a study;
insufficient investigator recruitment;
clinical drug manufacturing problems resulting in shortages of the product;
product withdrawal following market launch; and
shut down of manufacturing facilities.

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An unfavorable economic environment may negatively impact our financial performance as a result of client defaults and other factors.
Our ability to attract and retain clients, invest in and grow our business and meet our financial obligations depends on our operating and financial performance, which, in turn, is subject to numerous factors. In addition to factors specific to our business, prevailing economic conditions and financial, business, political and other factors beyond our control can also affect us. These factors include the recent European debt crisis, which highlighted concerns about the possibility of one or more sovereign debt defaults, significant bank failures or defaults and/or the exit of one or more countries from the European Monetary Union. There are continuing concerns as to the ultimate financial effectiveness of the assistance measures taken to date, and the extent to which the austerity measures may exacerbate high unemployment and test the social and political stability of weaker economies in Europe. The world has recently experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, demand for our services could decline, and we may experience material adverse impacts on our business, operating results, and financial condition. We cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
We are exposed to risks associated with reduced profitability and the potential financial instability of our clients, many of whom may be adversely affected by volatile conditions in the financial markets, the economy in general and disruptions to the demand for health care services and pharmaceuticals. These conditions could cause clients to experience reduced profitability and/or cash flow problems that could lead them to modify, delay or cancel contracts with us, including contracts included in our current backlog.
Some of our clients are not revenue-generating entities at this time and rely upon equity and debt investments and other external sources of capital to meet their cash requirements. Due to the poor condition of the current global economy and other factors outside of our control, these clients may lack the funds necessary to pay outstanding liabilities due to us, despite contractual obligations.
The fixed price nature of our contracts or failure to document change orders could hurt our operating results.
Approximately 90% of our contracts are fixed price. If we fail to accurately price our contracts, if we experience significant cost overruns that are not recovered from our clients, or if we do not properly document changes to work orders under existing contracts, our gross margins on the contracts would be reduced and we could lose money on contracts. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future.
If we are unable to attract suitable investigators and volunteers for our clinical trials, our clinical development business might suffer.
The clinical research studies we run in our CRS segment rely upon the ready accessibility and willing participation of physician investigators and volunteer subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial. Volunteer subjects generally include people from the communities in which the studies are conducted, and the rate of completion of clinical trials is significantly dependent upon the rate of participant enrollment.
Our clinical research development business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis. If we are unable to obtain sufficient patient enrollment or investigators to conduct clinical trials as planned, we might need to expend substantial additional funds to obtain access to resources or else be compelled to delay or modify our plans significantly. These considerations might result in our inability to successfully achieve projected development timelines as agreed with sponsors. In rare cases, it potentially may even lead us to recommend that trial sponsors terminate ongoing clinical trials or development of a product for a particular indication.
We rely on third parties and the transportation industry for important services.
We depend on third parties to provide us with products and services critical to our business. The failure of any of these third parties to adequately provide the needed products and services including, without limitation, transportation services, could have a material adverse effect on our business. Our clinical logistics services and other businesses are also heavily reliant on air travel for transport of clinical trial kits and other material, research products, and people, and a significant disruption to the air travel system, or our access to it, could have a material adverse effect on our business.
If our business, including PI, 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.
Our PI business involves collecting, managing, manipulating and analyzing large amounts of data, and communicating data via the Internet. In our PI business, we depend on the continuous, effective, reliable and secure operation of computer hardware, software, networks, telecommunication networks, Internet servers and related infrastructure. If the hardware or software malfunctions or access to data by internal research personnel or customers through the Internet is interrupted, our PI business

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could suffer. In addition, any sustained disruption in Internet access provided by third parties could adversely impact our PI business.
Although the computer and communications hardware used in our PI business 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. And while certain of our operations have appropriate disaster recovery plans in place, we currently do not have redundant facilities everywhere in the world to provide IT capacity in the event of a system failure. In addition, the PI software products are complex and sophisticated, and could contain data, design or software errors that could be difficult to detect and correct. If PI fails to maintain and further develop the necessary computer capacity and data to support the needs of our PI customers, it could result in a loss of or a delay in revenue and market acceptance. Additionally, significant delays in the planned delivery of system enhancements or inadequate performance of the systems once they are completed could damage our reputation and harm our business.
Finally, long-term disruptions to infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, and acts of terrorism (particularly in areas where we have offices) could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur.
Our business is subject to international economic, political, and other risks that could negatively affect our results of operations or financial position.
We provide most of our services on a worldwide basis. Our service revenue from non-U.S. operations represented approximately 52.2% and 53.7% of total consolidated service revenue for the nine months ended March 31, 2015 and 2014, respectively. More specifically, for the nine months ended March 31, 2015 and 2014, our service revenue from operations in Europe, the Middle East and Africa represented 35.4% and 36.7%, respectively, of total consolidated service revenue. Our service revenue from operations in the Asia/Pacific region represented 13.2% and 13.6% of total consolidated service revenue for the respective periods. Accordingly, our 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;
the outbreak of war or hostilities in specific geographic regions, including the Ukraine, Russia and the Middle East;
potential negative impact from changes in tax laws affecting any repatriation of profits;
difficulty in staffing and managing widespread operations;
unfavorable labor regulations applicable to our European or other international operations;
changes in foreign currency exchange rates; and
the need to ensure compliance with the numerous regulatory and legal requirements applicable to our business in each of these jurisdictions and to maintain an effective compliance program to ensure compliance.
Our operating results are impacted by the health of the global and local economies in which we operate. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, rising interest rates, financial market volatility and recession.
If we cannot retain our highly qualified management and technical personnel, our business would be harmed.
We rely on the expertise of our Chairman and Chief Executive Officer, Josef H. von Rickenbach, and our President and Chief Operating Officer, Mark A. Goldberg, and it would be difficult and expensive to find qualified replacements with the same level of specialized knowledge of our products and services and the biopharmaceutical outsourcing services industry. While we are a party to an employment agreement with Mr. von Rickenbach, it may be terminated by either party upon notice to the counterparty.
In addition, in order to compete effectively, we must attract and retain 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, or industry specific expertise, is intense. We may not be successful in attracting or retaining key personnel.
Risks Associated with our Financial Results
Our operating results have fluctuated between quarters and years and may continue to fluctuate in the future, which could affect the price of our common stock.
Our 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, our income from operations totaled $54.2 million for the fiscal quarter ended March 31, 2015, $52.8 million for the fiscal quarter ended December 31, 2014, $53.6 million for the fiscal quarter ended September 30, 2014, $58.8 million for

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the fiscal quarter ended June 30, 2014, and $52.2 million for the fiscal quarter ended March 31, 2014. Factors that cause these variations include:
the level of new business authorizations in particular quarters or years;
the timing of the initiation, progress, or cancellation of significant projects;
foreign currency 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 or internal expansion;
timing, costs and the related financial impact of acquisitions;
the timing and amount of costs associated with integrating acquisitions;
the timing and amount of startup costs incurred in connection with the introduction of new products, services or subsidiaries;
the dollar amount of changes in contract scope finalized during a particular period; and
the amount of any reserves we are required to record.
Many of these factors, such as the timing of cancellations of significant projects and foreign currency exchange rate fluctuations between quarters or years, are beyond our control.
If our operating results do not match the expectations of securities analysts and investors, the trading price of our common stock will likely decrease.
Backlog may not result in revenue.
Our backlog is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years. Additionally, as described above, contracts relating to our clinical development business are subject to early termination by the client, and clinical trials can be delayed or canceled for many reasons, including unexpected test results, safety concerns, regulatory developments or economic issues. Also, the scope of a contract can be reduced significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we do not fully realize our entire backlog as service revenue.
Our revenue and earnings are exposed to exchange rate fluctuations, which have substantially affected our operating results.
Our financial statements are denominated in U.S. dollars. Because we conduct a significant portion of our operations in foreign countries, changes in foreign currency exchange rates could have and have had a significant effect on our 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 our foreign operations are generally denominated in local currencies, primarily the Euro and the pound sterling, and are translated into U.S. dollars for financial reporting purposes. For the three months ended March 31, 2015 and 2014, our Euro denominated service revenue accounted for 12.4% and 13.8% of our consolidated service revenue, respectively. Accordingly, changes in exchange rates between relevant foreign currencies and the U.S. dollar will affect the translation of foreign results into U.S. dollars for purposes of reporting our consolidated financial results.
Foreign Currency Transaction Risk. We may be subjected to foreign currency transaction risk when our foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiary’s functional (local) currency. We also may be subject to foreign currency transaction risk based upon our internal contracts and the extent of work performed in a particular region. To the extent that we are unable to shift the effects of currency fluctuations to our clients, foreign currency exchange rate fluctuations as a result of foreign currency exchange losses could have a material adverse effect on our results of operations.
Although we try to limit these risks through the inclusion of exchange rate fluctuation provisions stated in our service contracts or by hedging transaction risk with foreign currency exchange contracts, we do not succeed in all cases. Even in those cases in which we are successful, we may still experience fluctuations in financial results from our operations outside of the U.S., and we may not be able to favorably reduce the currency transaction risk associated with our service contracts.

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Our effective income tax rate may fluctuate from quarter to quarter, which may affect our earnings and earnings per share.
Our quarterly effective income tax rate is influenced by our annual projected profitability in the various taxing jurisdictions in which we operate. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have a material adverse effect on our net income and earnings per share. Factors that affect the effective income tax rate include, but are not limited to:
the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions in which no tax benefit can be recognized;
the repatriation of foreign earnings to the U.S.;
actual and projected full-year pretax income;
changes in tax laws in various taxing jurisdictions;
audits by taxing authorities; and
the establishment of valuation allowances against deferred tax assets if it is determined that it is more likely than not that future tax benefits will not be realized.
These changes may cause fluctuations in our effective income tax rate that could cause fluctuation in our earnings and earnings per share, which in turn could affect our stock price.
Our results of operations may be adversely affected by the results of regulatory tax examinations.
We are subject to value added tax, customs tax, sales and use tax, withholding tax, payroll tax, income tax, and other taxes as a result of the operations of our business. The regulators from the various jurisdictions in which we operate periodically perform audits. In the conduct of such audits, we may be required to disclose information of a sensitive nature and, in general, to modify the way we conduct business with our vendors and customers as compared to our prior practices, which may affect our business in an adverse manner. We are also regularly subject to, and are currently undergoing, audits by tax authorities in the United States and foreign jurisdictions for prior tax years. Although we believe our tax estimates are reasonable, and we intend to defend our positions through litigation if necessary, the final outcome of tax audits and related litigation is inherently uncertain and could be materially different than that reflected in our historical income tax provisions and accruals. Moreover, we could be subject to assessments of substantial additional taxes and/or fines or penalties relating to ongoing or future audits. The adverse resolution of any audits or litigation could have an adverse effect on our financial position and results of operations.
Our results of operations may be adversely affected if our goodwill or intangible assets are impaired.
As of March 31, 2015, our total assets included $406.8 million of goodwill and net intangible assets. We assess the realizability of our indefinite-lived intangible assets and goodwill annually as well as whenever events or changes in circumstances indicate that these assets may be impaired. These events or changes in circumstances generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill and indefinite-lived intangible assets will depend on the future cash flows of these businesses. These cash flows may be impacted by how well we have integrated these businesses. If we are not able to realize the value of the goodwill and indefinite-lived intangible assets, we may be required to incur material charges relating to the impairment of those assets.
Changes to our computer operating systems, programs or software could adversely impact our business.
We may make changes to our existing computer operating systems, programs and/or software in an effort to increase our operating efficiency and/or deliver better value to our clients. Such changes may cause disruptions to our operations and have an adverse impact on our business in the short term.
Our business has experienced substantial expansion in the past and such expansion and any future expansion could strain our resources if not properly managed.
We have expanded our business substantially in the past. Future rapid expansion could strain our operational, human and financial resources. In order to manage expansion, we 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 we do not take these actions and are not able to manage the expanded business, the expanded business may be less successful than anticipated. We may be required to allocate existing or future resources to the expanded business that, in either case, we would have otherwise allocated to another part of our business.

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If we are unable to successfully execute our acquisition strategies, our business, results of operations and financial condition could be adversely impacted.
Historically our growth strategy has been based in part on our ability to acquire existing businesses, services or technologies. We do not know whether in the future we will be able to:
identify suitable businesses or technologies to buy;
complete the purchase of those businesses on terms acceptable to us;
successfully integrate their operations into our own;
obtain financing necessary for an acquisition at all or on commercially acceptable terms; or
retain key personnel and customers of acquired businesses.
We compete with other potential buyers for the acquisition of existing businesses and technology. This competition may result in fewer opportunities to purchase companies that are for sale. It may also result in higher purchase prices for the businesses that we want to purchase. We may also spend time and money investigating and negotiating with potential acquisition targets but not complete the transaction. Any future acquisition could involve other risks, including the assumption of additional liabilities and expenses, issuances of potentially dilutive securities or interest-bearing debt, transaction costs, and diversion of management’s attention from other business concerns.
If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business. In July 2014, we acquired ATLAS Medical Services, a provider of clinical research services in Turkey, the Middle East, and North Africa. In October 2014, we acquired ClinIntel, a provider of clinical RTSM services, based in the United Kingdom. In April 2015, we acquired Quantum Solutions India, a provider of specialized pharmacovigilance services, based in Chandigarh, India. If we fail to integrate any of these businesses, or any future businesses that we acquire in the future, it could disrupt our business and result in a material adverse effect on our business, financial condition and results of operations.
   
The success of our acquisition strategy will depend upon, among other things, our ability to:
assimilate the operations and services or products of the acquired company;
integrate acquired personnel;
retain and motivate key employees;
retain customers;
identify and manage risks facing the acquired company; and
minimize the diversion of management’s attention from other business concerns.
Acquisitions of companies outside of the United States 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 our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.
Our failure to execute our acquisition strategies, including the identification of potential acquisitions, completing targeted acquisitions, and integrating completed acquisitions, could have a material adverse effect on our business, financial condition and results of operations.
Risks Associated with our Industry
We depend on the pharmaceutical and biotechnology industries, either or both of which may suffer in the short or long term.
Our revenues depend greatly on the expenditures made by the pharmaceutical and biotechnology industries in research and development. In some instances, companies in these industries are reliant on their ability to raise capital in order to fund their research and development projects. Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business. If companies in these industries were to reduce the number of research and development projects they conduct or outsource, our business could be materially adversely affected.
In addition, we are dependent upon the ability and willingness of pharmaceutical and biotechnology companies to continue to spend on research and development and to outsource the services that we provide. We are therefore subject to risks, uncertainties and trends that affect companies in these industries. We have benefited to date from the tendency of pharmaceutical and biotechnology companies to outsource clinical research projects, but any downturn in these industries or

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reduction in spending or outsourcing could adversely affect our business. For example, if these companies expanded upon their in-house clinical or development capabilities, they would be less likely to utilize our services.
Pharmaceutical and biotechnology companies have been entering into strategic partnerships with clinical research organizations over the past few years. To the extent we are not selected or do not otherwise enter into a strategic partnership with a sponsor, future business with that sponsor may be limited.
Because we depend on a small number of industries, and there is a concentration of large clients in those industries, the loss of business from a significant client could harm our 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 our revenue and adversely affect our business and financial condition, possibly materially. In Fiscal Years 2014, 2013, and 2012, our five largest clients accounted for approximately 47%, 50%, and 40.5% of our consolidated service revenue, respectively. In Fiscal Year 2014, our two largest clients individually accounted for 16% and 11% of our consolidated service revenue, and in the fiscal year ended June 30, 2013, our two largest clients individually accounted for 17% and 12% of our consolidated service revenue. In our fiscal year ending June 30, 2015, we expect that a small number of clients will continue to represent a significant part of our consolidated revenue. This concentration may increase as a result of the increasing number of strategic partnerships into which we have entered with sponsors. Our contracts with these clients generally can be terminated on short notice. We have in the past experienced contract cancellations with significant clients. If we lose clients, we may not be able to attract new ones, and if we lose individual projects, we may not be able to replace them.
In addition, the portion of our backlog that consists of large, multi-year awards from strategic partnerships has grown in recent years and this trend may continue in the future. A higher concentration of backlog from strategic partnerships may result in an imbalance across our project portfolio among projects in the start-up phase, which typically generate lower revenue, and projects in later stages, which typically generate higher revenue. This in turn may cause fluctuations in our revenue and profitability from period to period.
We face intense competition in many areas of our business; if we do not compete effectively, our business will be harmed.
The biopharmaceutical services industry is highly competitive and we face numerous competitors in many areas of our business. If we fail to compete effectively, we may lose clients, which would cause our business to suffer.
We primarily compete against in-house departments of pharmaceutical companies, other full service clinical research organizations (“CROs”), small specialty CROs, and, to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which we compete include Quintiles Transnational Corporation, Covance, Inc., Pharmaceutical Product Development Inc., and Icon plc. In addition, our PC business 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. PI 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 we have. In addition, our competitors that are smaller specialized companies may compete effectively against us because of their concentrated size and focus.
In recent years, a number of the large pharmaceutical companies have established formal or informal alliances with one or more CROs relating to the provision of services for multiple trials over extended time periods. Our success depends in part on successfully establishing and maintaining these relationships. If we fail to do so, our revenue and results of operations could be adversely affected, possibly materially.
If we do not keep pace with rapid technological changes, our products and services may become less competitive or obsolete, especially in our PI business.
The biotechnology, pharmaceutical and medical device industries generally, and clinical research specifically, are subject to increasingly rapid technological changes. Our competitors or others might develop technologies, products or services that are more effective or commercially attractive than our current or future technologies, products or services, or render our technologies, products or services less competitive or obsolete. If our competitors introduce superior technologies, products or services and we cannot make enhancements to our technologies, products and services necessary to remain competitive, our competitive position would be harmed. If we are unable to compete successfully, we may lose clients or be unable to attract new clients, which could lead to a decrease in our revenue.
Risks Associated with Regulation or Legal Liabilities
If governmental regulation of the drug, medical device and biotechnology industry changes, the need for our services could decrease.
Governmental regulation of the drug, medical device and biotechnology product development process is complicated, extensive, and demanding. A large part of our business involves assisting pharmaceutical, biotechnology and medical device companies through the regulatory approval process. Changes in regulations that, for example, streamline procedures or relax

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approval standards, could eliminate or reduce the need for our services. If companies regulated by the United States Food and Drug Administration (the “FDA”) or similar foreign regulatory authorities needed fewer of our services, we would have fewer business opportunities and our revenues would decrease, possibly materially.
In the United States, the FDA and the Congress have attempted to streamline the regulatory process by providing for industry user fees that fund the hiring of additional reviewers and better management of the regulatory review process. In Europe, governmental authorities have approved common standards for clinical testing of new drugs throughout the European Union by adopting standards for Good Clinical Practices (“GCP”) and by making the clinical trial application and approval process more uniform across member states. 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 United States, Europe and Japan have also collaborated for over 15 years on the International Conference on Harmonisation (“ICH”), the purpose of which is to eliminate duplicative or conflicting regulations in the three regions. The ICH partners have agreed on a common format (the Common Technical Document) for new drug marketing applications that reduces 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 our services.
Parts of our PC business advise clients on how to satisfy regulatory standards for manufacturing and clinical 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 or clinical processes or levels of regulatory enforcement, generally, would result in fewer business opportunities for our business in this area.
If we fail to comply with existing regulations, our reputation and operating results would be harmed.
Our business is subject to numerous governmental regulations, primarily relating to worldwide pharmaceutical and medical device product development and regulatory approval, the conduct of clinical trials, and limitations on activities relating to delivery of health care items or services that are paid for with government health care program funding. In addition, we may be obligated to comply with or to assist our clients in complying with regulations that apply to our clients, including the Physician Payment Sunshine Act, which will require manufacturers and group purchasing organizations to report all payments or transfers of value to health care providers and teaching hospitals. If we fail to comply with these governmental regulations, such non-compliance could result in the termination of our ongoing research, development or sales and marketing projects, or the disqualification of data for submission to regulatory authorities. We also could be barred from providing clinical trial services in the future or could be subjected to civil monetary penalties or, in certain cases, criminal fines and penalties. Any of these consequences would harm our reputation, our prospects for future work and our operating results. In addition, we may have to repeat research or redo trials. If we are required to repeat research or redo trials, we may be contractually required to do so at no further cost to our clients, but at substantial cost to us.
We may lose business opportunities as a result of healthcare reform and the expansion of managed-care organizations.
Numerous governments, including the U.S. government, have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. In March 2010, the United States Congress enacted healthcare reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. The continuing implementation of this legislation may significantly impact the pharmaceutical industry. The U.S. Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. In addition, various state legislatures and European and Asian governments may consider various types of healthcare reform in order to control growing healthcare costs. We are presently uncertain as to the effects of the enacted legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any.
If these efforts are successful, drug, medical device and biotechnology companies may react by spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenue could decrease, possibly materially. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings.
In addition to healthcare reform proposals, the expansion of managed-care organizations in the healthcare market and 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, we would have fewer business opportunities and our revenue could decrease, possibly materially.
We may have substantial exposure to payment of personal injury claims and may not have adequate insurance to cover such claims.
Our 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 a number of reasons, including, but not limited to:
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;

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general risks associated with our Early Phase facilities, including professional malpractice of physicians, nurses and other medical care providers; and
errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial or study.
In order to mitigate the risk of liability, we seek to include indemnification provisions in our CRS contracts with clients and with investigators. However, we are not able to include indemnification provisions in all of our contracts. In addition, even if we are able to include an indemnification provision in all of our contracts, the indemnification provisions may not cover our exposure if:
we had to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; or
a client failed to indemnify us in accordance with the terms of an indemnification agreement because it did not have the financial ability to fulfill its indemnification obligation or for any other reason.
In addition, contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct.
We also carry insurance to cover our risk of liability. However, our 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, we may not be able to maintain or obtain the same levels of coverage on reasonable terms, at a reasonable cost, or in sufficient amounts to protect us against losses due to claims.
Existing and proposed laws and regulations regarding confidentiality of patients’ and other individuals’ personal information could result in increased risks of liability or increased cost to us or could limit our product and service offerings.
The confidentiality, security, use and disclosure of patient-specific information are subject to governmental regulation. Regulations to protect the safety and privacy of human subjects who participate in or whose data are used in clinical research generally require clinical investigators to obtain legally effective informed consent from identifiable research subjects before research is undertaken. Under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health (“HITECH”) Act of 2009, the U.S. Department of Health and Human Services has issued regulations mandating privacy and data security standards and breach notification requirements for certain types of individually identifiable health information, or protected health information, when used or disclosed by health care providers and other HIPAA-covered entities or business associates that provide services to or perform functions on behalf of these covered entities. HIPAA regulations generally require individuals’ written authorization before identifiable health information may be used for research, in addition to any required informed consent. HIPAA regulations also specify standards for de-identifying health information so that information can be handled outside of the HIPAA requirements and for creating limited data sets that can be used for research purposes under less stringent HIPAA restrictions.
The European Union and its member states, as well as other countries, such as Canada, Argentina, Japan and other Asian countries, and state governments in the United States, have adopted and continue to implement new medical privacy and general data protection laws and regulations. In those countries, collecting, processing, using and transferring an individual’s personal data is subject to specific requirements, such as obtaining explicit consent, processing the information for limited purposes and restrictions with respect to cross-border transfers. Many countries and almost all states in the United States have adopted data security breach laws that require the user of such data to inform the affected individuals and, in some cases, government authorities and the general public of security breaches. In order to comply with these laws and regulations and corresponding contractual demands from our clients, we must maintain internal compliance policies and procedures, and we may need to implement new privacy and security measures, which may require us to make substantial expenditures or cause us to limit the products and services we offer. In addition, if we violate applicable laws, regulations, contractual commitments, or other duties relating to the use, privacy or security of health information, we could be subject to civil liability or criminal penalties and it may be necessary to modify our business practices.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and delays in completing our internal controls and financial audits, could have a material adverse effect on our business and stock price.
If we fail to achieve and maintain effective internal controls, we will not be able to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment, and delays in completing our internal controls and financial audits, could cause investors to lose confidence in our reported financial information and our Company, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise equity financing if needed in the future. Our Fiscal Year 2009 management assessment revealed a material weakness in our internal controls over financial reporting due to insufficient controls associated with accounting for

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the ClinPhone business combination, specifically the adoption by ClinPhone of an accounting policy for revenue recognition that was compliant with generally accepted accounting principles in the U.S. We have since changed our internal controls to address this material weakness and concluded in Fiscal Year 2013 that our internal controls related to our accounting for business combinations were designed and operating effectively. Nevertheless, we may identify other significant deficiencies or material weaknesses which we may not be able to remediate in a timely manner or at all.
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.
The U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, generally prohibit companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, anti-corruption laws have appeared to conflict with local customs and practices. Despite our training and compliance programs, we cannot assure that our internal control policies and procedures always will protect us from reckless or criminal acts committed by persons associated with PAREXEL. Our continued global expansion, including in developing countries, could increase such risk in the future. Violations of these laws, or even allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition.
Risks Associated with Indebtedness
Our indebtedness may limit cash flow available to invest in the ongoing needs of our business.
As of March 31, 2015, we had $385.0 million principal amount of debt outstanding and remaining borrowing availability of $215.0 million under our credit arrangements. We may incur additional debt in the future. Our leverage could have significant adverse consequences, including:
requiring us to dedicate a substantial portion of any cash flow from operations to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital and capital expenditures, and for other general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
placing us at a competitive disadvantage to our competitors that have less debt.
Under the terms of our various credit facilities, interest rates are fixed based on market indices at the time of borrowing and, depending upon the interest mechanism selected by us, may float thereafter. Some of our other smaller credit facilities also bear interest at floating rates. As a result, the amount of interest payable by us on our borrowings may increase if market interest rates change.
We may not have sufficient funds, our business may not generate sufficient cash flow from operations, or we may be unable to arrange for additional financing, to pay the amounts due under our existing or any future debt, or any other liquidity needs. In addition, a failure to comply with the covenants under our existing credit facilities could result in an event of default under those credit facilities. In the event of an acceleration of amounts due under our credit facilities as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any required accelerated payments.
In addition, the terms of the 2014 Credit Agreement and the Note Purchase Agreement provide that upon the occurrence of a change in control, as defined in the 2014 Credit Agreement and the Note Purchase Agreement, all outstanding indebtedness under the 2014 Credit Agreement and the Notes would become due. This provision may delay or prevent a change in control that stockholders may consider desirable.
Our existing credit facilities contain covenants that limit our flexibility and prevent us from taking certain actions.
The agreements in connection with our 2014 Credit Agreement and in our short term debt facilities include a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions, meet our capital needs and execute our business strategy. These covenants, among other things, limit our ability and the ability of our restricted subsidiaries to:
incur additional debt;
buy back our common stock;
make certain investments;
enter into certain types of transactions with affiliates;

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make specified restricted payments; and
sell certain assets or merge with or into other companies.
These covenants may limit our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities. Our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their scheduled due date.
Risks Associated with our Common Stock
Our corporate governance structure, including provisions of our articles of organization, by-laws, as well as Massachusetts law, may delay or prevent a change in control or management that stockholders may consider desirable.
Provisions of our articles of organization, and by-laws, as well as provisions of Massachusetts law, may enable our management to resist an acquisition of us by a third party, or may discourage a third party from acquiring us. These provisions include the following:
we have divided our board of directors into three classes that serve staggered three-year terms;
we are 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 our board of directors may only be filled by a vote of our board of directors, and the number of directors may be fixed only by our board of directors;
we are subject to Chapter 110F of the Massachusetts General Laws, which may limit the ability of some interested stockholders to engage in business combinations with us; and
our stockholders are limited in their ability to call or introduce proposals at stockholder meetings.
These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our 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 our stock.
In addition, our board of directors may issue preferred stock in the future without stockholder approval. If our board of directors issues preferred stock, the rights of the holders of common stock would be subordinate to the rights of the holders of preferred stock. Our 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 our stock.
Our stock price has been, and may in the future be volatile, which could lead to losses by investors.
The market price of our common stock has fluctuated widely in the past and may continue to do so in the future. On April 29, 2015, the closing sales price of our common stock on the Nasdaq Global Select Market was $68.26 per share. During the period from April 29, 2013 to April 29, 2015, our common stock traded at prices ranging from a high of $71.42 per share to a low of $37.53 per share. Investors in our 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 our common stock could decline.
Our stock price can be affected by quarter-to-quarter variations in a number of factors including, but not limited to:
operating results;
earnings estimates by industry analysts;
market conditions in our industry or the pharmaceutical and biotechnology industries;
prospects of healthcare reform;
changes in government regulations;
general economic conditions; and
our effective income tax rate.
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 our common stock. Although our 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 our common stock could quickly and substantially decline as a result of even a relatively small shortfall in earnings from, or a change in, analysts’ expectations.

ITEM 5. OTHER INFORMATION
None.

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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 on Form 10-Q, 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 1, 2015