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EX-32.2 - EXHIBIT 32.2 - PAREXEL INTERNATIONAL CORPprxl322q21712312016.htm
EX-32.1 - EXHIBIT 32.1 - PAREXEL INTERNATIONAL CORPprxl321q21712312016.htm
EX-31.2 - EXHIBIT 31.2 - PAREXEL INTERNATIONAL CORPprxl312q21712312016.htm
EX-31.1 - EXHIBIT 31.1 - PAREXEL INTERNATIONAL CORPprxl311q21712312016.htm
EX-10.3 - EXHIBIT 10.3 - PAREXEL INTERNATIONAL CORPprxl103q21712312016.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 December 31, 2016
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 February 6, 2017, there were 50,954,585 shares of common stock outstanding.




PAREXEL INTERNATIONAL CORPORATION
INDEX
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited): December 31, 2016 and June 30, 2016
 
 
Condensed Consolidated Statements Of Income and Comprehensive Income (Unaudited): Three and Six Months Ended December 31, 2016 and 2015
 
 
Condensed Consolidated Statements Of Cash Flows (Unaudited): Six Months Ended December 31, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
 
 
 
 
 

1



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions)
 
December 31, 2016
 
June 30, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
252.4

 
$
248.6

Billed accounts receivable, net
640.5

 
506.1

Unbilled accounts receivable, net
277.6

 
327.9

Prepaid expenses
26.7

 
23.3

Income taxes receivable
17.3

 
25.2

Other current assets
59.6

 
50.1

Total current assets
1,274.1

 
1,181.2

Property and equipment, net
252.4

 
259.3

Goodwill
441.0

 
389.2

Other intangible assets, net
203.6

 
130.7

Non-current deferred tax assets
27.4

 
27.1

Long-term income taxes receivable
9.9

 
10.4

Other assets
38.0

 
38.3

Total assets
$
2,246.4

 
$
2,036.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable and current portion of long-term debt
$
20.8

 
$
16.6

Accounts payable
102.4

 
62.6

Deferred revenue
453.7

 
420.2

Accrued expenses
36.3

 
35.0

Accrued restructuring charges, current portion
5.6

 
14.6

Accrued employee benefits and withholdings
137.9

 
176.4

Income taxes payable
17.2

 
21.6

Other current liabilities
27.4

 
22.4

Total current liabilities
801.3

 
769.4

Long-term debt, net of current portion
756.9

 
484.8

Non-current deferred tax liabilities
16.9

 
19.3

Long-term income tax liabilities
30.9

 
31.5

Long-term deferred revenue
37.3

 
38.3

Other liabilities
68.0

 
59.5

Total liabilities
1,711.3

 
1,402.8

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
0.5

 
0.5

Additional paid-in capital

 
31.4

Retained earnings
691.7

 
737.5

Accumulated other comprehensive loss
(157.1
)
 
(136.0
)
Total stockholders’ equity
535.1

 
633.4

Total liabilities and stockholders’ equity
$
2,246.4

 
$
2,036.2


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 millions, except per share data) 
        
 
Three Months Ended

Six Months Ended
 
December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015
Service revenue
$
534.4

 
$
518.5

 
$
1,031.1

 
$
1,030.6

Reimbursement revenue
77.8

 
85.7

 
157.6

 
158.8

Total revenue
612.2

 
604.2

 
1,188.7

 
1,189.4

Direct costs
350.9

 
332.5

 
678.6

 
675.7

Reimbursable out-of-pocket expenses
77.8

 
85.7

 
157.6

 
158.8

Selling, general and administrative
95.6

 
97.4

 
187.8

 
192.3

Depreciation
19.1

 
17.9

 
38.4

 
35.9

Amortization
7.2

 
5.7

 
12.7

 
11.4

Restructuring charge
1.6

 
10.4

 
0.3

 
25.2

Total costs and expenses
552.2

 
549.6

 
1,075.4

 
1,099.3

Income from operations
60.0

 
54.6

 
113.3

 
90.1

Interest expense, net
(2.8
)
 
(2.1
)
 
(5.4
)
 
(3.7
)
Miscellaneous (expense) income, net
(17.7
)
 
(0.1
)
 
(18.5
)
 
1.7

Total other expense
(20.5
)
 
(2.2
)
 
(23.9
)
 
(2.0
)
Income before income taxes
39.5

 
52.4

 
89.4

 
88.1

Provision for income taxes
17.7

 
13.0

 
29.8

 
23.8

Net income
$
21.8


$
39.4

 
$
59.6


$
64.3

 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
Basic
$
0.42

 
$
0.74

 
$
1.14

 
$
1.19

Diluted
$
0.41

 
$
0.73

 
$
1.12

 
$
1.17

Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
52.0

 
53.3

 
52.4

 
54.1

Diluted
52.7

 
54.0

 
53.2

 
54.9

 
 
 
 
 
 
 
 
Comprehensive income
 
 
 
 
 
 
 
Net income
$
21.8

 
$
39.4

 
$
59.6

 
$
64.3

Unrealized (loss) gain on derivative instruments, net of taxes
(1.1
)
 
(0.1
)
 
1.1

 
(2.2
)
Foreign currency translation adjustment
(26.0
)
 
(12.2
)
 
(22.2
)
 
(27.2
)
Total comprehensive (loss) income
$
(5.3
)
 
$
27.1

 
$
38.5

 
$
34.9


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 millions) 
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
Cash flow from operating activities:
 
 
 
Net income
$
59.6

 
$
64.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
51.1

 
47.3

Stock-based compensation
10.4

 
9.9

Excess tax benefit from stock-based compensation

 
(2.7
)
Unrealized forward contract loss on share repurchase
20.3

 

Deferred income taxes
(1.5
)
 
(7.1
)
Fair value adjustment of contingent consideration
(0.6
)
 
8.2

Other non-cash items
0.1

 
(0.1
)
Changes in operating assets and liabilities, net of effects from acquisitions
(27.9
)
 
(34.1
)
Net cash provided by operating activities
111.5

 
85.7

Cash flow from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
(148.3
)
 

Purchases of property and equipment
(33.2
)
 
(53.3
)
Net cash used in investing activities
(181.5
)
 
(53.3
)
Cash flow from financing activities:
 
 
 
Proceeds from issuance of common stock, net
12.8

 
10.2

Excess tax benefit from stock-based compensation

 
2.7

Payments for share repurchase
(200.0
)
 
(200.0
)
Borrowings under credit agreement/facility
419.2

 
475.0

Repayments under credit agreement/facility and other debt
(142.8
)
 
(358.9
)
Net cash provided by (used in) financing activities
89.2

 
(71.0
)
Effect of exchange rate changes on cash and cash equivalents
(15.4
)
 
(14.8
)
Net increase (decrease) in cash and cash equivalents
3.8

 
(53.4
)
Cash and cash equivalents at beginning of period
248.6

 
207.4

Cash and cash equivalents at end of period
$
252.4

 
$
154.0

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Non-cash capital expenditures
$
4.7

 
$
6.3

Cash paid during the period for:
 
 
 
Interest
$
8.8

 
$
5.4

Income taxes, net of refunds
$
22.5

 
$
9.0


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 December 31, 2016 and, results of operations for the three and six months ended December 31, 2016 and 2015 have been included. Operating results for the three and six months ended December 31, 2016 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, 2016 (the “2016 10-K”) filed with the Securities and Exchange Commission on September 9, 2016.
In the three and six month periods ended December 31, 2016, we recorded $2.4 million and $8.3 million, respectively, of adjustments related to revenue arrangements recognized in prior periods. The adjustments were recorded as reductions to service revenues in the consolidated statements of income and comprehensive income for the three and six months ended December 31, 2016. We concluded that the effect of these errors was not material to our consolidated financial statements for the current period, or any of the prior periods and, as such, these consolidated financial statements are not materially misstated.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), which provides 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. As originally issued, ASU 2014-09 will be effective prospectively for fiscal years and interim periods within those years beginning after December 15, 2016. On July 9, 2015, the FASB approved the proposal to defer the effective date of this standard by one year. Early adoption is permitted for annual periods beginning after December 16, 2016. The Company will adopt ASU 2014-09 effective July 1, 2018. We are assessing the impact of adopting ASU 2014-09 on our consolidated financial statements.
Subsequent to issuing ASU 2014-09, the FASB issued the following amendments concerning clarification of ASU 2014-09.  In March 2016, the FASB issued ASU No. 2016-08 (“ASU 2016-08”), Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which further clarifies the implementation guidance on principal versus agent considerations. The new guidance requires either a retrospective or a modified retrospective approach to adoption. In April 2016, the FASB issued ASU No. 2016-10, (“ASU 2016-10”) Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued ASU No. 2016-12 (“ASU 2016-12”), Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. We are currently evaluating the impact these ASUs will have on our consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments—Overall (Subtopic 825-10)Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU is intended to provide users of financial statements with more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. We are assessing the impact of adopting ASU No. 2016-01 on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) Section A-Leases: Amendments to the FASB Accounting Standards Codification® Section B-Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification® Section C-Background Information and Basis for Conclusions. This ASU requires an entity that leases assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are assessing the impact of adopting ASU 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-05 (“ASU 2016-05”), Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a Consensus of the Emerging Issues Task Force). This ASU

5

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. We are assessing the impact of adopting ASU 2016-05 on our consolidated financial statements.
Recently Adopted Accounting Standards
In the first quarter of our fiscal year ending June 30, 2017, the Company adopted ASU No. 2014-12 (“ASU 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 permits using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) 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 new or modified awards 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. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In the first quarter of our fiscal year ending June 30, 2017, the Company adopted ASU No. 2015-16 (“ASU 2015-16”), Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU requires adjustments to provisional amounts that are identified during the measurement period of a business combination to be recognized in the reporting period in which the adjustment amounts are determined. Acquirers are no longer required to revise comparative information for prior periods as if the accounting for the business combination had been completed as of the acquisition date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In the first quarter of our fiscal year ending June 30, 2017, the Company adopted ASU No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires the presentation of debt issue costs in the consolidated balance sheets as a reduction to the related debt liability rather than as an asset. Amortization of debt issuance costs continues to be classified as interest expense. The adoption of this ASU did not have a material impact on our consolidated financial statements.
In the first quarter of our fiscal year ending June 30, 2017, the Company adopted ASU No. 2016-09 (“ASU 2016-09”), Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The following summarizes the effects of the adoption on the Company's unaudited condensed consolidated financial statements:
Income taxes - Upon adoption of this standard, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur. The Company also recognizes excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. As a result, the Company recognized discrete adjustments to income tax expense for six months ended December 31, 2016, in the amount of $2.3 million related to excess tax benefits. The Company has applied the modified retrospective adoption approach beginning in Fiscal Year 2017. This cumulative-effect adjustment related to tax assets that had previously arisen from tax deductions for equity compensation expenses that were greater than the compensation recognized for financial reporting. These assets had been excluded from the deferred tax assets and liabilities totals on the balance sheet as a result of certain realization requirements previously included in ASC 718. Prior periods have not been adjusted. 
Forfeitures - Prior to adoption, share-based compensation expense was recognized on a straight line basis, net of estimated forfeitures, such that expense was recognized only for share-based awards that are expected to vest. A forfeiture rate was estimated annually and revised, if necessary, in subsequent periods if actual forfeitures differed from initial estimates. Upon adoption, the Company will no longer apply a forfeiture rate and instead will account for forfeitures as they occur. As we previously estimated forfeitures to determine stock-based compensation expense, this change resulted in a cumulative-effect adjustment as of July 1, 2016 to reduce retained earnings by $0.6 million.
Statements of Cash Flows - The Company historically accounted for excess tax benefits on the Statement of Cash Flows as a financing activity. Upon adoption of this standard, excess tax benefits are classified as an operating activity. The Company has elected to adopt this portion of the standard on a prospective basis beginning in Fiscal Year 2017. Prior periods have not been adjusted.
Earnings Per Share - The Company uses the treasury stock method to compute diluted earnings per share, unless the effect would be anti-dilutive. Under this method, the Company will no longer be required to estimate the tax rate and apply it to the dilutive share calculation for determining the dilutive earnings per share. The Company has applied this methodology beginning in Fiscal Year 2017, and prior periods have not been adjusted.

6

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Upon adoption, no other aspects of ASU 2016-09 had a material effect on the Company's unaudited condensed consolidated financial statements or related footnote disclosures.

NOTE 2. – ACQUISITIONS
The pro forma effects of the acquisition described below are not significant to the Company's reported results for any period presented. Accordingly, no pro forma financial statements have been presented herein.
We accounted for these acquisitions as business combinations in accordance with FASB ASC Topic 805, "Business Combinations." We allocate the amount 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.
ExecuPharm, Inc.
On October 3, 2016, we acquired all of the capital stock of privately owned ExecuPharm, Inc. ("ExecuPharm"), a leading global functional service provider, based in Pennsylvania. ExecuPharm provides clinical monitoring or study management, along with associated operational activities such as onboarding, training, line management, performance management and policy administration. 
We paid approximately $148.9 million for the capital stock of ExecuPharm, plus the potential for us to pay an additional $20 million if specific financial targets for ExecuPharm are achieved, and $5.0 million for management retention bonuses. In addition, we made a 338(h)(10) tax election with respect to the ExecuPharm acquisition. Under the 338(h)(10) election, ExecuPharm was deemed to have sold and repurchased its assets at fair market value. In connection with this election, the Company will provide the seller with a tax gross-up payment, which is expected to be paid during the fourth quarter of our Fiscal Year 2017, in the estimated amount of $9.3 million. We funded the acquisition through the use of existing cash held within the United States and $100 million from our credit agreement as defined in Note 10. We will include ExecuPharm results of operations in our Clinical Research Services business segment.
The components of the consideration transferred in conjunction with the ExecuPharm acquisition and the preliminary allocation of that consideration is as follows (in millions):
Total consideration transferred:
 
 
    Cash paid, net of cash acquired
 
$
148.5

    Fair value of contingent consideration
 
9.4

    Deferred payment
 
9.3

Net purchase price
 
$
167.2

Preliminary allocation of consideration transferred:
 
 
    Accounts receivable
 
$
29.2

    Other current assets
 
0.1

    Property and equipment, net
 
0.9

    Definite-lived intangible assets
 
87.1

    Goodwill
 
58.6

          Total assets acquired
 
175.9

    Current liabilities
 
8.7

         Total liabilities assumed
 
8.7

Net assets acquired:
 
$
167.2

The amounts above represent our preliminary fair value estimates as of December 31, 2016 and may be subject to subsequent adjustment as we obtain additional information during the measurement period and finalize our fair value estimates.
The goodwill of $58.6 million arising from the ExecuPharm acquisition largely reflects the potential synergies and expansion of our service offerings across products and markets complementary to our existing service offering and markets. All of the goodwill is expected to be deductible for tax purposes.

7

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following are the preliminary identifiable intangible assets acquired and their respective estimated useful lives, based on preliminary valuations (dollars in millions):
 
 
Amount
 
Estimated Useful Life (Years)
Customer relationships
 
$
85.5

 
15
Trade name
 
1.6

 
2
   Total
 
$
87.1

 
 
Health Advances Acquisition
On January 19, 2016, we entered into a definitive agreement to acquire all of the outstanding equity securities of Health Advances, LLC (“Health Advances”), an independent life sciences strategy consulting firm. Health Advances combines clinical, scientific, and business expertise to provide strategic advice to executives leading life sciences companies and investors. The acquisition closed on February 10, 2016 and is part of the PAREXEL Consulting Services (“PC”) segment.
The net purchase price for the acquisition was approximately $67.1 million, plus the potential to pay up to an additional $15.8 million over a thirty-six month period following the acquisition date if Health Advances achieves certain financial targets. We funded the acquisition with credit facilities.
The components of the consideration transferred in conjunction with the Health Advances acquisition and the preliminary allocation of that consideration is as follows (in millions):
Total consideration transferred:
 
 
    Cash paid, net of cash acquired
 
$
67.1

    Fair value of contingent consideration
 
4.5

Net purchase price
 
$
71.6

Preliminary allocation of consideration transferred:
 
 
    Accounts receivable
 
$
4.0

    Other current assets
 
0.7

    Property and equipment, net
 
1.0

    Deferred tax assets
 
0.2

    Definite-lived intangible assets
 
15.0

    Goodwill
 
52.5

          Total assets acquired
 
73.4

    Current liabilities
 
1.8

         Total liabilities assumed
 
1.8

Net assets acquired:
 
$
71.6

The amounts above represent our preliminary fair value estimates as of December 31, 2016 and may be subject to subsequent adjustment as we obtain additional information during the measurement period and finalize our fair value estimates. During the six months ended December 31, 2016, we received a working capital adjustment payment from the sellers of $0.2 million.
The goodwill of $52.5 million arising from the Health Advances acquisition largely reflects the potential synergies and expansion of our service offerings across products and markets complementary to our existing service offering and markets. All of the goodwill is expected to be deductible for tax purposes.
The following are the preliminary identifiable intangible assets acquired and their respective estimated useful lives, as determined based on preliminary valuations (dollars in millions):
 
 
Amount
 
Estimated Useful Life (Years)
Customer relationships
 
$
11.6

 
10
Technology
 
1.8

 
3
Trade name
 
1.6

 
5
   Total
 
$
15.0

 
 




8

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The Medical Affairs Company, LLC
On February 1, 2017, the Company entered into a definitive agreement to acquire The Medical Affairs Company, LLC, a leading provider of outsourced medical affairs services to the pharmaceutical, biotechnology, and medical device industries. The acquisition is expected to close during the third quarter of our Fiscal Year 2017.

NOTE 3. – EQUITY AND EARNINGS PER SHARE
We have authorized 5.0 million shares of preferred stock at $0.01 par value. As of December 31, 2016 and June 30, 2016, we had no shares of preferred stock issued and outstanding.
We have authorized 150.0 million shares of common stock at $0.01 par value. As of December 31, 2016 and June 30, 2016, respectively, we had 50.9 million and 52.9 million 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 millions, except per share data)
Three Months Ended

Six Months Ended
 
December 31, 2016

December 31, 2015

December 31, 2016

December 31, 2015
Net income attributable to common stock
$
21.8

 
$
39.4

 
$
59.6

 
$
64.3

Weighted average number of shares outstanding, used in computing basic earnings per share
52.0

 
53.3

 
52.4

 
54.1

Dilutive common stock equivalents
0.7

 
0.7

 
0.8

 
0.8

Weighted average number of shares outstanding used in computing diluted earnings per share
52.7

 
54.0

 
53.2

 
54.9

Basic earnings per share
$
0.42

 
$
0.74

 
$
1.14

 
$
1.19

Diluted earnings per share
$
0.41

 
$
0.73

 
$
1.12

 
$
1.17

Anti-dilutive equity instruments (excluded from the calculation of diluted earnings per share)
0.6

 
1.4

 
0.8

 
1.2

Share Repurchase Plan
Fiscal Year 2017 Share Repurchase
On October 26, 2016, we announced that our Board of Directors approved a share repurchase program (the “2017 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. On November 21, 2016, we entered into an agreement (the “2017 Agreement”) to purchase shares of our common stock from HSBC, National Association (“HSBC”), for an aggregate purchase price of $200.0 million pursuant to an accelerated share purchase program. Pursuant to the 2017 Agreement, in November 2016, we paid $200.0 million to HSBC and received from HSBC 2.8 million shares of our common stock, representing 80% of the estimated shares to be repurchased by us under the 2017 Agreement. The shares were repurchased at a price of $57.51 per share, which was the closing price of our common stock on the Nasdaq Global Select Market on November 21, 2016. These shares were canceled and restored to the status of authorized and unissued shares. As of December 31, 2016, we recorded the $160.0 million payment, which represents the 80% of the shares we repurchased, 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. The remaining $40.0 million, which is an advanced payment accounted for as a forward share repurchase contract, was recorded as within other current assets within the condensed consolidated balance sheet. During the three months ended December 31, 2016, the fair value of the forward share repurchase contract in the amount of $40.0 million decreased by $20.3 million.
Fiscal Year 2016 Share Repurchase
On September 14, 2015, we announced that our Board of Directors approved a share repurchase program (the “2016 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. On September 15, 2015, we entered into an agreement (the “2016 Agreement”) to purchase shares of our common stock from Wells Fargo Bank, National Association (“WF”), for an aggregate purchase price of $200.0 million pursuant to an accelerated share purchase program. Pursuant to the 2016 Agreement, in September 2015, we paid $200.0 million to WF and received from WF 2.3 million shares of our common stock, representing 80% of the shares to be repurchased by us under the 2016 Agreement. The shares were repurchased at a price of $70.35 per share, which was the closing

9

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



price of our common stock on the Nasdaq Global Select Market on September 16, 2015. These shares were canceled and restored to the status of authorized and unissued shares. As of December 31, 2016, we recorded the $200.0 million payment to WF 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 February 10, 2016, we received 0.9 million shares representing the final settlement of the 2016 Agreement and the 2016 Program was completed. Pursuant to the 2016 Program, we repurchased 3.2 million shares of our common stock at an average price of $62.92 per share from September 2015 to February 2016.

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 six months ended December 31, 2016:
(in millions)
 
Foreign Currency
 
Unrealized Gain/Loss on Derivatives
 
Total
Balance as of June 30, 2016
 
$
(130.5
)
 
$
(5.5
)
 
$
(136.0
)
Other comprehensive loss before reclassifications
 
(22.2
)
 
(3.6
)
 
(25.8
)
Loss reclassified from accumulated other comprehensive income
 

 
4.7

 
4.7

Net current-period other comprehensive (loss) gain
 
$
(22.2
)
 
$
1.1

 
$
(21.1
)
Balance as of December 31, 2016
 
$
(152.7
)

$
(4.4
)
 
$
(157.1
)
The change in our translation adjustment was due primarily to the movements in the Japanese Yen (JPY), Great British Pound (GBP) and Euro (EUR) exchange rates against the United States Dollar (USD). The USD strengthened by 12.1%, 8.2% and 4.9% versus the JPY, GBP and EUR, respectively, between June 30, 2016 and December 31, 2016. The movement in the JPY, GBP and EUR represented $3.0 million, $8.4 million and $8.6 million, respectively, out of the $22.2 million foreign currency translation adjustment during the six months ended December 31, 2016. The remaining foreign currency translation adjustment is attributable to the USD appreciation against other major world-wide currencies, including Chinese Yuan, Canadian Dollar, Argentine Peso and Ukrainian Hryvnia.
The details regarding pre-tax loss on derivative instruments reclassified to net income from accumulated other comprehensive income (loss) for the three and six months ended December 31, 2016 and 2015 are presented below:
 
 
Three Months Ended
 
Affected Line in the Consolidated Statements of Income
(in millions)
 
December 31, 2016
 
December 31, 2015
 
Interest rate contracts
 
$
(0.2
)
 
$
(0.1
)
 
Interest expense, net
Foreign exchange contracts
 
(2.1
)
 
(0.2
)
 
Service Revenue
Foreign exchange contracts
 
(0.7
)
 
(1.8
)
 
Direct Costs
Total
 
$
(3.0
)
 
$
(2.1
)
 
 
 
 
Six Months Ended
 
Affected Line in the Consolidated Statements of Income
(in millions)
 
December 31, 2016
 
December 31, 2015
 
Interest rate contracts
 
$
(0.2
)
 
$
(0.3
)
 
Interest expense, net
Foreign exchange contracts
 
(4.8
)
 
(0.4
)
 
Service Revenue
Foreign exchange contracts
 
(0.8
)
 
(4.6
)
 
Direct Costs
Total
 
$
(5.8
)
 
$
(5.3
)
 
 
The amounts of loss reclassified from accumulated other comprehensive income into net income are net of taxes of $0.7 million, and $1.2 million for the three and six months ended December 31, 2016, respectively.
The amounts of loss reclassified from accumulated other comprehensive income into net income are net of taxes of $0.8 million, and $2.1 million for the three and six months ended December 31, 2015, respectively.


10

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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 millions)
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
Direct costs
$
1.1

 
$
1.0

 
$
2.2

 
$
2.2

Selling, general and administrative
4.5

 
3.8

 
8.2

 
7.7

Total stock-based compensation
$
5.6

 
$
4.8

 
$
10.4

 
$
9.9

On December 3, 2015, the Company's shareholders approved a new share-based compensation plan, the 2015 Stock Incentive Plan (the “2015 Plan”). The 2015 Plan allows for the issuance of up to the sum of (i) 3.0 million shares of PAREXEL common stock plus (ii) up to an additional 3.4 million shares of PAREXEL common stock from awards under the Existing Plans (as defined below), which expire, terminate or are otherwise surrendered, canceled, forfeited, or repurchased by the Company. The Company stopped making awards under its Existing Plans upon approval of the 2015 Plan by its shareholders. The term “Existing Plans” refers collectively to the Company’s 2005 Stock Incentive Plan, 2007 Stock Incentive Plan, and 2010 Stock Incentive Plan.
The 2015 Plan allows for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards, which are referred to collectively as “Awards.” The 2015 Plan became effective upon approval by the Company’s shareholders. No Awards may be made under the 2015 Plan after December 3, 2025.

NOTE 6. RESTRUCTURING CHARGES
In June 2015, the Board of Directors approved a plan (the “Margin Acceleration Program”) to restructure our operations to improve the productivity and efficiency of the Company, simplify the organization, and streamline decision-making, thereby enhancing client engagement. The Margin Acceleration Program is company-wide. The activities under the Margin Acceleration Program were substantially complete as of June 30, 2016. In Fiscal Years 2015 and 2016, we recorded restructuring charges of $20.0 million and $27.8 million, respectively. In the first quarter of Fiscal Year 2017, we recorded a benefit of $1.3 million, while in the second quarter of Fiscal Year 2017, we recorded a restructuring charge of $1.6 million related to the Margin Acceleration Program.
Changes in the restructuring accrual during the first six months of Fiscal Year 2016 are summarized below:
 
 
Balance at
 
Charges/(Benefits)
 
Payments/Foreign
Currency Exchange/Other
 
Balance at
 
 
June 30, 2016
 
 
 
December 31, 2016
2015 Margin Acceleration Program
 
 
 
 
 
 
 
 
Employee severance
 
$
10.5

 
$
(0.5
)
 
$
(6.8
)
 
$
3.2

Facilities-related
 
7.1

 
0.8

 
(2.8
)
 
5.1

Pre-Fiscal Year 2012 Restructuring Plans
 
 
 
 
 
 
 
 
Facilities-related
 
0.1

 

 

 
0.1

Total
 
$
17.7

 
$
0.3

 
$
(9.6
)
 
$
8.4

 
 
 
 
 
 
 
 
 

11

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Net restructuring charges by segment are as follows:
 
 
Six Months Ended
(dollars in millions)
 
December 31, 2016
 
December 31, 2015
CRS
 
$
(0.7
)
 
$
12.2

PC
 
(0.1
)
 
0.7

PI
 
2.6

 
7.6

    Segment Total
 
1.8

 
20.5

Corporate restructuring charges
 
(1.5
)
 
4.7

    Total restructuring charges
 
$
0.3

 
$
25.2

2017 Restructuring Plan
On January 6, 2017, the Company approved a plan to restructure its operations to improve the productivity and efficiency of the company, simplify the organization, and streamline decision-making, thereby enhancing client engagement. The restructuring initiative is company-wide. These actions are expected to result in pre-tax charges in the range of $25.0 million to $35.0 million, all of which are anticipated to be cash expenditures.

NOTE 7. – SEGMENT INFORMATION
We have three reportable 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 include in our PAREXEL Access product offering, formerly known as Peri/Post Approval Services. Our services include clinical trials management and biostatistics, commercialization, 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 and PAREXEL Access with Phase II-III 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 communication 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.
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 assets are not identified by reportable segment.

12

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Our segment results were as follows:
(in millions)
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
Service revenue
 
 
 
 
 
 
 
CRS
$
408.9

 
$
407.1

 
$
785.2

 
$
817.3

PC
54.6

 
41.4

 
109.6

 
80.7

PI
70.9

 
70.0

 
136.3

 
132.6

Total service revenue
$
534.4

 
$
518.5

 
$
1,031.1

 
$
1,030.6

Direct costs
 
 
 
 
 
 
 
CRS
$
284.5

 
$
274.4

 
$
546.6

 
$
561.9

PC
30.9

 
20.8

 
61.3

 
41.0

PI
35.5

 
37.3

 
70.7

 
72.8

Total direct costs
$
350.9

 
$
332.5

 
$
678.6

 
$
675.7

Gross profit
 
 
 
 
 
 
 
CRS
$
124.4

 
$
132.7

 
$
238.6

 
$
255.4

PC
23.7

 
20.6

 
48.3

 
39.7

PI
35.4

 
32.7

 
65.6

 
59.8

Total gross profit
$
183.5

 
$
186.0

 
$
352.5

 
$
354.9


NOTE 8. – INCOME TAXES
We determine our global provision for corporate income taxes in accordance with 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.
For the three months ended December 31, 2016 and 2015, we had effective income tax rates of 44.8% and 24.8%, respectively. The tax rate for the three months ended December 31, 2016 was higher than the expected statutory rate of 35% primarily due to the non-deductibility of the unrealized loss on the fair value adjustment of $20.3 million in connection with the accelerated share repurchase program, which increased the tax rate by15.2%, and was partially offset by the favorable effect of statutory tax rates applicable to income earned outside the United States on the projected annual effective tax rate. The tax rate for the three months ended December 31, 2015 was 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 on the projected annual effective tax rate.
For the six months ended December 31, 2016 and 2015, we had effective income tax rates of 33.3% and 27.0%, 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 on the projected annual effective tax rate. The tax rate for the six months ended December 31, 2016, benefited 2.5% from the adoption of ASU 2016-09 as discussed in Note 1 to these condensed consolidated financial statements, and increased by 6.1% due to the non-deductibility of the unrealized loss on the fair value adjustment of $20.3 million in connection with accelerated share repurchase program.
As of December 31, 2016, we had $28.9 million of gross unrecognized tax benefits, of which $18.7 million would impact the effective tax rate if recognized. As of June 30, 2016, we had $29.5 million of gross unrecognized tax benefits, of which $18.9 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 $0.7 million net decrease in gross unrecognized tax benefits is primarily attributable to currency translation adjustments.
As of December 31, 2016, we do not anticipate that the liability for unrecognized tax benefits for uncertain tax positions could decrease 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 December 31, 2016 and June 30, 2016, $3.5 million and $3.4 million, respectively, of gross interest and penalties were included in the liability for unrecognized

13

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



tax benefits. For the six month periods ended December 31, 2016 and 2015, expenses of $0.2 million and $0.4 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 states, local and foreign jurisdictions. Our U.S. federal, state and local income tax returns for the tax years 2005 to 2015 remain open for examination by the relevant tax authority. In foreign tax jurisdictions, the Company has open tax years dating back to 2002. The extended open tax years for these jurisdictions resulted from tax attributes carryover, including net operating losses or tax credits from those tax years.
We are subject to on-going tax audits in various jurisdictions. Tax authorities may disagree with certain positions we have taken and assess additional taxes. We regularly assess the likely outcomes of these audits in order to determine the appropriateness of our tax provision and have established contingency reserves for material, known tax exposures.

NOTE 9. CREDIT AGREEMENTS
2016 Credit Agreement
On March 11, 2016, PAREXEL, certain subsidiaries of PAREXEL; Bank of America, N.A. (“Bank of America”), as Administrative Agent, Swingline Lender and L/C Issuer; Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”); HSBC Bank USA, N.A. (“HSBC”), U.S. Bank, N.A. (“US Bank”); TD Securities (USA) LLC (“TD Securities”) and Wells Fargo Securities, LLC (“Wells Fargo Securities”) as Joint Lead Arrangers and Joint Book Managers, HSBC, US Bank, TD Bank, N.A. (“TD Bank”) and Wells Fargo Bank, N.A. (“Wells Fargo Bank”) as Joint Syndication Agents, and the other lenders party thereto entered into an amended and restated credit agreement (the “2016 Credit Agreement”). The 2016 Credit Agreement provided for a five-year term loan and revolving credit facility in the principal amount of up to $750.0 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 2016 Credit Agreement amends and restates the amended and restated credit agreement dated October 15, 2014, (the “2014 Credit Agreement”), by and among the Company, certain subsidiaries of the Company; Bank of America, as Administrative Agent, Swingline Lender and L/C Issuer; MLPFS; J.P. Morgan Securities LLC; HSBC; and US Bank, as Joint Lead Arrangers and Joint Book Managers; JPMorgan Chase Bank N.A., HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto.
The 2016 Credit Agreement provides for a revolving credit facility in the principal amount of up to $350.0 million from time to time outstanding. 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 up to a sublimit of $10.0 million.
The 2016 Credit Agreement is intended to provide funds (i) for stock repurchases, (ii) for the issuance of letters of credit and (iii) for other general corporate purposes of PAREXEL and its subsidiaries, including permitted acquisitions.
On the closing date of March 11, 2016, after giving effect to the amendment and restatement of the 2014 Credit Agreement and the effectiveness of the 2016 Credit Agreement, the Company was obligated under the 2016 Credit Agreement for term loans in the principal amount of $400.0 million and revolving loans in the principal amount of $65.0 million.
As of December 31, 2016, we had $285.0 million of principal borrowed under the revolving credit facility and $392.5 million of principal borrowed under the term loan. The outstanding amount is presented net of debt issuance costs of approximately $2.9 million, in our consolidated balance sheet at December 31, 2016. As of December 31, 2016, we had borrowing availability of $165.0 million under the revolving credit facility. We used $100.0 million in borrowings under this credit facility in connection with our acquisition of ExecuPharm and $140.0 million to support our $200.0 million accelerated share repurchase program.
PAREXEL’s obligations under the 2016 Credit Agreement are guaranteed by certain material domestic subsidiaries of the Company, and the obligations, if any, of any foreign designated borrower are guaranteed by the Company and certain of its material domestic subsidiaries.
Borrowings (other than swingline loans) under the 2016 Credit Agreement bear interest, at PAREXEL’s determination, at a rate based on either (a) LIBOR plus a margin (not to exceed a per annum rate of 2.0%) based on a ratio of consolidated net funded debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Net Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one month LIBOR rate plus 100 basis points (such highest rate, the “Alternate Base Rate”), plus a margin (not to exceed a per annum rate of 1.0%) based on the Consolidated Net 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 1.0%). Loans outstanding under the 2016 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 2016 Credit Agreement. The 2016 Credit Agreement terminates, and any outstanding loans under it mature, on March 11, 2021.

14

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on March 11, 2021. A swingline loan under the 2016 Credit Agreement generally must be paid ten (10) 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 March 11, 2021:
0.63% by quarterly term loan amortization payments to be made commencing June 30, 2016 and made on or prior to March 31, 2017;
1.25% by quarterly term loan amortization payments to be made on or after June 30, 2017, but on or prior to March 31, 2019;
1.88% by quarterly term loan amortization payments to be made on or after June 30, 2019, but on or prior to March 31, 2020;
2.50% by quarterly term loan amortization payments to be made on or after June 30, 2020, but prior to March 11, 2021; and
72.50% (or if less, the remaining principal amount of the term loan) on March 11, 2021.
To the extent not previously paid, all borrowings under the 2016 Credit Agreement must be repaid on March 11, 2021.
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.
The obligations of PAREXEL under the 2016 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2016 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 2016 Credit Agreement contains negative covenants applicable to PAREXEL and its subsidiaries, including financial covenants requiring PAREXEL to comply with maximum net leverage ratios and minimum interest coverage ratios, as well as restrictions on liens, investments, indebtedness, fundamental changes, acquisitions, dispositions of property, specified restricted payments (including cash dividends and stock repurchases that would result in the Company exceeding an agreed-to Consolidated Net Leverage Ratio), transactions with affiliates, and other restrictive covenants. As of December 31, 2016, we were in compliance with all covenants under the 2016 Credit Agreement.
Under the terms of the 2016 Credit Agreement, neither we nor any of our subsidiaries may pay any dividend or make any other distribution with respect to any shares of capital stock except that (a) we and our subsidiaries may declare and pay dividends with respect to equity interests payable solely in additional shares of common stock, (b) our subsidiaries may declare and pay dividends and other distributions ratably with respect to their equity interests, (c) we may make payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Company and our subsidiaries, and (d) the Company and certain of its subsidiaries may make payments in connection with permitted repurchases of their respective capital stock.
In connection with the 2016 Credit Agreement, PAREXEL 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 0.250% (based on the Consolidated Net Leverage Ratio). To the extent there are letters of credit outstanding under the 2016 Credit Agreement, PAREXEL will pay letter of credit fees plus a fronting fee and additional charges. PAREXEL agreed to pay (i) Bank of America for its own account, an arrangement fee, (ii) to each of the lenders on the closing date, an upfront fee, and (iii) to Bank of America for its own account, an annual agency fee.
In May 2013, we entered into an interest rate swap agreement and hedged an additional principal amount of $100.0 million under a prior credit agreement, with a fixed interest rate of 0.73%. The interest rate swap agreement now hedges $100.0 million of principal under our 2016 Credit Agreement. These interest rate hedges were deemed to be fully effective in accordance with ASC 815 "Derivatives and Hedging", and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income in our consolidated balance sheets.
On October 1, 2015, we entered into a two-year interest rate swap agreement effective September 30, 2016, which now hedges an additional principal amount of $100.0 million under the 2016 Credit Agreement with a fixed interest rate 1.104%.
2016 Term Loan Agreement
On February 10, 2016, PAREXEL entered into a short term unsecured term loan agreement with TD Bank, providing for a loan to the Company of $75.0 million (the “Loan”). The Loan would have matured on April 30, 2016 unless earlier payment had been required under the terms of the Company loan agreement with TD Bank. The Loan bore interest, at PAREXEL’s determination, at a base rate plus a margin (such margin not to exceed a per annum rate of 0.750%) based on a ratio of consolidated funded debt

15

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the prior four fiscal quarters (the “Leverage Ratio”), or at a LIBOR rate plus a margin (such margin not to exceed a per annum rate of 1.750%) based on the Leverage Ratio. The Loan could have been 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 of the loan agreement.
The proceeds of the Loan were advanced to the Company on February 12, 2016 and were used to repay borrowings under the Company’s 2014 Facility.
The obligations of PAREXEL under the Loan could have been accelerated upon the occurrence of an event of default under the Loan, which included customary events of default, including payment defaults, the inaccuracy of representations or warranties, and cross defaults to the 2014 Facility.
As of December 31, 2016, all outstanding amounts under the Loan were fully repaid with the proceeds from the 2016 Credit Agreement.
Master Financing Agreement
On June 12, 2015, we entered into a three-year, interest-free Master Financing Agreement for $7.1 million with General Electric Capital Corporation, (“GECC”), in conjunction with a software term license purchase. On June 30, 2015 we received the gross proceeds of $7.1 million from GECC. Repayment of the principal borrowed under the Master Financing Agreement is due annually on July 1 as follows:
$1.4 million made on or prior to July 1, 2015;
$2.8 million made on or prior to July 1, 2016; and
$2.9 million paid on or prior to July 1, 2017.
As of December 31, 2016, we had $2.9 million principal borrowed under the Master Financing Agreement.
2014 Credit Agreement
The 2014 Credit Agreement provided 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 loan facility available under the 2014 Credit Agreement consisted of a term loan facility and a revolving credit facility. The principal amount of up to $200.0 million of the Loan Amount was available through the term loan facility, and the principal amount of up to $300.0 million of the Loan Amount was available through the revolving credit facility. A portion of the revolving credit facility was 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.
Our obligations under the 2014 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.
The 2014 Credit Agreement was superseded by the 2016 Credit Agreement, and as of December 31, 2016 all outstanding amounts under the 2014 Credit Agreement were fully repaid.
Borrowings (other than swingline loans) under the 2014 Credit Agreement bore 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 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%).
Interest due under the revolving credit facility (other than a swingline loan) and the term loan facility had to be paid quarterly for borrowings with an interest rate determined with reference to the Alternate Base Rate. Interest had to 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. Under the terms of the 2014 Credit Agreement, neither we nor any of our subsidiaries could have paid any dividend or made any other distribution with respect to any shares of capital stock except that (a) we and our subsidiaries could have declared and paid dividends with respect to equity interests payable solely in additional shares of common stock, (b) our subsidiaries could have declared and paid dividends and other distributions ratably with respect to their equity interests, (c) we could have made payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Company and our subsidiaries, and (d) the Company and certain of its subsidiaries could have made payments in connection with permitted repurchases of their respective capital stock.
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 would have paid letter of credit

16

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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.
In September 2011, we entered into an interest rate swap agreement, which hedged $100.0 million of principal under our prior debt obligations and carried a fixed interest rate of 1.30%. In September 2015, the interest rate swap agreement matured and the related accumulated other comprehensive income was reclassified to net income during the three months ended September 30, 2015.
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 a previous credit agreement. 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 December 31, 2016, 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 December 31, 2016, 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 $0.2 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 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 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 six months ended December 31, 2016, we transferred approximately $0.7 million of trade receivables. As of December 31, 2016 and June 30, 2016, no transfers were accounted for as a financing activity.
Additional Lines of Credit
On December 23, 2016, we entered into an unsecured line of credit with HSBC Bank, USA in the amount of $100.0 million. The line bears interest, at PAREXEL’s determination, at a base rate plus a margin (such margin not to exceed a per annum rate of 1.00%) based on a ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) for the prior four fiscal quarters (the “Leverage Ratio”), or at a LIBOR rate plus a margin (such margin not to exceed a per annum rate of 2.00%) based on the Leverage Ratio. We entered into this line of credit to facilitate business transactions. As of December 31, 2016, we had $100.0 million available under this line of credit.
We have an unsecured line of credit with JP Morgan UK of $4.5 million, which 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 December 31, 2016, we had $4.5 million available for borrowing under this line of credit.
We have an unsecured uncommitted overdraft facility with ING Bank NV of 7.5 million Euros, which 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 December 31, 2016, we had 7.5 million Euros available under this line of credit.


17

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



NOTE 10. – DEBT, COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of December 31, 2016, our future minimum debt obligations related to the 2016 Credit Agreement and the Notes described in Note 9 above were as follows:
(in millions)
 
FY 2017
 
FY 2018
 
FY 2019
 
FY 2020
 
FY 2021
 
Thereafter
 
Total
Debt obligations (principal)
 
$
8.0

 
$
22.8

 
$
22.5

 
$
32.5

 
$
695.0

 
$

 
$
780.8

We have letter-of-credit agreements with banks totaling approximately $10.2 million guaranteeing performance under various operating leases and vendor agreements. Additionally, the borrowings under the 2016 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.
The above table does not include asset retirement obligations due to the uncertainty of the timing of the future cash outflows related to the restoration costs associated with returning certain facilities to their original condition upon termination of our long-term lease. As of December 31, 2016, the obligation expected to be incurred was $14.1 million.
The above table does not include contingent consideration due to the uncertainty regarding the amounts and timing of the future cash outflows related to the potential payments. As of December 31, 2016, we recorded contingent consideration liabilities of $14.0 million. See Note 12 to our consolidated financial statements included in this quarterly report for more information.
After consultation with counsel or other experts, we believe 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 11. – 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. 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 is intended to reduce the impact of foreign exchange rate risk on our direct costs and 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.
During three month ended December 31, 2016, we entered into a forward share repurchase contract in connection with our 2017 accelerated share repurchase program with HSBC.

18

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



The following table presents the notional amounts and fair values of our derivatives as of December 31, 2016 and June 30, 2016. 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 millions)
December 31, 2016
 
June 30, 2016
 
Notional
Amount
 
Asset
(Liability)
 
Notional
Amount
 
Asset
(Liability)
Derivatives designated as hedging instruments under ASC 815
 
 
Derivatives in an asset position:
 
 
 
 
 
 
 
Interest rate contracts
$
200.0

 
$
0.5

 
$

 
$

Foreign exchange contracts
59.9

 
2.4

 
81.2

 
3.5

Derivatives in a liability position:
 
 
 
 
 
 
 
Interest rate contracts

 

 
200.0

 
(1.3
)
Foreign exchange contracts
95.8

 
(7.6
)
 
103.3

 
(8.9
)
Total designated derivatives
$
355.7

 
$
(4.7
)
 
$
384.5

 
$
(6.7
)
Derivatives not designated as hedging instruments under ASC 815
Derivatives in an asset position:
 
 
 
 
 
 
 
Foreign exchange contracts
$
108.0

 
$
1.6

 
$
36.2

 
$
1.5

Forward share repurchase contract

$
200.0

 
$
19.7

 
$

 
$

Derivatives in a liability position:
 
 
 
 
 
 
 
Foreign exchange contracts
38.8

 
(1.7
)
 
48.0

 
(1.4
)
Total non-designated derivatives
$
346.8

 
$
19.6

 
$
84.2

 
$
0.1

Total derivatives
$
702.5

 
$
14.9

 
$
468.7

 
$
(6.6
)
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 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 December 31, 2016 and 2015, we recorded losses of $0.6 million and $0.7 million, respectively, in miscellaneous income (expense), net in our consolidated statements of income to reflect ineffective portions of hedges. During the six months ended December 31, 2016 and 2015, we recorded losses of $0.4 million and $1.7 million, respectively, in miscellaneous income (expense), net in our consolidated statements of income to reflect ineffective portions of hedges.
The amounts recognized in other comprehensive income (loss), net of taxes, are presented below: 
(in millions)
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
Derivatives designated as hedging instruments under ASC 815
 
 
Interest rate contracts
$
1.4

 
$
0.7

 
$
1.9

 
$
0.2

Foreign exchange contracts
(2.5
)
 
(0.8
)
 
(0.8
)
 
(2.4
)
Total designated derivatives
$
(1.1
)
 
$
(0.1
)
 
$
1.1

 
$
(2.2
)
The unrealized gain (loss) on derivative instruments is net of $0.3 million and $0.4 million taxes, respectively, for the three months ended December 31, 2016 and 2015. The unrealized gain (loss) on derivative instruments is net of $0.5 million and $0.4 million taxes, respectively, for the six months ended December 31, 2016 and 2015.The estimated net amount of the existing losses that are expected to be reclassified into earnings within the next twelve months is $6.3 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 $0.9 million and of $3.3 million for the three months ended December 31, 2016 and 2015, respectively. The total gains and losses related to foreign exchange contracts not designated as hedging instruments were losses of $0.8 million and of $3.6 million for the six months ended December 31, 2016 and 2015, respectively. The loss related to the forward share repurchase contract for the three months ended December 31, 2016 was $20.3 million.
The unrealized losses recognized are presented below:

19

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



(in millions)
Three Months Ended
 
Six Months Ended
 
December 31, 2016
 
December 31, 2015
 
December 31, 2016
 
December 31, 2015
Derivatives not designated as hedging instruments under ASC 815
 
 
Forward share repurchase contract

$
(20.3
)
 
$

 
$
(20.3
)
 
$

Foreign exchange contracts
(1.2
)
 
(0.1
)
 
(1.4
)
 
(0.7
)
Total non-designated derivative unrealized loss, net
$
(21.5
)
 
$
(0.1
)
 
$
(21.7
)
 
$
(0.7
)

NOTE 12. FAIR VALUE MEASUREMENTS
We apply the provisions of 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 enables 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 value. 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.
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 December 31, 2016, we did not hold any marketable securities.
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.
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 asset 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 December 31, 2016:
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Contingent consideration
$

 
$

 
$
(14.0
)
 
$
(14.0
)
Forward share repurchase contract

 

 
19.7

 
19.7

Interest rate derivative instruments

 
0.5

 

 
0.5

Foreign currency exchange contracts

 
(5.3
)
 

 
(5.3
)
Total
$

 
$
(4.8
)
 
$
5.7

 
$
0.9

The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of June 30, 2016: 
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Contingent consideration
$

 
$

 
$
(5.2
)
 
$
(5.2
)
Interest rate derivative instruments

 
(1.3
)
 

 
(1.3
)
Foreign currency exchange contracts

 
(5.3
)
 

 
(5.3
)
Total
$

 
$
(6.6
)
 
$
(5.2
)
 
$
(11.8
)

20

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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.
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. These are 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
We have entered into a forward share repurchase contract in connection with our 2017 accelerated share repurchase program with HSBC. We recorded the $160.0 million payment, which represents the 80% of the shares we repurchased, 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. The remaining $40.0 million, which is an advance payment accounted for as a forward share repurchase contract, was recorded as within other current assets within the condensed consolidated balance sheet. The prepaid forward contract was initially valued at the transaction price of $40.0 million. The forward share repurchase contract was remeasured at fair value with market conditions based on the use of a Monte-Carlo Simulation Model. Increases or decreases in the fair value of our forward contract are primarily impacted by the Company's stock price. During the three months ended December 31, 2016, the fair value of the forward share repurchase contract decreased by $20.3 million from $40.0 million to $19.7 million. The change in fair value of $20.3 million was recorded in miscellaneous (expense) income, net.
The recurring Level 3 fair value measurements of our forward share repurchase contract asset include the following significant unobservable inputs:
 
Forward Share
Unobservable Input
Repurchase Contract
Risk free rate
0.6%
Share price volatility
37.5
Contract term
0.4 years
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 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.
In October 2016, we acquired ExecuPharm, Inc. (“ExecuPharm”), a leading global functional service provider, based in Pennsylvania.  ExecuPharm provides clinical monitoring or study management, along with associated operational activities such as onboarding, training, line management, performance management, and policy administration. The purchase price for the ExcuPharm acquisition was approximately $148.9 million, plus the potential to pay up to an additional $20.0 million at the end of a two year period ending June 30, 2018 if ExecuPharm achieves specific financial targets. The contingent consideration related to the ExecuPharm acquisition is measured at fair value with market conditions based on the use of a Monte-Carlo Simulation Model. Increases or decreases in the fair value of our contingent consideration liability is primarily impacted by the likelihood of achieving financial targets, but also by changes in discount periods and rates.
The recurring Level 3 fair value measurements of our contingent consideration liability include the following significant unobservable inputs:

21

PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



 
 
Health Advances
 
ExecuPharm
Unobservable Input
 
Range
 
Range
Risk free rate
 
1.3%
 
0.7%
Revenue volatility
 
26%
 
29%
Projected period of payment
 
Approximately 2 years
 
Approximately 2 years
The following table provides a summary of the change in our valuation of the fair value of the contingent consideration liability, which was determined by Level 3 inputs:
(in millions)
 
 
 
 
Balance at June 30, 2016
 
 
 
$
5.2

Additions of contingent consideration due to ExecuPharm acquistion
 
 
 
9.4

Change in fair value of contingent consideration for Health Advances
 
 
 
(0.6
)
Balance at December 31, 2016
 
 
 
$
14.0

The following table provides a summary of the change in our valuation of the fair value of the forward share repurchase contract asset, which was determined by Level 3 inputs:
(in millions)
 
 
 
 
Balance at June 30, 2016
 
 
 
$

Additions of forward share repurchase contract
 
 
 
40.0

Change in fair value of forward share repurchase contract
 
 
 
(20.3
)
Balance at December 31, 2016
 
 
 
$
19.7

For the three and six months ended December 31, 2016, 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. For the three and six months ended December 31, 2016, the change in the fair value of the contingent consideration for Health Advances, LLC (“Health Advances”) of $0.6 million was recorded in selling, general and administrative expense. During the three months ended December 31, 2016, the fair value of contingent consideration for Health Advances in the amount of $4.6 million decreased by $0.6 million from June 30, 2016. For the three and six months ended December 31, 2015, the change in the fair value of the contingent consideration for ClinIntel Limited ("ClinIntel") of $3.2 million and $8.2 million, respectively, was recorded in selling, general and administrative expense.
In February 2016, we acquired Health Advances, an independent life sciences strategy consulting firm. Health Advances combines clinical, scientific and business expertise to provide strategic advice to executives leading life sciences companies and investors. The purchase price for the Health Advances acquisition was approximately $67.1 million, plus the potential to pay up to an additional $15.8 million over a thirty-six month period following the acquisition date if Health Advances achieves specific financial targets. The contingent consideration related to the Health Advances acquisition is measured at fair value with market conditions based on the use of a Monte-Carlo Simulation Model. 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.
In October 2014, we acquired ClinIntel, a provider of clinical randomization and trial supply management services, which are designed to make patient randomization and clinical supply chain solutions more efficient. 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. To achieve the maximum payment of $16.2 million, billings of $13.4 million in the 21 month period needed to be achieved. As of December 31, 2016, we have no further contingent consideration in connection with this acquisition.
The fair value of the debt under the Notes was estimated to be $96.5 million as of December 31, 2016, 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 2016 Credit Agreement approximates fair value because all of the debt bears variable-rate interest.


22



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, 2016, filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2016 (the “2016 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.
BUSINESS 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 include in our PAREXEL Access product offering, formerly known as Peri/Post Approval Services. Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, pharmacovigilance, and investigator site services. CRS also includes our clinical supply and drug logistics business. We have aggregated Early Phase and PAREXEL Access with Phase II-III 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®

23

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


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 addition, PI's portfolio of services is increasingly being embedded with that of CRS, to provide our clients with an integrated offering.

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 under different assumptions or conditions.
For further information on our other critical accounting policies, please refer to the consolidated financial statements and footnotes thereto included in the 2016 10-K.
RESULTS OF OPERATIONS
Three and Six Months Ended December 31, 2016 Compared With Three and Six Months Ended December 31, 2015:
Revenue
Our service revenue by segment is as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Service revenue
 
 
 
 
 
 
 
 
 
 
 
CRS
$
408.9

 
$
407.1

 
0.4
%
 
$
785.2

 
$
817.3

 
(3.9
)%
PC
54.6

 
41.4

 
31.9
%
 
109.6

 
80.7

 
35.8
 %
PI
70.9

 
70.0

 
1.3
%
 
136.3

 
132.6

 
2.8
 %
Total service revenue
$
534.4

 
$
518.5

 
3.1
%
 
$
1,031.1

 
$
1,030.6

 
 %
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 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, assets are not identified by reportable segment.
Service revenue increased by $15.9 million, or 3.1%, to $534.4 million for the three months ended December 31, 2016 from $518.5 million for the same period in the fiscal year ended June 30, 2016 ("Fiscal Year 2016"). Service revenue increased by $0.5 million to $1,031.1 million for the six months ended December 31, 2016 from $1,030.6 million for the same period in Fiscal Year 2016.
CRS
In the three months ended December 31, 2016, CRS service revenue increased $1.8 million, or 0.4%, to $408.9 million from $407.1 million for the same period in Fiscal Year 2016. The increase was primarily due to $28.8 million from the acquisition of ExecuPharm, Inc. ("ExecuPharm") in the second quarter of the fiscal year ending June 30, 2017 ("Fiscal Year 2017"), partially offset by lower revenue in Phase II/III due to a high number of cancellations for active studies and large late phase studies reaching completion. In the six months ended December 31, 2016, CRS service revenue decreased by $32.1 million, or 3.9%, to $785.2 million from $817.3 million for the same period in Fiscal Year 2016. The decrease was primarily due to a high number of cancellations for active studies and large late phase studies reaching completion, partially offset by growth in our early-phase business due to increased business volumes and $28.8 million from the acquisition of ExecuPharm.

24

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


PC
PC service revenue increased by $13.2 million, or 31.9%, to $54.6 million for the three months ended December 31, 2016 from $41.4 million for the same period in Fiscal Year 2016. The increase was due to new partnerships, an increase in the number of projects, and an additional $8.4 million in revenue from the acquisition of Health Advances, LLC ("Health Advances") in the third quarter of Fiscal Year 2016. PC service revenue increased by $28.9 million, or 35.8%, to $109.6 million for the six months ended December 31, 2016 from $80.7 million for the same period in Fiscal Year 2016. The increase was due to new partnerships, an increase in the number of projects and an additional $17.4 million in revenue from the acquisition of Health Advances in the third quarter of Fiscal Year 2016.
PI
Service revenue increased by $0.9 million, or 1.3%, to $70.9 million in the three months ended December 31, 2016 from $70.0 million in the same period in Fiscal Year 2016. Service revenue increased by $3.7 million, or 2.8% to $136.3 million, in the six months ended December 31, 2016 from $132.6 million in the same periods in Fiscal Year 2016. The increases in service revenue during the three and six months ended December 31, 2016 from the same periods in Fiscal Year 2016, were primarily driven by contributions from new business awards and higher demand for technology usage in clinical trials.
Reimbursement Revenue
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
Our direct costs and service gross profit by segment are as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Direct costs
 
 
 
 
 
 
 
 
 
 
 
CRS
$
284.5

 
$
274.4

 
3.7
 %
 
$
546.6

 
$
561.9

 
(2.7
)%
PC
30.9

 
20.8

 
48.6
 %
 
61.3

 
41.0

 
49.5
 %
PI
35.5

 
37.3

 
(4.8
)%
 
70.7

 
72.8

 
(2.9
)%
Total direct costs
$
350.9

 
$
332.5

 
5.5
 %
 
$
678.6

 
$
675.7

 
0.4
 %
Gross profit
 
 
 
 
 
 
 
 
 
 
 
CRS
$
124.4

 
$
132.7

 
(6.3
)%
 
$
238.6

 
$
255.4

 
(6.6
)%
PC
23.7

 
20.6

 
15.0
 %
 
48.3

 
39.7

 
21.7
 %
PI
35.4

 
32.7

 
8.3
 %
 
65.6

 
59.8

 
9.7
 %
Total gross profit
$
183.5

 
$
186.0

 
(1.3
)%
 
$
352.5

 
$
354.9

 
(0.7
)%
Direct costs increased by $18.4 million, or 5.5% to $350.9 million in the three months ended December 31, 2016 from $332.5 million for the three months ended December 31, 2015. In the three months ended December 31, 2016, direct costs as a percentage of total service revenue, increased to 65.7% from 64.1% compared to the same period in Fiscal Year 2016. Direct costs increased by $2.9 million, or 0.4% to $678.6 million in the six months ended December 31, 2016 from $675.7 million for the six months ended December 31, 2015. As a percentage of total service revenue, direct costs for the six months ended December 31, 2016 increased to 65.8% from 65.6% for the respective period in Fiscal Year 2016. For the three and six months ended December 31, 2016 compared to the same periods in Fiscal Year 2016 gross margin decreased primarily due to margin contraction in the CRS and PC segments, partially offset by increases in the PI segment and savings resulting from our Margin Acceleration Program ("MAP").

25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


CRS
Direct costs increased by $10.1 million, or 3.7%, to $284.5 million in the three months ended December 31, 2016 from $274.4 million for the three months ended December 31, 2015. For the three months ended December 31, 2016 compared to the same period in Fiscal Year 2016, CRS direct costs increased primarily due to the acquisition of ExecuPharm in the second quarter of Fiscal Year 2017, partially offset by decreases due to lower business volumes, lower variable compensation expense and cost savings in connection with our MAP. Direct costs decreased $15.3 million, or 2.7%, to $546.6 million in the six months ended December 31, 2016 from $561.9 million for six months ended December 31, 2015. For the six months ended December 31, 2016 compared to the same period in Fiscal Year 2016, CRS direct costs decreased primarily due to lower business volume, lower fixed and variable compensation expense and lower cost incurred in connection with our MAP, partially offset by increases from the acquisition of ExecuPharm. As a percentage of service revenue, direct costs increased to 69.6% in the three months ended December 31, 2016 from 67.4% for the same period in Fiscal Year 2016, and increased to 69.6% for the six months ended December 31, 2016 from 68.8% for the same period in Fiscal Year 2016. The increase in the three and six months ended December 31, 2016 was due primarily to lower gross margins contributed by ExecuPharm, which was acquired on October 3, 2017, partially offset by lower labor costs as a result of the MAP.
PC
Direct costs increased by $10.1 million, or 48.6%, to $30.9 million in the three months ended December 31, 2016 from $20.8 million for the same period in Fiscal Year 2016. Direct costs increased $20.3 million, or 49.5% to $61.3 million in the six months ended December 31, 2016 from $41.0 million for the same period in Fiscal Year 2016. Direct costs increased in the three and six months ended December 31, 2016 compared to the same periods in Fiscal Year 2016 due primarily to increased business volume and increased retention bonuses in connection with our acquisition of Health Advances in the third quarter of Fiscal Year 2016. As a percentage of service revenue, direct costs increased to 56.6% for the three months ended December 31, 2016 from 50.2% for the same period in Fiscal Year 2016 and increased to 55.9% from 50.8% in the six month comparison due primarily to less favorable revenue mix.
PI
Direct costs decreased by $1.8 million, or 4.8%, to $35.5 million in the three months ended December 31, 2016 from $37.3 million for the same period in Fiscal Year 2016. Direct costs decreased by $2.1 million, or 2.9% to $70.7 million in the six months ended December 31, 2016 from $72.8 million in the same period in Fiscal Year 2016. Direct costs decreased in the three and six months ended December 31, 2016 compared to the same periods in Fiscal Year 2016 primarily due to service revenue mix and lower costs due to our MAP. As a percentage of service revenue, direct costs in the three months ended December 31, 2016, decreased to 50.1% from 53.3% for the same period in Fiscal Year 2016. In the six months ended December 31, 2016 direct costs as a percentage of service revenue decreased to 51.9% from 54.9% for the same period in Fiscal Year 2016. Direct costs as a percentage of service revenue decreased in the three and six months ended December 31, 2016 from the same periods in Fiscal Year 2016 primarily due to higher business volume, increased staff utilization due to increased project volume, and lower costs due to our MAP.
Selling, General and Administrative ("SG&A")
SG&A expense is summarized as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Selling, general and administrative
$
95.6

 
$
97.4

 
(1.8
)%
 
$
187.8

 
$
192.3

 
(2.3
)%
% of service revenues
17.9
%
 
18.8
%
 
 
 
18.2
%
 
18.7
%
 
 
SG&A expense was relatively flat for the three months ended December 31, 2016, decreasing 1.8% compared to the same period in Fiscal Year 2016. SG&A expense decreased 2.3%, for the six months ended December 31, 2016 compared to the same period in Fiscal Year 2016. The decrease in SG&A for the three months ended December 31, 2016 was primarily due to lower fixed and variable compensation expense, a $3.8 million reduction in the losses from the changes in fair value of contingent consideration, a favorable foreign exchange impact of $3.5 million and the effect of efficiency initiatives for our support functions. The decrease in SG&A for the six months ended December 31, 2016 was primarily due to lower fixed and variable compensation expenses, an $8.8 million reduction in the losses from the changes in fair value of contingent consideration, a favorable foreign exchange impact of $9.1 million and the effect of efficiency initiatives for our support functions. These decreases were partially offset by lower amounts of labor being capitalized on information technology infrastructure projects. SG&A expense as a percentage of service revenue decreased 0.9% and 0.5% for the three and six months ended December 31, 2016, respectively, primarily due a decrease in the change fair value of contingent consideration.

26

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


Depreciation and Amortization
Depreciation and amortization expense is summarized as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Depreciation and amortization
$
26.3

 
$
23.6

 
11.4
%
 
$
51.1

 
$
47.3

 
8.0
%
% of service revenues
4.9
%
 
4.6
%
 
 
 
5.0
%
 
4.6
%
 
 
Depreciation and amortization expense increased by 11.4% and 8.0% in the three and six months ended December 31, 2016 respectively, compared to the same periods in Fiscal Year 2016 due primarily to amortization expense attributable to our acquisition of ExecuPharm in the second quarter of Fiscal Year 2017 and our acquisition of Health Advances in the third quarter of Fiscal Year 2016.
Restructuring Charge
Restructuring charge is summarized as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Restructuring charge
$
1.6

 
$
10.4

 
(84.6
)%
 
$
0.3

 
$
25.2

 
(98.8
)%
In June 2015, we adopted the MAP to restructure our operations to improve the productivity and efficiency of the Company simplify the organization, and streamline decision-making, thereby enhancing client engagement. For the three and six months ended December 31, 2016 , we recorded a net $1.6 million and a net $0.3 million, respectively, restructuring charge to the MAP, which consisted of changes in estimates on employee separation benefits and lease termination costs. For the three and six months ended December 31, 2015, we recorded a net $10.4 million and $25.2 million respectively, restructuring charge to the MAP. In the second quarter of 2016 this charge was composed of $6.7 million of employee separation benefits and $3.7 million of lease termination related costs.
From the announcement of the program through December 31, 2016, we recorded a net $48.1 million restructuring charge related to the MAP, which consisted of $38.0 million of employee separation benefits and $10.1 million of lease termination related costs. The MAP is company wide. The activities under the MAP were substantially complete as of December 31, 2016.
On January 6, 2017, we approved a plan to further restructure our operations to improve the productivity and efficiency of the company, simplify the organization, and streamline decision-making, thereby enhancing client engagement. The restructuring initiative is company-wide. These actions are expected to result in pre-tax charges in the range of $25 million to $35 million, all of which are anticipated to be cash expenditures. We expect to record a pre-tax charge in the third quarter of Fiscal Year 2017 in the range of $20 million to $27 million, with the remainder of the charges to be incurred by the end of the fiscal year ending June 30, 2018 (“Fiscal Year 2018”). The charges will include approximately $24 million to $32 million in employee separation costs and approximately $1 million to $3 million in other costs. We anticipate completing restructuring activities by the end of Fiscal Year 2018, and we expect the charges to result in annual pre-tax savings of approximately $7 million to $10 million over the course of Fiscal Year 2017 and approximately $30 million to $40 million on an annualized basis when fully completed.
Income from Operations
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Income from operations
$
60.0

 
$
54.6

 
9.9
%
 
$
113.3

 
$
90.1

 
25.7
%
Operating margin
11.2
%
 
10.5
%
 
 
 
11.0
%
 
8.7
%
 
 
The increase in income from operations in the three months ended December 31, 2016 was primarily due to increased service revenue and decreased restructuring charges, partially offset by increases in direct costs, depreciation, and amortization compared to the same period in Fiscal Year 2016. The operating margin remained relatively flat in the three months ended December 31, 2016 compared to the same period in Fiscal Year 2016. The increase in both income from operations and in operating margin in the six months ended December 31, 2016 was due primarily to a $25.2 million charge related to the MAP in the six months ended December 31, 2015, partially offset by higher direct costs, depreciation and amortization in the period ended December 31, 2016.

27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


Other Expense, net
Other expense, net is summarized as follows:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Interest expense, net
$
(2.8
)
 
$
(2.1
)
 
33.3
%
 
$
(5.4
)
 
$
(3.7
)
 
45.9
%
Miscellaneous (expense) income
(17.7
)
 
(0.1
)
 
>1000%

 
(18.5
)
 
1.7

 
>1000%

Other expense, net
$
(20.5
)
 
$
(2.2
)
 
831.8
%
 
$
(23.9
)
 
$
(2.0
)
 
1,095.0
%
Net interest expense increased in the three and six months ended December 31, 2016 compared to the same periods in Fiscal Year 2016 as a result of higher debt balances.
The increases in miscellaneous expense in the three and six months ended December 31, 2016 of $17.6 million and $20.2 million, respectively, was due primarily to a $20.3 million reduction in fair value to our forward share repurchase contract, partially offset by foreign currency exchange gains which were driven by the Great British Pound and the Euro.
Taxes
The following table presents the provision for income taxes and our effective tax rate for the three and six months ended December 31, 2016 and 2015:
(dollar amounts in millions)
Three Months Ended
 
 
 
Six Months Ended
 
 
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
 
December 31, 2016
 
December 31, 2015
 
 Increase/(Decrease)%
Provision for income taxes
$
17.7

 
$
13.0

 
36.2
%
 
$
29.8

 
$
23.8

 
25.2
%
Effective tax rate
44.8
%
 
24.8
%
 

 
33.3
%
 
27.0
%
 

The tax rates for the three and six months ended December 31, 2016 and 2015 each benefited from a favorable distribution of taxable income among lower tax rate foreign jurisdictions and the United States. The tax rate for the six months ended December 31, 2016 benefited 2.5% from the adoption of ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, as further described in Note 1 to our consolidated financial statements included in this quarterly report. The tax rates for the three and six months ended December 31, 2016 increased by 15.2% and 6.1%, respectively, due to the non-deductibility of the unrealized loss on the fair value adjustment of $20.3 million in connection with the accelerated share repurchase program.
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 December 31, 2016, we had cash and cash equivalents of approximately $252.4 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. As of December 31, 2016 we did not hold any marketable securities. Foreign cash balances include unremitted foreign earnings, which are invested indefinitely outside of the United States. 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 December 31, 2016 and June 30, 2016:

28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)


(in millions)
December 31, 2016
 
June 30, 2016
Billed accounts receivable, net
$
640.5

 
$
506.1

Unbilled accounts receivable, net
277.6

 
327.9

Total accounts receivable, net
918.1

 
834.0

Deferred revenue
491.0

 
458.5

Net receivables
$
427.1

 
$
375.5

 
 
 
 
DSO (in days)
55

 
48

DSO for the three months ended December 31, 2016 grew seven days compared with the three months ended June 30, 2016 due to project billing milestones and the timing of cash collections.
CASH FLOWS
Sources and uses of cash flows are summarized as follows:
 
 
Six Months Ended
 
 
 
 
December 31,
 
Percentage
(dollar amounts in millions)

 
2016
 
2015
 
Change
Net cash provided by operating activities
 
$
111.5

 
$
85.7

 
30.1
 %
Net cash (used in) provided by investing activities
 
(181.5
)
 
(53.3
)
 
240.5
 %
Net cash provided by (used in) financing activities
 
89.2

 
(71.0
)
 
(225.6
)%
Effect of exchange rate changes on cash