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PAREXEL INTERNATIONAL CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) 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"), formerly known as PAREXEL Consulting and Medical Communication Services, and PAREXEL Informatics, Inc. ("PI"), formerly known as Perceptive Informatics, Inc. • CRS constitutes our core business and includes all phases of clinical research from Early Phase (encompassing the early stages of clinical testing that range from first-in-man through proof-of-concept studies) to Phase II-III and Phase IV, which we call Peri/Post-Approval Services, formerly known as Peri-Approval Clinical Excellence. Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, pharmacovigilance, and investigator site services. CRS also includes our clinical supply and drug logistics business. We have aggregated Early Phase with Phase II-III and Peri/Post-Approval Services due to economic similarities in these operating segments. • PC provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, commercialization and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PC consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization. • PI provides information technology solutions designed to help improve clients' product development and regulatory submission processes. PI offers a portfolio of products and services that includes medical imaging services, ClinPhone® RTSM, IMPACT® CTMS, DataLabs® EDC, web-based portals, systems integration, electronic patient reported outcomes ("ePRO") and LIQUENT InSight® RIM platform. These services are often bundled together and integrated with other applications to provide an eClinical solution for our clients. In February 2014, we announced the launch of PAREXEL Regulatory Outsourcing Services ("PROS"), which was designed to provide a focused, market-driven approach to regulatory outsourcing services in the life science industry, with a primary emphasis on post-approval regulatory activities. Effective July 1, 2014, the operating results of PROS are included in the PC segment. This service line offering was previously included within LIQUENT RIM solutions and reported within the PI segment. For interim and annual periods beginning July 1, 2014, we will disclose the reportable segment on this new basis and prior periods will be retroactively restated to reflect the change. We conduct a significant portion of our operations in countries which are outside of the United States. Approximately 53.0% and 54.0% of our consolidated service revenue for the fiscal year 2014 and 2013 ended June 30, 2014 ("Fiscal Year 2014") and the fiscal year ended June 30, 2013 ("Fiscal Year 2013"), respectively, were from non-U.S. operations. Because our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates can have a significant effect on our operating results. For Fiscal Year 2014, approximately 13.7% of total consolidated service revenue was from euro-denominated contracts and approximately 2.9% of total consolidated service revenue was from pound sterling-denominated contracts. For Fiscal Year 2013, approximately 13.0% of total consolidated service revenue was from euro-denominated contracts and approximately 2.6% of total consolidated service revenue was from pounds sterling-denominated contracts. Approximately 90% of our contracts are fixed price, with some variable components, and range in duration from a few months to several years. Cash flows from these contracts typically consist of a down payment required at the time of contract execution 30 -------------------------------------------------------------------------------- with the balance due in installments over the contract's duration, usually on a milestone achievement basis. Revenue from these contracts is recognized generally as work is performed. As a result, the timing of client billing and cash receipts do not necessarily correspond to costs incurred and revenue recognized on contracts. Generally, our clients can either terminate their contracts with us upon thirty to sixty days notice or delay execution of services. Clients may terminate or delay contracts for a variety of reasons, including: merger or potential merger-related activities involving the client, the failure of products being tested to satisfy safety requirements or efficacy criteria, unexpected or undesired clinical results of the product, client cost reductions as a result of budgetary limits or changing priorities, the client's decision to forego a particular study, insufficient patient enrollment or investigator recruitment, or clinical drug manufacturing problems resulting in shortages of the product. In the cases where the contracts are canceled, services delivered through the cancellation date are due and payable by the client, including certain costs to conclude the trial or study. 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 U.S. 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. We regard an accounting estimate underlying our financial statements as a "critical accounting estimate" if the nature of the estimate or assumption is material due to the level of subjectivity and judgment involved, or the susceptibility of such matter to change, and if the impact of the estimate or assumption on financial condition or operating performance is material. We believe that the following accounting policies are most critical to aid in fully understanding and evaluating our reported financial results: REVENUE RECOGNITION We derive revenue from the delivery of services or software solutions to clients in the worldwide pharmaceutical, biotechnology, and medical device industries. We recognize revenue as services are performed when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service offering has been delivered to the client; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the client is fixed or determinable. Our client arrangements in CRS generally involve multiple service deliverables, where bundled service deliverables are accounted for in accordance with Accounting Standards Codification ("ASC") 605-25, "Multiple-Element Arrangements." We determined that standalone value exists for each of our service deliverables and we base the selling price upon third-party evidence ("TPE"). TPE is established for each of our arrangement deliverables based on the price we charge for equivalent services when sold to other similar customers as well as our knowledge of market-pricing from the competitive bidding process for customer contracts offering similar services to comparably situated customers. Within PI's Clinphone® RTSM business, we offer selected software solutions through a hosted application delivered through a standard web-browser. We recognize revenue from application hosting services in accordance with ASC 985-605, "Revenue Recognition in the Software Industry" and ASC 605-25 as our customers do not have the right to take possession of the software. Revenue resulting from these hosting services is recognized over the service period. Critical management estimates may be involved in the determination of the customer relationship period, and other revenue elements. Changes to these elements could affect the amount and timing of revenue recognition. BILLED AND UNBILLED ACCOUNTS RECEIVABLE Billed accounts receivable represent amounts for which invoices have been sent to clients based upon contract terms. Unbilled accounts receivable represent amounts recognized as revenue for which invoices have not yet been sent to clients due to contract terms. We maintain a provision for losses on receivables based on historical collectability and specific identification of potential problem accounts. Critical management estimates may be involved in the determination of "collectability" and the amounts required to be recorded as provisions for losses on receivables. INCOME TAXES Our global provision for corporate income taxes is determined in accordance with ASC 740, "Income Taxes," which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. A valuation allowance is established if it is more likely than not that future tax benefits from the deferred tax assets will not be realized. Income tax expense is based on the distribution of profit before tax among the various taxing jurisdictions in which we operate, adjusted as required by the tax laws of each taxing jurisdiction. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective tax rate. 31 -------------------------------------------------------------------------------- We account for uncertain tax positions in accordance with the provisions of ASC 740, which requires financial statement reporting of the expected future tax consequences of uncertain tax return reporting positions 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. In addition, ASC 740 requires financial statement disclosure about uncertainty in income tax reporting positions. We are subject to ongoing audits by federal, state and foreign tax authorities that may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is based on judgment. We believe we have adequately provided for any uncertain tax positions. However, future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period assessments are made or resolved or when statutes of limitation on potential assessments expire. GOODWILL AND INDEFINITE-LIVED INTANGIBLES Goodwill represents the excess of the cost of an acquired business over the fair value of the related net assets at the date of acquisition and is subject to annual impairment testing or more frequent testing if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value. Our impairment testing for goodwill and an indefinite-lived intangible, the ClinPhone RTSM tradename, involves assessment of qualitative factors to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit or the fair value of the indefinite-lived intangibles is less than its carrying amount, including goodwill. This assessment requires management judgment on the potential impact of each qualitative factor. Based on our Fiscal Year 2014 qualitative assessment of impairment for goodwill and our ClinPhone RTSM tradename, we concluded that neither were impaired. BUSINESS COMBINATIONS Business combinations are accounted for under the acquisition method of accounting. Allocating the purchase price requires us to estimate the fair value of various assets acquired and liabilities assumed, including contingent consideration to be paid if specific financial targets are achieved. We are responsible for determining the appropriate valuation model and estimated fair values, and in doing so, we consider a number of factors, including information provided by an outside valuation advisor. We primarily establish fair value using the income approach based upon a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, as well as discount factors and income tax rates. Contingent consideration liabilities are remeasured 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. 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. 32 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Note 18 to our consolidated financial statements included in this annual report provides a summary of our unaudited quarterly results of operations for Fiscal Years 2014 and 2013. 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, interest income (expense), other income (loss), and income tax expense (benefit) in segment profitability. We attribute revenue to individual countries based upon the cost of services performed in the respective countries and 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, direct costs, and gross profit on service revenue for Fiscal Years 2014, 2013, and the fiscal year ended June 30, 2012 ("Fiscal Year 2012") were as follows: (in thousands) Years Ended June 30, 2014 June 30, 2013 Increase $ Increase % Service revenue CRS $ 1,455,279 $ 1,303,569 $ 151,710 11.6 % PC 216,184 202,524 13,660 6.7 % PI 267,897 228,349 39,548 17.3 % Total service revenue $ 1,939,360 $ 1,734,442 $ 204,918 11.8 % Direct costs CRS $ 1,010,069 $ 956,513 $ 53,556 5.6 % PC 124,686 120,954 3,732 3.1 % PI 144,423 130,069 14,354 11.0 % Total direct costs $ 1,279,178 $ 1,207,536 $ 71,642 5.9 % Gross profit CRS $ 445,210 $ 347,056 $ 98,154 28.3 % PC 91,498 81,570 9,928 12.2 % PI 123,474 98,280 25,194 25.6 % Total gross profit $ 660,182 $ 526,906 $ 133,276 25.3 % (in thousands) Years Ended June 30, 2013 June 30, 2012 Increase $ Increase % Service revenue CRS $ 1,303,569 $ 1,038,705 $ 264,864 25.5 % PC 202,524 167,125 35,399 21.2 % PI 228,349 190,678 37,671 19.8 % Total service revenue $ 1,734,442 $ 1,396,508 $ 337,934 24.2 % Direct costs CRS $ 956,513 $ 759,539 $ 196,974 25.9 % PC 120,954 97,560 23,394 24.0 % PI 130,069 114,730 15,339 13.4 % Total direct costs $ 1,207,536 $ 971,829 $ 235,707 24.3 % Gross profit CRS $ 347,056 $ 279,166 $ 67,890 24.3 % PC 81,570 69,565 12,005 17.3 % PI 98,280 75,948 22,332 29.4 % Total gross profit $ 526,906 $ 424,679 $ 102,227 24.1 % 33-------------------------------------------------------------------------------- FISCAL YEAR ENDED JUNE 30, 2014 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30, 2013 Revenue Service revenue increased by $205.0 million, or 11.8%, to $1,939.4 million for Fiscal Year 2014 from $1,734.4 million for Fiscal Year 2013. On a geographic basis, service revenue was distributed as follows (in millions): Fiscal Year 2014 Fiscal Year 2013 Region Service Revenue % of Total Service Revenue % of Total The Americas $ 970.9 50.1 % $ 867.0 50.0 % Europe, Middle East & Africa $ 709.2 36.6 % $ 624.0 36.0 % Asia/Pacific $ 259.3 13.3 % $ 243.4 14.0 % Total $ 1,939.4 100.0 % $ 1,734.4 100.0 % For Fiscal Year 2014 compared with Fiscal Year 2013, service revenue in The Americas increased by $103.9 million, or 12.0%; Europe, Middle East & Africa service revenue increased by $85.2 million, or 13.7%; and Asia/Pacific service revenue increased by $15.9 million, or 6.5%. Revenue growth in all regions was attributable to higher demand for services in all of our reporting segments, the impact of our strategic partnership wins, and additional revenue from our LIQUENT Inc.("LIQUENT") and HERON Group LTD ("HERON") businesses, which we acquired in December 2012 and April 2013, respectively. On a segment basis, CRS service revenue increased by $151.7 million, or 11.6%, to $1,455.3 million for Fiscal Year 2014 from $1,303.6 million for Fiscal Year 2013. The increase was attributable to growth in both the Phase II-III and Peri/Post Approval Service and the Early Phase businesses. Within the Phase II-III and Peri/Post Approval Service businesses, the efforts of a more productive employee base and the growth of backlog with a higher conversion rate caused revenue to increase across all of our client segments. The Early Phase business increases were due to increased demand for study services with patients. PC service revenue increased by $13.7 million, or 6.7%, to $216.2 million for Fiscal Year 2014 from $202.5 million for Fiscal Year 2013. Higher service revenue was due primarily to $9.7 million of revenue from HERON, and the increase in consulting services associated with growth in the integrated product development consulting service line. PI service revenue increased by $39.5 million, or 17.3%, to $267.9 million for Fiscal Year 2014 from $228.3 million for Fiscal Year 2013. The increase was primarily due to growth across all PI service lines due to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships, along with $17.5 million of revenue from LIQUENT. Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred on behalf of and reimbursable by clients. Reimbursement revenue does not yield any gross profit to us, nor does it have an impact on net income. Direct Costs Direct costs increased by $71.6 million, or 5.9%, to $1,279.2 million for Fiscal Year 2014 from $1,207.5 million for Fiscal Year 2013. As a percentage of total service revenue, direct costs decreased to 66.0% from 69.6% for the respective periods. The gross margin improvement primarily related to the impact of various productivity and efficiency initiatives, changes in the revenue mix, and the increased sourcing of operations to low-cost countries. On a segment basis, CRS direct costs increased by $53.6 million, or 5.6%, to $1,010.1 million for Fiscal Year 2014 from $956.5 million for Fiscal Year 2013. This increase resulted primarily from increased labor costs associated with headcount growth in CRS to match the demand of higher levels of clinical trial activity. As a percentage of service revenue, CRS direct costs decreased to 69.4% for Fiscal Year 2014 from 73.4% for Fiscal Year 2013. The decrease as a percentage of service revenue was related to the results of our operational efficiency programs, the reduction in contract staff usage, and the impact of shifting activities to low-cost countries. PC direct costs increased by $3.7 million, or 3.1%, to $124.7 million for Fiscal Year 2014 from $121.0 million for Fiscal Year 2013. This increase was primarily due to higher headcount levels and direct costs from HERON. As a percentage of service revenue, PC direct costs decreased to 57.7% from 59.7% for the respective periods as a result of a more favorable revenue mix. PI direct costs increased by $14.4 million, or 11.0%, to $144.4 million for Fiscal Year 2014 from $130.1 million for Fiscal Year 2013. This increase was due primarily to the inclusion of LIQUENT direct costs. As a percentage of service revenue, Perceptive direct costs decreased to 53.9% for Fiscal Year 2014 from 57.0% for Fiscal Year 2013 due to revenue growth and the impact of shifting resources to low-cost countries. Selling, General and Administrative Selling, general and administrative ("SG&A") expense increased by $61.0 million, or 19.1%, to $379.8 million for Fiscal Year 2014 from $318.8 million for Fiscal Year 2013. This increase was due primarily to an increase in fixed and variable 34 -------------------------------------------------------------------------------- compensation costs attributable to the larger employee base needed to support business growth, an increase in costs incurred to support our information technology infrastructure and facility expansion to better accommodate our growth, and an inclusion of $12.2 million in costs related to LIQUENT and HERON. As a percentage of service revenue, SG&A increased to 19.6% in Fiscal Year 2014 from 18.4% in Fiscal Year 2013. Depreciation and Amortization Depreciation and amortization ("D&A") expense increased by $8.1 million, or 11.1%, to $81.3 million for Fiscal Year 2014 from $73.2 million for Fiscal Year 2013, due to higher amortization expense from the increase in intangible assets driven by the LIQUENT and HERON acquisitions and higher depreciation expense from the increasing capital expenditures from Fiscal Year 2011 to Fiscal Year 2013 to support business growth. As a percentage of service revenue, D&A was 4.2% for both Fiscal Year 2014 and Fiscal Year 2013 . Restructuring Charge Our restructuring plans were substantially completed by March 2012. For Fiscal Year 2014 and Fiscal Year 2013, respectively, we recorded a $0.4 million and $1.2 million net reduction in restructuring charges for adjustments to facility-related charges under our previously announced restructuring plans. Income from Operations Income from operations increased to $199.5 million for Fiscal Year 2014 from $136.1 million for Fiscal Year 2013. Income from operations as a percentage of service revenue ("operating margin") increased to 10.3% from 7.8% for the respective periods. This increase in operating margin was due primarily to higher gross margin, partially offset by higher SG&A and depreciation and amortization expenses. Other Expense, Net We recorded net other expense of $11.6 million for Fiscal Year 2014 compared with $3.0 million for Fiscal Year 2013. The $8.66 million increase was driven primarily by a $6.8 million increase in miscellaneous expenses, largely due to net foreign currency exchange losses recorded during Fiscal Year 2014 compared to the net foreign currency exchange gains recorded during Fiscal Year 2013. Additionally, the increase is attributable a $1.9 million increase in net interest expense related to a higher average debt balance in Fiscal Year 2014. Taxes For Fiscal Year 2014 and Fiscal Year 2013, we had effective income tax rates of 31.3% and 27.9%, respectively. The increase in Fiscal Year 2014 tax rate was primarily attributable to a shift in the geographic distribution of income which increased income subject to taxation in the United States relative to lower tax rate jurisdictions (primarily EU countries and the U.K.). 35-------------------------------------------------------------------------------- FISCAL YEAR ENDED JUNE 30, 2013 COMPARED WITH THE FISCAL YEAR ENDED JUNE 30, 2012 Revenue Service revenue increased by $337.9 million, or 24.2%, to $1,734.4 million for Fiscal Year 2013 from $1,396.5 million for Fiscal Year 2012. On a geographic basis, service revenue was distributed as follows (in millions): Fiscal Year 2013 Fiscal Year 2012 Region Service Revenue % of Total Service Revenue % of Total The Americas $ 867.0 50.0 % $ 635.3 45.5 % Europe, Middle East & Africa $ 624.0 36.0 % $ 555.4 39.8 % Asia/Pacific $ 243.4 14.0 % $ 205.8 14.7 % Total $ 1,734.4 100.0 % $ 1,396.5 100.0 % For Fiscal Year 2013 compared with Fiscal Year 2012, service revenue in The Americas increased by $231.7 million, or 36.5%; Europe, Middle East & Africa service revenue increased by $68.6 million, or 12.4%; and Asia/Pacific service revenue increased by $37.6 million, or 18.3%. Revenue growth in all regions was attributable to higher demand for services in all of our reporting segments and the impact of our strategic partnership wins. The conversion of backlog to revenue increased as projects matured and moved from startup phases to ongoing monitoring activities. The higher levels of service revenue growth in the Americas region was due to increased activity in the Phase II-III and Peri/Post Approval Service businesses. Service revenue growth was negatively impacted by foreign currency exchange rate fluctuations of approximately $15.1 million. On a segment basis, CRS service revenue increased by $264.9 million, or 25.5%, to $1,303.6 million for Fiscal Year 2013 from $1,038.7 million for Fiscal Year 2012. The increase was attributable to growth in both our Phase II-III and Peri/Post Approval Service businesses and our Early Phase business. These increases were partly offset by a $12.4 million negative impact from foreign currency exchange rate movements. The Phase II-III and Peri/Post Approval Service increases were due to our success in forging strategic partnership relationships which has benefited our pipeline of work. Higher levels of new business awards won in prior periods across our entire customer base resulted in more active projects and, coupled with the efforts of a larger and more productive employee base, caused the conversion of backlog into revenue to accelerate. The revenue increase in our Early Phase business was due to improvements in our win rate among emerging clients combined with success in winning additional strategic partner relationships. PC service revenue increased by $35.4 million, or 21.2%, to $202.5 million for Fiscal Year 2013 from $167.1 million for Fiscal Year 2012. The increase was due primarily to a $38.2 million increase in consulting services associated with growth in strategic compliance work due to higher levels of regulatory activity. These increases were partly offset by a $2.8 million decrease in our medical communications and commercialization service revenue. PI service revenue increased by $37.7 million, or 19.8%, to $228.3 million for Fiscal Year 2013 from $190.7 million for Fiscal Year 2012. The growth was due primarily to $20.2 million in revenue from LIQUENT and a $17.5 million increase in eClinical and medical imaging services. Excluding the impact from LIQUENT, the continued growth in PI service revenue was due to higher demand for technology usage in clinical trials and the positive impact of strategic partnerships. Reimbursement revenue consists of reimbursable out-of-pocket expenses incurred on behalf of and reimbursable by clients. Reimbursement revenue does not yield any gross profit to us, nor does it have an impact on net income. Direct Costs Direct costs increased by $235.7 million, or 24.3%, to $1,207.5 million for Fiscal Year 2013 from $971.8 million for Fiscal Year 2012. As a percentage of total service revenue, direct costs remained consistent at 69.6% for both periods. On a segment basis, CRS direct costs increased by $197.0 million, or 25.9%, to $956.5 million for Fiscal Year 2013 from $759.5 million for Fiscal Year 2012. This increase resulted primarily from increased labor costs associated with headcount growth in CRS to match the demand of higher levels of clinical trial activity. Increased labor costs were also affected by upward pressure on wage rates in certain markets due to labor shortages and an increase in the number of contracted staff needed for projects in response to the higher number of studies that were initiated in Fiscal Year 2012 and the beginning of Fiscal Year 2013. The use of contracted staff declined in the latter half of Fiscal Year 2013 as full-time employees were hired to replace contract staff, and as the CRS employee base increased its productivity and efficiency. As a percentage of service revenue, CRS direct costs increased slightly to 73.4% for Fiscal Year 2013 from 73.1% for Fiscal Year 2012. PC direct costs increased by $23.4 million, or 24.0%, to $121.0 million for Fiscal Year 2013 from $97.6 million for Fiscal Year 2012. This increase resulted primarily from higher labor costs in our consulting services unit due to increased demand related to strategic compliance work. Offsetting this increase was a $4.1 million decline in labor costs within the medical communications business. As a percentage of service revenue, PC direct costs increased to 59.7% from 58.4% for the 36 -------------------------------------------------------------------------------- respective periods as a result of higher labor costs associated with consulting services and short-term investments directed at better positioning the business for continued growth. PI direct costs increased by $15.3 million, or 13.4%, to $130.1 million for Fiscal Year 2013 from $114.7 million for Fiscal Year 2012. This increase was due primarily to the impact of LIQUENT, an increase in labor costs in existing businesses, and higher medical imaging "read" expenses associated with greater volume. As a percentage of service revenue, PI direct costs decreased to 57.0% for Fiscal Year 2013 from 60.2% for Fiscal Year 2012 due to the impact of shifting resources to low cost countries and a better revenue mix. Selling, General and Administrative SG&A expense increased by $55.3 million, or 21.0%, to $318.8 million for Fiscal Year 2013 from $263.5 million for Fiscal Year 2012. This increase was primarily due to the addition of LIQUENT and HERON SG&A costs, an increase in fixed and variable compensation costs attributable to the larger employee base needed to support business growth, and an increase in rent and other office-related expenses. As a percentage of service revenue, SG&A decreased to 18.4% in Fiscal Year 2013 from 18.9% in Fiscal Year 2012 due to leveraging of our revenue growth, effective cost management, and the benefits of past restructuring activities. Depreciation and Amortization D&A expense increased by $7.0 million, or 10.6%, to $73.2 million for Fiscal Year 2013 from $66.2 million for Fiscal Year 2012, primarily due to additional depreciation expense from increased capital expenditures in both Fiscal Year 2013 and Fiscal Year 2012 and higher amortization expense from the intangibles assets acquired in conjunction with the LIQUENT and HERON acquisitions. As a percentage of service revenue, D&A decreased to 4.2% for Fiscal Year 2013 from 4.7% for Fiscal Year 2012 mainly due to revenue growth. Restructuring Charge Our restructuring plans were substantially completed by March 2012. For Fiscal Year 2013, we recorded a $1.2 million net reduction in restructuring charges for adjustments to facility-related charges under our previously announced restructuring plans. For Fiscal Year 2012, we recorded $6.2 million in restructuring charges under our restructuring plans, including $4.3 million in employee separation benefits and $1.9 million of facility-related costs. Income from Operations Income from operations increased to $136.1 million for Fiscal Year 2013 from $88.8 million for Fiscal Year 2012 due to the factors described above. Operating margin increased to 7.8% from 6.4% for the respective periods for the reasons discussed above. Other Expense, Net We recorded net other expense of $3.0 million for Fiscal Year 2013 compared with $9.1 million for Fiscal Year 2012. The $6.1 million decrease was due primarily to lower miscellaneous expense, partially offset by $0.3 million increase in net interest expense. Miscellaneous income for Fiscal Year 2013 of $4.3 million was driven by $4.1 million in foreign exchange gains from certain foreign-denominated assets and liabilities. Miscellaneous expense for Fiscal Year 2012 of $2.1 million was primarily attributable to $6.3 million of unrealized losses related to derivatives contracts and $2.4 million of losses from asset disposals and loan write-offs, partly offset by $6.6 million in foreign exchange gains from certain foreign-denominated assets and liabilities. Taxes For Fiscal Year 2013 and Fiscal Year 2012, we had effective income tax rates of 27.9% and 20.8%, respectively. The increase in the Fiscal Year 2013 tax rate was primarily attributable to a lower level of income tax reserve releases and a shift in the geographic distribution of income which increased income subject to taxation in the United States relative to lower tax rate jurisdictions (primarily EU countries and the UK), net of reductions in valuation allowances resulting from improved profitability in the United States. The lower tax rate for Fiscal Year 2012 was primarily the result of the release of income tax reserves and associated accruals for interest and penalties resulting from settlements with tax authorities and the expiration of statutes of limitations in Europe. 37-------------------------------------------------------------------------------- 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 to fund business acquisitions and working capital. Investing activities primarily reflect capital expenditures for information systems enhancements and leasehold improvements. As of June 30, 2014, we had cash and cash equivalents of approximately $188.2 million and marketable securities of $95.6 million, of which the majority is held in countries which are outside of the U.S. since excess cash generated in the U.S. is primarily used to repay our debt obligations. Foreign cash and marketable securities balances include unremitted foreign earnings, which are invested indefinitely outside of the U.S. Our cash and cash equivalents and marketable securities are held in deposit accounts, money market funds and foreign government treasury certificates over 90 days but less than one year, which provide us with immediate and unlimited access to the funds. Repatriation of funds to the U.S. 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 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 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, account receivables balances, and deferred revenue as of June 30, 2014 and June 30, 2013. (in millions) June 30, 2014 June 30, 2013 Billed accounts receivable, net $ 497.1 $ 457.2 Unbilled accounts receivable, net 225.5 248.2 Total accounts receivable 722.6 705.4 Deferred revenue 467.0 408.3 Net receivables $ 255.6 $ 297.1 DSO ( in days) 32 42 The decrease in DSO for the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013, was largely driven by strong collections and benefits of increased deferred revenue. CASH FLOWS Operating Activities Net cash provided by operating activities was $287.2 million for Fiscal Year 2014 as compared with $183.8 million for Fiscal Year 2013. The $103.4 million increase in operating cash flows resulted primarily from $33.1 million of higher net income, a $79.2 million increase in net change of working capital and an $8.1 million increase in depreciation and amortization expenses. These increases were partially offset by a $17.5 million change in our deferred income tax provision. Investing Activities Net cash used for investing activities was $31.2 million for Fiscal Year 2014 as compared with $305.5 million for Fiscal Year 2013. During Fiscal Year 2014, we made $72.6 million in capital expenditures, which was partially offset by $41.5 million in net proceeds from the sale of marketable securities. During Fiscal Year 2013, we made net purchases of $129.6 million in marketable securities, paid $97.1 million in cash to acquire LIQUENT and HERON, and made $81.1 million in capital expenditures. Financing Activities Net cash used by financing activities was $224.0 million for Fiscal Year 2014 as compared with net cash provided by financing activities of $52.4 million for Fiscal Year 2013. During Fiscal Year 2014, we paid $154.9 million for share repurchases and made net payments of $187.5 million under the 2013 Credit Agreement (as defined below), which were partially offset by $100.0 million borrowings under the Note Purchase Agreement (as defined below), $14.6 million in proceeds received related to employee stock purchases and $4.5 million in proceeds received from our receivable factoring. 38 -------------------------------------------------------------------------------- During Fiscal Year 2013, we borrowed an additional $217.5 million under new and existing credit facilities to fund the LIQUENT and HERON acquisitions and share repurchases, received $20.9 million in proceeds from employee stock purchases, and received $10.4 million from receivable factoring. These proceeds were partially offset by $195.1 million paid for share repurchases and $1.2 million payments for debt issuance costs. CREDIT AGREEMENTS 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 portion of the 2013 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. In connection with the Note Purchase Agreement, certain subsidiaries of ours entered into a Subsidiary Guaranty, pursuant to which such subsidiaries guaranteed our obligations under the Notes and the Note Purchase Agreement. As of June 30, 2014, we had $100.0 million of principal borrowed under the Note Purchase Agreement. The outstanding amounts are presented net of debt issuance cost of approximately $0.4 million in our consolidated balance sheets. In April and May 2013, we entered into three treasury lock agreements each with a notional amount of $25.0 million in connection with the planned issuance of our Notes that were issued in July 2013. The three treasury locks were used to minimize our interest rate exposure prior to locking in the fixed interest rate on our Notes. The treasury locks matured in May 2013 when the interest rate on our Notes was fixed. The treasury locks were deemed to be fully effective in accordance with Financial Accounting Standards Board ("FASB") ASC 815, "Derivatives and Hedging" ("ASC 815"), and as such, the unrealized gains related to these derivatives are recorded as other comprehensive income and are amortized over the life of the Notes as interest income. 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 of ours, or its subsidiaries or affiliates. The Receivable Agreement includes customary representations and covenants on behalf of us, and may be terminated by either us or JPMorgan upon five business days advance notice. The Receivable Agreement provides a mechanism for accelerating the receipt of cash due on outstanding receivables. We account for the transfer of our receivables with respect to which we have satisfied the applicable revenue recognition criteria in accordance with FASB ASC 860, "Transfers and Servicing." If we have not satisfied the applicable revenue recognition criteria for the underlying sales transaction, the transfer of the receivable is accounted for as a financing activity in accordance with FASB ASC 470, "Debt." The accounts receivable and short-term debt balances are derecognized from our consolidated balance sheets at the earlier of the factored receivable's due date or when all of the revenue recognition criteria are met for those billed services. For Fiscal Year 2014 and 2013, we transferred approximately $184.6 million and $36.5 million of trade receivables, respectively. As of June 30, 2013, we accounted for $10.4 million of the total transfers as financing activities which are recorded in accounts receivable and short-term debt on our consolidated balance sheets. As of June 30, 2014, no transfers were accounted for as a financing activity. 2013 Credit Agreement On March 22, 2013, we, certain of our subsidiaries, Bank of America, N.A. ("Bank of America"), as Administrative Agent, Swingline Lender and L/C Issuer, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS"), J.P. Morgan Securities LLC ("JPM Securities"), HSBC Bank USA, National Association ("HSBC") and U.S. Bank, National Association ("US Bank"), as Joint Lead Arrangers and Joint Book Managers, JPMorgan Chase Bank N.A. ("JPMorgan"), HSBC and US Bank, as Joint Syndication Agents, and the other lenders party thereto entered into an amended and restated agreement (the "2013 Credit Agreement") providing for a five-year term loan of $200.0 million and a revolving credit facility in the amount of up to $300.0 million, plus additional amounts of up to $200.0 million of loans to be made available upon our request subject to specified 39 -------------------------------------------------------------------------------- terms and conditions. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $75.0 million and for the issuance of standby letters of credit of up to a sublimit of $10.0 million. On March 22, 2013, we drew down $107.5 million under the 2013 Credit Agreement resulting in total outstanding borrowings of $400.0 million. We used the proceeds of the borrowing (i) to repay outstanding amounts under our existing four short-term credit facilities with each of Bank of America, HSBC, TD Bank, N.A. and US Bank (collectively, the "Short Term Credit Facilities"), (ii) for stock repurchases and (iii) for other general corporate purposes. Our obligations under the 2013 Credit Agreement are guaranteed by certain of our material domestic subsidiaries, and the obligations, if any, of any of our foreign designated borrower are guaranteed by us and certain of our material domestic subsidiaries. Borrowings (other than swingline loans) under the 2013 Credit Agreement bear interest, at our determination, at a rate based on either (a) LIBOR plus a margin (not to exceed a per annum rate of 1.750%) based on a ratio of consolidated funded debt to consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") (the "Leverage Ratio") or (b) the highest of (i) prime, (ii) the federal funds rate plus 0.50%, and (iii) the one month LIBOR rate plus 1.00% (such highest rate, the "Alternate Base Rate"), plus a margin (not to exceed a per annum rate of 0.750%) based on the Leverage Ratio. Swingline loans in U.S. dollars bear interest calculated at the Alternate Base Rate plus a margin (not to exceed a per annum rate of 0.750%). Loans outstanding under the 2013 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 2013 Credit Agreement. The 2013 Credit Agreement terminates and any outstanding loans under it mature on March 22, 2018 (the "Maturity Date"). Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on the Maturity Date. 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 the Maturity Date: • 1.25% by quarterly term loan amortization payments to be made commencing in June 2013 and made prior to June 30, 2015; • 2.50% by quarterly term loan amortization payments to be made on or after June 30, 2015, but prior to June 30, 2016; • 5.00% by quarterly term loan amortization payments to be made on or after June 30, 2016, but prior to June 30, 2017; • 7.50% by quarterly term loan amortization payment to be made on or after June 30, 2017, but prior to the Maturity Date; and • 37.50% on the Maturity Date Our obligations under the 2013 Credit Agreement may be accelerated upon the occurrence of an event of default, 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 2013 Credit Agreement contains negative covenants applicable to us and our subsidiaries, including financial covenants requiring us to comply with maximum leverage ratios and minimum interest coverage ratios, as well as restrictions on liens, investments, indebtedness, fundamental changes, acquisitions, dispositions of property, making specified restricted payments (including stock repurchases exceeding an agreed to percentage of consolidated net income), and transactions with affiliates. As of June 30, 2014, we were in compliance with all covenants under the 2013 Credit Agreement. In connection with the 2013 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 0.350% (based on the Leverage Ratio). To the extent there are letters of credit outstanding under the 2013 Credit Agreement, we will pay letter of credit fees plus a fronting fee and additional charges. We also paid various customary fees to secure this arrangement, which are being amortized using the effective interest method over the life of the debt. As of June 30, 2014, we had $62.5 million of principal borrowed under the revolving credit facility and $187.5 million of principal under the term loan. For Fiscal Year 2014, we made principal payments of $10.0 million on the term loan under the 2013 Credit Agreement. The outstanding amounts are presented net of debt issuance cost of approximately $2.7 million in our consolidated balance sheets. We have borrowing availability of $237.5 million under the revolving credit facility. In September 2011, we entered into an interest rate swap agreement and an interest rate cap agreement. Prior to the execution of the 2013 Credit Agreement, the interest rate swap and cap agreements hedged principal under our 2011 Credit Agreement, as discussed below. The interest rate swap and cap agreements now hedge a portion of the principal under our 2013 Credit Agreement. Specifically, principal in the amount of $100.0 million under our 2013 Credit Agreement has been hedged with the interest rate swap agreement and carries a fixed interest rate of 1.30% plus an applicable margin. Principal in the amount of 40 -------------------------------------------------------------------------------- $25.0 million has been hedged with the interest rate cap arrangement with an interest rate cap of 2.00% plus an applicable margin. In March 2014, the interest rate cap agreement matured and the related accumulated other comprehensive income was reclassified to net income during Fiscal Year 2014. In May 2013, we entered into another interest rate swap agreement and hedged an additional principal amount of $100.0 million under our 2013 Credit Agreement with a fixed interest rate of 0.73% plus an applicable margin. As of June 30, 2014, our debt under the 2013 Credit Agreement, including the $200.0 million of principal hedged with both interest swap agreements, carried an average annualized interest rate of 1.60%. 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. 2012 Term Loan and 2013 Facilities On December 20, 2012, we entered into a new $100.0 million unsecured term loan agreement (the "2012 Term Loan") with Bank of America, which was initially guaranteed by certain of our subsidiaries, but which guarantees were released in connection with the partial prepayment of the 2012 Term Loan in January 2013. The 2012 Term Loan was used to fund our acquisition of LIQUENT. The 2012 Term Loan consisted of a term loan facility for $100.0 million, the full amount of which was advanced to us on December 21, 2012 and was scheduled to mature on June 30, 2013. Borrowings made under the 2012 Term Loan bore interest, at our option, at a base rate plus a margin (such margin not to exceed a per annum rate of 0.75%) based on a ratio of consolidated funded debt to EBITDA for the preceding twelve months (the "2012 Term Loan Leverage Ratio"), or at a LIBOR rate plus a margin (such margin not to exceed a per annum rate of 1.75%) based on the 2012 Term Loan Leverage Ratio. As of June 30, 2014, all outstanding amounts under the 2012 Term Loan were fully repaid with the proceeds from the 2013 Credit Agreement. On January 22, 2013, we entered into additional short term unsecured term loan agreements with each of HSBC, TD Bank, N.A., and US Bank, each in the amount of $25.0 million (collectively, the "2013 Facilities"). The key terms of the 2013 Facilities were substantially the same as the 2012 Term Loan, including the loan maturities on June 30, 2013, except that there were no guaranties provided by any of our subsidiaries. The $75.0 million aggregate proceeds of the 2013 Facilities were used to partially pay down balances owed under the 2012 Term Loan, and in connection with such payment, Bank of America released our subsidiaries from their guaranty obligations under the 2012 Term Loan. As of June 30, 2014, all outstanding amounts under the 2013 Facilities were fully repaid with the proceeds from the 2013 Credit Agreement. 2011 Credit Agreement On June 30, 2011, we entered into the 2011 Credit Agreement providing for a five-year term loan of $100 million and a five-year revolving credit facility in the principal amount of up to $300 million. The borrowings all carried a variable interest rate based on LIBOR, prime, or a similar index, plus a margin (such margin not to exceed a per annum rate of 1.75%). On March 22, 2013, the 2011 Credit Agreement was amended and restated in its entirety by the 2013 Credit Agreement. All amounts outstanding under the 2011 Credit Agreement immediately prior to the execution of the 2013 Credit Agreement were deemed to be outstanding under the terms and conditions of the 2013 Credit Agreement. As discussed above, in September 2011, we entered into an interest rate swap and an interest rate cap agreement. Prior to the execution of the 2013 Credit Agreement, principal in the amount of $100.0 million under the 2011 Credit Agreement had been hedged with an interest rate swap agreement and carried a fixed interest rate of 1.30% plus an applicable margin. Principal in the amount of $25.0 million had been hedged with an interest rate cap arrangement with an interest rate cap of 2.00% plus an applicable margin. Additional Lines of Credit We have an unsecured line of credit with JP Morgan UK in the amount of $4.5 million that bears interest at an annual rate ranging between 2.00% and 4.00%. We entered into this line of credit to facilitate business transactions. At June 30, 2014, we had $4.5 million available under this line of credit. We have a cash pool facility with RBS Nederland, NV in the amount of 5.0 million Euros that bears interest at an annual rate ranging between 2.00% and 4.00%. We entered into this line of credit to facilitate business transactions. At June 30, 2014, we had 5.0 million Euros available under this line of credit. 41 -------------------------------------------------------------------------------- FINANCING NEEDS Our primary cash needs are for operating expenses (such as salaries and fringe benefits, hiring and recruiting, business development and facilities), business acquisitions, stock buybacks, capital expenditures, and repayment of principal and interest on our borrowings. Fiscal Year 2014 Share Repurchase On June 2, 2014, we announced that our Board of Directors approved a share repurchase program (the "2014 Program") authorizing the repurchase of up to $150.0 million of our common stock to be financed with cash on hand, cash generated from operations, existing credit facilities, or new financing. On June 13, 2014, we entered into an agreement (the "2014 Agreement") to purchase shares of our common stock from Goldman Sachs & Co. ("GS"), for an aggregate purchase price of $150.0 million pursuant to an accelerated share purchase program. Pursuant to the 2014 Agreement, in June 2014, we paid $150.0 million to GS and received from GS 2,284,844 shares of common stock, representing 80 percent of the shares to be repurchased by us under the 2014 Agreement. The shares were repurchased at a price of $52.52 per share, which was the closing price of our common stock on the Nasdaq Global Select Market on June 13, 2014. These shares were canceled and restored to the status of authorized and unissued shares. As of June 30, 2014, we recorded the $150.0 million payment to GS as a decrease to equity in our consolidated balance sheet. The final number of shares to be delivered to us by GS under the 2014 Agreement at program maturity, net of the initial delivery, will be adjusted based on an agreed upon discount to the average of the daily volume weighted average price of the common stock during the term of the 2014 Agreement. If the number of shares to be delivered to us at maturity is less than the initial delivery of shares by GS, we would be required to remit shares or cash, at our option, to GS in an amount equivalent to such shortfall. We expect the 2014 Program to be completed by December 31, 2014. Credit Agreements and Note Purchase Agreement In July 2013, we issued $100.0 million principal amount of 3.11% senior notes due July 25, 2020 for aggregate gross proceeds of $100.0 million in a private placement solely to accredited investors. We utilized the proceeds from the private placement to pay down debt outstanding under our 2013 Credit Agreement. The Note Purchase Agreement permits the proceeds from the private placement to be used for working capital purposes, stock repurchase financing, debt refinancing, and for general corporate purposes including the financing of acquisitions, subject in each case to the terms of the Note Purchase Agreement. Our requirements for cash to pay principal and interest on our borrowings will increase significantly in future periods based on the repayment terms of our 2013 Credit Agreement and the Notes. Our primary committed external source of funds is the 2013 Credit Agreement. Our principal source of cash is from the performance of services under contracts with our clients. If we are unable to generate new contracts with existing and new clients or if the level of contract cancellations increases, our revenue and cash flow would be adversely affected (see Part II, Item 1A "Risk Factors" for further detail on these risks). Absent a material adverse change in the level of our new business bookings or contract cancellations, we believe that our existing capital resources together with cash flow from operations and borrowing capacity under existing credit facilities will be sufficient to meet our foreseeable cash needs over the next twelve months and on a longer-term basis. Depending upon our revenue and cash flow from operations, it is possible that we will require external funds to repay amounts outstanding under our 2013 Credit Agreement upon its maturity in 2018. We expect to continue to acquire businesses that enhance our service and product offerings, expand our therapeutic expertise, and/or increase our global presence. Depending on their size, any future acquisitions may require additional external financing, and we may from time to time seek to obtain funds from public or private issuances of equity or debt securities. We may be unable to secure such financing at all or on terms acceptable to us, as a result of our outstanding borrowings, including our outstanding borrowings under the 2013 Credit Agreement. Under the terms of the 2013 Credit Agreement, interest rates are fixed based on market indices at the time of borrowing and, depending upon the interest mechanism selected by us, may float thereafter. As a result, the amount of interest payable by us on our borrowings may increase if market interest rates change. However, we expect to mitigate the risk of increasing market interest rates with our hedging programs described below under Part II. Item 7A "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency Exchange Rates and Interest Rates." Capital Expenditures We made capital expenditures of approximately $72.6 million during Fiscal Year 2014, primarily for computer software (including internally developed software), hardware, and leasehold improvements. Fiscal Year 2013 Share Repurchase In August 2012, our Board of Directors approved a share repurchase program (the "2013 Program") authorizing the repurchase of up to $200.0 million of our common stock to be financed with cash on hand, cash generated from operations, existing credit 42 -------------------------------------------------------------------------------- facilities, or new financing. During Fiscal Year 2013, we repurchased $197.6 million of our common stock. We repurchased the remaining $2.4 million of our common stock in July 2013. The 2013 Program repurchases were effected pursuant to a $50.0 million accelerated share repurchase agreement and a $50.0 million open market agreement entered into in September 2012 and a $50.0 million accelerated share repurchase agreement ("March 2013 ASR Agreement") and a $50.0 million open market agreement ("March 2013 Open Market Agreement") entered in March 2013. Pursuant to the 2013 Program, we repurchased 5,458,285 shares of our common stock at an average price of $36.64 per share from September 2012 to July 2013. The buyback activity also resulted in a reduction of our stockholders' equity of $200.0 million for the value of shares repurchased and retired by the Company. In July 2013, we purchased 51,071 shares under our March 2013 Open Market Agreement and received 101,247 shares representing the final settlement of our March 2013 ASR Agreement. With the completion of our March 2013 Open Market Agreement and the final settlement of the March 2013 ASR Agreement, the 2013 Program was completed. DEBT, CONTRACTUAL OBLIGATIONS, CONTINGENT LIABILITIES AND GUARANTEES The following table summarizes our contractual obligations at June 30, 2014: Less than More than (in thousands) 1 year 2-3 years 4-5 years 5 years Total Debt obligations (principal) $ 12,501 $ 70,000 $ 167,500 $ 100,000 $ 350,001 Operating leases 62,103 91,912 56,384 99,818 310,217 Purchase obligations* 55,036 23,929 2,608 - 81,573 Total $ 129,640 $ 185,841 $ 226,492 $ 199,818 $ 741,791 *includes commitments to purchase software, hardware, and services. The above table does not include approximately $41.5 million of potential tax liabilities from unrecognized tax benefits related to uncertain tax positions. See Note 14 to our consolidated financial statements included in this annual report for more information. We also did not include contingent payments related to the HERON acquisition, as the amounts of these payments will be determined based on the operating results of our commercialization service line for Fiscal Year 2015. The final payment related to the HERON acquisition may range from zero to $14.2 million. Any obligations will be paid during the three months ending September 30, 2015. We have letter-of-credit agreements with banks, totaling approximately $10.5 million, guaranteeing performance under various operating leases and vendor agreements. Additionally, the borrowings under the 2013 Credit Agreement and Note Purchase Agreement 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 believe, after consultation with counsel, 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. OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial position, changes in financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors. RESTRUCTURING PLANS In April 2011, we adopted a plan to restructure our operations to reduce expenses, better align costs with geographic sources of revenue, and improve operating efficiencies (the "2011 Restructuring Plan"). During Fiscal Year 2011, we recorded $8.5 million in restructuring charges related to the 2011 Restructuring Plan, including approximately $1.8 million in employee separation benefits, $3.6 million in costs related to the abandonment of certain property leases, and $3.1 million in impairment charges related to exited facilities. During Fiscal Year 2012, we recorded $7.3 million in restructuring charges related to the 2011 Restructuring Plan, including $5.3 million in severance costs and $2.0 million in facility-related costs. During Fiscal Year 2013 and 2014, we recorded a $1.2 million and $0.4 million net reduction, respectively, to restructuring charges for adjustments to facility-related charges under the 2011 Restructuring Plan. The total cost of the 2011 Restructuring Plan was approximately $14.2 million and included the elimination of approximately 150 managerial and staff positions and costs related to the abandonment of certain property leases. INFLATION We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition. 43 -------------------------------------------------------------------------------- RECENTLY ISSUED ACCOUNTING STANDARDS In March 2013, the FASB issued ASU No. 2013-05, "Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity." ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years and interim periods within those fiscal years beginning after December 15, 2013 and early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective prospectively for fiscal years and interim periods within those fiscal years beginning after December 15, 2016, and early adoption is not permitted. The impact on our Financial Statements of adopting ASU 2014-09 is being assessed by our management. In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12"). 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 ASC 718, Compensation-Stock Compensation, as it relates to such awards. ASU 2014-12 is effective in the first quarter of our fiscal year ending June 30, 2017 with early adoption permitted 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. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements. 44-------------------------------------------------------------------------------- |