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
September 30, 2016
, results of operations for the
three
months ended
September 30, 2016
and
2015
have been included. Operating results for the
three
months ended
September 30, 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 month period ended September 30, 2016, we recorded
$5.7 million
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 months ended September 30, 2016. We concluded 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
, 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. 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”),
Le
ase
s (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
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 the three months ended September 30, 2016, in the amount of
$2.0 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.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 this acquisition as a business combination 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.
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 specified financial targets. We funded the acquisition with borrowings under our credit facilities.
The components of the consideration transferred in conjunction with the Health Advances acquisition and the preliminary fair value allocation of that consideration is as follows (dollars 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
September 30, 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 three months ended September 30, 2016, we received a working capital adjustment payment from the sellers of
$0.3 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.
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, 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
|
|
|
|
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
$135.0 million
for the capital stock of ExecuPharm,
plus the potential for us to pay an additional
$20.0 million
if specific financial targets for ExecuPharm are achieved and
$5.0 million
for management retention bonuses.
We funded the acquisition through the use of existing cash held within the United States. We will include ExecuPharm results of operations in our Clinical Research Services business segment. Due to the limited time since the acquisition date, we have not yet completed the initial accounting for this business combination.
NOTE 3. – EQUITY AND EARNINGS PER SHARE
We have authorized
5
million shares of preferred stock at
$0.01
par value. As of
September 30, 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
September 30, 2016
and
June 30, 2016
, respectively, we had
53.3 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 common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share data)
|
Three Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Net income attributable to common shares
|
$
|
37.8
|
|
|
$
|
24.9
|
|
|
Weighted average number of shares outstanding, used in computing basic earnings per share
|
52.9
|
|
|
55.0
|
|
|
Dilutive common stock equivalents
|
0.8
|
|
|
0.9
|
|
|
Weighted average shares used in computing diluted earnings per share
|
53.7
|
|
|
55.9
|
|
|
Basic earnings per share
|
$
|
0.71
|
|
|
$
|
0.45
|
|
|
Diluted earnings per share
|
$
|
0.70
|
|
|
$
|
0.45
|
|
|
Anti-dilutive options and restricted stock (excluded from the calculation of diluted earnings per share)
|
0.8
|
|
|
0.9
|
|
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.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
September 30, 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
three
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
Foreign Currency
|
|
Unrealized Gain/Loss on Derivatives
|
|
Total
|
|
Balance as of June 30, 2016
|
|
$
|
(130.5
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
(136.0
|
)
|
|
Other comprehensive income before reclassifications
|
|
3.8
|
|
|
4.4
|
|
|
8.2
|
|
|
Loss reclassified from accumulated other comprehensive income
|
|
—
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
Net current-period other comprehensive income
|
|
$
|
3.8
|
|
|
$
|
2.2
|
|
|
$
|
6.0
|
|
|
Balance as of September 30, 2016
|
|
$
|
(126.7
|
)
|
|
$
|
(3.3
|
)
|
|
$
|
(130.0
|
)
|
The significant change in our translation adjustment was due primarily to the movements in Euro (EUR), Indian Rupee (INR), Taiwan Dollar (TWD), South African Rand (ZAR) and partially offset by Great British Pound (GBP) exchange rates against the United States Dollar (USD). For the
three
months ended
September 30, 2016
, the USD weakened by
1.3%
,
1.5%
,
3.0%
and
9.3%
as compared to the EUR, INR, TWD and ZAR between
June 30, 2016
and
September 30, 2016
, respectively; and the USD appreciated by
2.9%
against GBP during the same period. The movement in the EUR, INR, TWD and ZAR represents gains of
$2.1 million
,
$1.5 million
,
$1.1 million
, and
$1.0 million
respectively, out of the
$3.8 million
foreign currency translation adjustment during the
three
months ended
September 30, 2016
. The overall change in our translation adjustment was partially offset by the movement in GBP, representing a loss of
$2.8 million
.
The details regarding pre-tax gain (loss) on derivative instruments reclassified to net income from accumulated other comprehensive income (loss) for the
three
months ended
September 30, 2016
and
2015
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Affected Line in the Consolidated Statements of Income
|
|
(dollars in millions)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
|
Interest rate contracts
|
|
$
|
(0.1
|
)
|
|
$
|
(0.2
|
)
|
|
Interest expense, net
|
|
Foreign exchange contracts
|
|
(2.6
|
)
|
|
(0.2
|
)
|
|
Service revenue
|
|
Foreign exchange contracts
|
|
(0.1
|
)
|
|
(2.8
|
)
|
|
Direct costs
|
|
Total
|
|
$
|
(2.8
|
)
|
|
$
|
(3.2
|
)
|
|
|
The amounts of gain (loss) reclassified from accumulated other comprehensive income into net income are net of taxes of
$0.5 million
, and
$1.3 million
for the three months ended
September 30, 2016
and
September 30, 2015
, respectively.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5. – STOCK-BASED COMPENSATION
We account for stock-based compensation according to ASC 718,
“Compensation—Stock Compensation.”
The classification of compensation expense within the consolidated statements of income is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Three Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Direct costs
|
$
|
1.1
|
|
|
$
|
1.2
|
|
|
Selling, general and administrative
|
3.7
|
|
|
3.9
|
|
|
Total stock-based compensation
|
$
|
4.8
|
|
|
$
|
5.1
|
|
On December 3, 2015, the shareholders approved a new share-based compensation plan, the 2015 Stock Incentive Plan (the “2015 Plan”). The 2015 Plan allows for the issuance of (i) up to 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. We stopped making awards under the Existing Plans upon approval of the 2015 Plan by our 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 our 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 Year 2015 and the 2016 we recorded restructuring charges of
$20.0 million
and
$27.8 million
, respectively, while in the first quarter of Fiscal Year 2017 we recorded a benefit
$1.3 million
related to the Margin Acceleration Program.
Changes in the restructuring accrual during the first quarter of Fiscal Year 2017 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charges/(Benefits)
|
|
Payments/Foreign
Currency Exchange
|
|
Balance at
|
|
(dollars in millions)
|
|
June 30, 2016
|
|
|
|
September 30, 2016
|
|
2015 Margin Acceleration Program
|
|
|
|
|
|
|
|
|
|
Employee severance
|
|
$
|
10.5
|
|
|
$
|
(1.0
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
6.1
|
|
|
Facilities-related
|
|
7.1
|
|
|
(0.3
|
)
|
|
(0.7
|
)
|
|
6.1
|
|
|
Pre-Fiscal Year 2012 Restructuring Plans
|
|
|
|
|
|
|
|
|
|
Facilities-related
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Total
|
|
$
|
17.7
|
|
|
$
|
(1.3
|
)
|
|
$
|
(4.1
|
)
|
|
$
|
12.3
|
|
|
|
|
|
|
|
|
|
|
|
Net restructuring charges by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
(dollars in millions)
|
|
September 30, 2016
|
|
September 30, 2015
|
|
CRS
|
|
$
|
(0.6
|
)
|
|
$
|
8.2
|
|
|
PC
|
|
(0.1
|
)
|
|
0.5
|
|
|
PI
|
|
(0.2
|
)
|
|
3.1
|
|
|
Segments total
|
|
(0.9
|
)
|
|
11.8
|
|
|
Corporate restructuring charges
|
|
(0.4
|
)
|
|
3.0
|
|
|
Total restructuring charges
|
|
$
|
(1.3
|
)
|
|
$
|
14.8
|
|
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 call PAREXEL Access). 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 its business segments, and therefore, assets are not identified by reportable segment.
Our segment results were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Three Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Service revenue
|
|
|
|
|
CRS
|
$
|
376.3
|
|
|
$
|
410.2
|
|
|
PC
|
55.0
|
|
|
39.3
|
|
|
PI
|
65.4
|
|
|
62.6
|
|
|
Total service revenue
|
$
|
496.7
|
|
|
$
|
512.1
|
|
|
Direct costs
|
|
|
|
|
CRS
|
$
|
262.1
|
|
|
$
|
287.5
|
|
|
PC
|
30.4
|
|
|
20.2
|
|
|
PI
|
35.2
|
|
|
35.5
|
|
|
Total direct costs
|
$
|
327.7
|
|
|
$
|
343.2
|
|
|
Gross profit
|
|
|
|
|
CRS
|
$
|
114.2
|
|
|
$
|
122.7
|
|
|
PC
|
24.6
|
|
|
19.1
|
|
|
PI
|
30.2
|
|
|
27.1
|
|
|
Total gross profit
|
$
|
169.0
|
|
|
$
|
168.9
|
|
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
As of
September 30, 2016
, we had
$29.3 million
of gross unrecognized tax benefits, of which
$18.9 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
$0.2 million
net decrease in gross unrecognized tax benefits is primarily attributable to currency translation adjustments.
As of
September 30, 2016
, we anticipate that the liability for unrecognized tax benefits for uncertain tax positions could decrease by approximately
$0.4 million
over the next 12 months primarily as a result of the expiration of statutes of limitations and settlements with tax authorities.
We recognize interest and penalties related to income tax matters in income tax expense. As of
September 30, 2016
and
June 30, 2016
,
$3.6 million
and
$3.4 million
, respectively of gross interest and penalties were included in the liability for unrecognized tax benefits. For the
three
month periods ended
September 30, 2016
and
2015
, expenses of $
0.2 million
and
$0.2 million
, respectively, were recorded for interest and penalties related to tax matters.
We are subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. 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.
For the
three
months ended
September 30, 2016
and 2015, we had effective income tax rates of
24.2%
and
30.3%
, 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 three months ended September 30, 2016, benefited 4.4% from the adoption of ASU 2016-09 as discussed in Note 1 to these condensed consolidated financial statements.
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
.
On the closing date of March 11, 2016, after giving effect to the amendment and restatement of the 2014 Credit Agreement and
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
September 30, 2016
, we had
$25.0 million
borrowed under the revolving credit facility and
$395.0 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
September 30, 2016
. As of
September 30, 2016
, we had borrowing availability of
$325.0 million
under the revolving credit facility. Subsequent to September 30, 2016, we used
$100.0 million
in borrowings under this credit facility in connection with our acquisition of ExecuPharm.
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.
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.
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 US 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
September 30, 2016
, we were in compliance with all covenants under the 2016 Credit Agreement.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 the 2013 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 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 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
September 30, 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 or prior to July 1, 2016; and
|
|
|
|
|
•
|
$2.8 million
paid on or prior to July 1, 2017.
|
As of
September 30, 2016
, we had
$2.8 million
of 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
.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 September 30, 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 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
September 30, 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
September 30, 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.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
three
months ended
September 30, 2016
, we transferred approximately
$0.7 million
of trade receivables. As of
September 30, 2016
and
June 30, 2016
,
no
transfers were accounted for as a financing activity.
Additional Lines 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
September 30, 2016
, we had
$4.5 million
available for borrowing under this line of credit.
We have a cash pool facility with RBS Nederland, NV in the amount of
4.0 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
September 30, 2016
, we had
4.0 million
Euros 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
September 30, 2016
, we had
7.5 million
Euros available under this line of credit.
NOTE 10. – DEBT, COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of
September 30, 2016
, our future minimum debt obligations related to the 2016 Credit Agreement and the Notes described in Note 9 above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
FY 2017
|
|
FY 2018
|
|
FY 2019
|
|
FY 2020
|
|
FY 2021
|
|
Thereafter
|
|
Total
|
|
Debt obligations (principal)
|
|
$
|
10.5
|
|
|
$
|
22.8
|
|
|
$
|
22.5
|
|
|
$
|
32.5
|
|
|
$
|
435.0
|
|
|
$
|
—
|
|
|
$
|
523.3
|
|
We have letter-of-credit agreements with banks totaling approximately
$10.7 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 from 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
September 30, 2016
, the obligation expected to be incurred was
$14.2 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
September 30, 2016
, we recorded contingent consideration liabilities of
$5.2 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 have a material impact on our consolidated financial position, results of operations, or liquidity in the event of an adverse outcome, either individually or in aggregate.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 our intercompany transactions, direct costs, services revenues and significant external transactions. 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 and inherit rate risk related to intercompany and significant external transactions. These contracts are not designated as hedges in accordance with ASC 815.
The following table presents the notional amounts and fair values of our derivatives as of
September 30, 2016
and
June 30, 2016
. All asset and liability amounts are reported in other current and non-current assets and other current and non-current liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
September 30, 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:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
75.8
|
|
|
$
|
3.9
|
|
|
$
|
81.2
|
|
|
$
|
3.5
|
|
|
Derivatives in a liability position:
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
200.0
|
|
|
(0.6
|
)
|
|
200.0
|
|
|
(1.3
|
)
|
|
Foreign exchange contracts
|
97.1
|
|
|
(6.8
|
)
|
|
103.3
|
|
|
(8.9
|
)
|
|
Total designated derivatives
|
$
|
372.9
|
|
|
$
|
(3.5
|
)
|
|
$
|
384.5
|
|
|
$
|
(6.7
|
)
|
|
Derivatives not designated as hedging instruments under ASC 815
|
|
Derivatives in an asset position:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
94.7
|
|
|
$
|
1.2
|
|
|
$
|
36.2
|
|
|
$
|
1.5
|
|
|
Derivatives in a liability position:
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
19.0
|
|
|
(1.0
|
)
|
|
48.0
|
|
|
(1.4
|
)
|
|
Total non-designated derivatives
|
$
|
113.7
|
|
|
$
|
0.2
|
|
|
$
|
84.2
|
|
|
$
|
0.1
|
|
|
Total derivatives
|
$
|
486.6
|
|
|
$
|
(3.3
|
)
|
|
$
|
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 income (loss) in our consolidated balance sheets, net of deferred taxes, and any ineffective portion to miscellaneous income (expense), net in our consolidated statements of income. During the
three
months ended
September 30, 2016
and
2015
, we recorded a gain of
$0.1 million
and a loss of
$1.0 million
, respectively, in miscellaneous income (expense), net in our consolidated statements of income to reflect ineffective portions of hedges.
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amounts recognized in other comprehensive income (loss), net of taxes, are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Three Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Derivatives designated as hedging instruments under ASC 815
|
|
Interest rate contracts
|
$
|
0.4
|
|
|
$
|
(0.4
|
)
|
|
Foreign exchange contracts
|
1.8
|
|
|
(1.8
|
)
|
|
Total designated derivatives
|
$
|
2.2
|
|
|
$
|
(2.2
|
)
|
The unrealized gain (loss) on derivative instruments is net of taxes of
$0.8 million
and
$0.7 million
, respectively, for the
three
months ended
September 30, 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
$3.3 million
.
The change in the fair value of derivatives not designated as hedging instruments under ASC 815 is recorded in 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 a gain of
$0.1 million
and a loss of
$2.8 million
for the
three
months ended
September 30, 2016
and
2015
, respectively.
The unrealized gain (loss) recognized are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Three Months Ended
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Derivatives not designated as hedging instruments under ASC 815
|
|
Foreign exchange contracts
|
$
|
(1.1
|
)
|
|
$
|
(0.7
|
)
|
|
Total non-designated derivative unrealized loss, net
|
$
|
(1.1
|
)
|
|
$
|
(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 September 30, 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).
|
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5.2
|
)
|
|
$
|
(5.2
|
)
|
|
Interest rate derivative instruments
|
—
|
|
|
(0.6
|
)
|
|
—
|
|
|
(0.6
|
)
|
|
Foreign currency exchange contracts
|
—
|
|
|
(2.7
|
)
|
|
—
|
|
|
(2.7
|
)
|
|
Total
|
$
|
—
|
|
|
$
|
(3.3
|
)
|
|
$
|
(5.2
|
)
|
|
$
|
(8.5
|
)
|
The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars 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
|
)
|
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. This is observable data that represent the rates that the financial institution uses for contracts entered into at that date; however, they are not based on actual transactions, so they are classified as Level 2.
Level 3 Estimates
Contingent consideration liabilities are re-measured to fair value each reporting period using projected financial targets, discount rates, probabilities of payment and projected payment dates. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Projected financial targets are based on our most recent internal operational budgets and may take into consideration alternate scenarios that could result in more or less profitability for the respective service line. Increases or decreases in projected financial targets and probabilities of payment may result in significant changes in the fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs in isolation may result in a significantly lower or higher fair value measurement.
We acquired ClinIntel Limited (“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, in October 2014. 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 September 30, 2016, we have no further contingent consideration in connection with this acquisition.
In February 2016, we acquired 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 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 months
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 were 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:
PAREXEL INTERNATIONAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
Health Advances
|
|
Unobservable Input
|
|
Range
|
|
Risk free rate
|
|
1%
|
|
Revenue volatility
|
|
25%
|
|
Projected period of payment
|
|
Approximately 3 years
|
For the
three
months ended
September 30, 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 months ended September 30, 2015, the change in the fair value of the contingent consideration of
$5.0 million
was recorded in selling, general and administrative expense. During the three months ended September 30, 2016, the fair value of contingent consideration in the amount of
$5.2 million
remained unchanged.
The fair value of the debt under the Notes was estimated to be
$99.6 million
as of
September 30, 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 2014 Credit Agreement approximates fair value because all of the debt bears variable-rate interest.