XNAS:PRXL Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:PRXL (): Fair Value Estimate
Premium
XNAS:PRXL (): Consider Buying
Premium
XNAS:PRXL (): Consider Selling
Premium
XNAS:PRXL (): Fair Value Uncertainty
Premium
XNAS:PRXL (): Economic Moat
Premium
XNAS:PRXL (): Stewardship
Premium
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 000-21244
PAREXEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
 
Massachusetts
 
04-2776269
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
195 West Street
Waltham, Massachusetts
 
02451
(Address of principal executive offices)
 
(Zip Code)
(781) 487-9900
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
 
 
 
 
 
 
Large Accelerated Filer
 
ý
  
Accelerated Filer
 
¨
 
 
 
 
 
Non-accelerated Filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 7, 2012, there were 59,888,387 shares of common stock outstanding.

1



PAREXEL INTERNATIONAL CORPORATION
INDEX
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets (Unaudited): March 31, 2012 and June 30, 2011
 
 
Condensed Consolidated Statements Of Income (Unaudited): Three and Nine Months Ended March 31, 2012 and March 31, 2011
 
 
Condensed Consolidated Statements Of Cash Flows (Unaudited): Nine Months Ended March 31, 2012 and March 31, 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share and per share data)
 
March 31, 2012
 
June 30, 2011
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
129,891

 
$
89,056

Marketable securities
53,385

 

Billed and unbilled accounts receivable, net
643,576

 
649,643

Prepaid expenses
20,758

 
21,336

Deferred tax assets
24,692

 
17,817

Income taxes receivable

 
6,347

Other current assets
23,908

 
23,379

Total current assets
896,210

 
807,578

Property and equipment, net
187,975

 
201,342

Goodwill
258,239

 
262,313

Other intangible assets, net
72,872

 
79,958

Non-current deferred tax assets
26,299

 
31,434

Long-term income taxes receivable
17,396

 
20,222

Other assets
31,146

 
26,636

Total assets
$
1,490,137

 
$
1,429,483

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Notes payable and current portion of long-term debt
$
5,004

 
$
5,867

Accounts payable
40,745

 
31,724

Deferred revenue
322,713

 
311,896

Accrued expenses
32,317

 
35,949

Accrued restructuring charges, current portion
5,033

 
4,689

Accrued employee benefits and withholdings
99,433

 
79,542

Current deferred tax liabilities
15,144

 
17,216

Income taxes payable
8,706

 

Other current liabilities
13,349

 
3,397

Total current liabilities
542,444

 
490,280

Long-term debt, net of current portion
224,234

 
240,102

Non-current deferred tax liabilities
25,411

 
30,987

Long-term accrued restructuring charges, net of current portion
3,884

 
4,709

Long-term income tax liabilities
51,833

 
57,816

Long-term deferred revenue
27,133

 
20,766

Other liabilities
19,309

 
18,819

Total liabilities
894,248

 
863,479

Stockholders’ equity:
 
 
 
Preferred stock

 

Common stock
599

 
584

Additional paid-in capital
267,529

 
251,045

Retained earnings
340,890

 
295,520

Accumulated other comprehensive (loss) income
(13,129
)
 
18,855

Total stockholders’ equity
595,889

 
566,004

Total liabilities and stockholders’ equity
$
1,490,137

 
$
1,429,483


See notes to condensed consolidated financial statements.

2



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

Nine Months Ended
 
March 31,
2012

March 31,
2011

March 31,
2012

March 31,
2011
Service revenue
$
355,992

 
$
301,396

 
$
1,003,897

 
$
901,575

Reimbursement revenue
56,037

 
51,565

 
156,592

 
157,693

Total revenue
412,029

 
352,961

 
1,160,489

 
1,059,268

Direct costs
241,445

 
195,605

 
691,718

 
584,738

Reimbursable out-of-pocket expenses
56,037

 
51,565

 
156,592

 
157,693

Selling, general and administrative
67,159

 
67,700

 
192,506

 
189,740

Depreciation
15,166

 
13,582

 
44,199

 
40,438

Amortization
2,198

 
2,500

 
6,542

 
7,408

Restructuring charge (benefit)
1,807

 
144

 
5,669

 
(818
)
Total costs and expenses
383,812

 
331,096

 
1,097,226

 
979,199

Income from operations
28,217

 
21,865

 
63,263

 
80,069

Interest income
1,250

 
1,211

 
4,009

 
3,616

Interest expense
(3,152
)
 
(3,699
)
 
(9,598
)
 
(11,881
)
Miscellaneous expense
(4,373
)
 
(4,515
)
 
(2,856
)
 
(14,526
)
Other expense
(6,275
)
 
(7,003
)
 
(8,445
)
 
(22,791
)
Income before income taxes
21,942

 
14,862

 
54,818

 
57,278

(Benefit) provision for income taxes
(927
)
 
(872
)
 
9,448

 
6,921

Net income
$
22,869


$
15,734

 
$
45,370


$
50,357

Earnings per common share
 
 
 
 
 
 
 
Basic
$0.38
 
$0.27
 
$0.76
 
$0.86
Diluted
$0.38
 
$0.26
 
$0.75
 
$0.84
Shares used in computing earnings per common share
 
 
 
 
 
 
 
Basic
59,652

 
58,673

 
59,319

 
58,545

Diluted
60,494

 
59,808

 
60,272

 
59,717

See notes to condensed consolidated financial statements.

3



PAREXEL INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands) 
 
Nine Months Ended
 
March 31,
2012
 
March 31,
2011
Cash flow from operating activities:
 
 
 
Net income
$
45,370

 
$
50,357

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
50,741

 
47,846

Stock-based compensation
8,236

 
7,421

Provision for losses on receivables
738

 
1,029

Deferred income taxes
(9,384
)
 
(15,462
)
Changes in operating assets and liabilities
60,265

 
(131,148
)
Net cash provided by (used in) operating activities
155,966

 
(39,957
)
Cash flow from investing activities:
 
 
 
(Purchase of) proceeds from redemption of marketable securities
(53,647
)
 
13,058

Purchase of property and equipment
(38,163
)
 
(38,727
)
Proceeds from sale of assets

 
98

Net cash used in investing activities
(91,810
)
 
(25,571
)
Cash flow from financing activities:
 
 
 
Proceeds from issuance of common stock
8,263

 
4,493

Borrowing under credit agreement
168,000

 
195,000

Repayments under credit agreement
(183,750
)
 
(119,500
)
Repayments under other debt
(842
)
 
(1,696
)
Purchase of non-controlling interests

 
(1,550
)
Net cash (used in) provided by financing activities
(8,329
)
 
76,747

Effect of exchange rate changes on cash and cash equivalents
(14,992
)
 
13,035

Net increase in cash and cash equivalents
40,835

 
24,254

Cash and cash equivalents at beginning of period
89,056

 
95,170

Cash and cash equivalents at end of period
$
129,891

 
$
119,424

Supplemental disclosures of cash flow information
 
 
 
Net cash paid during the period for:
 
 
 
Interest
$
8,782

 
$
12,014

Income taxes, net of refunds
$
7,038

 
$
26,060

See notes to condensed consolidated financial statements.

4



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

NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of PAREXEL International Corporation (“PAREXEL,” “the Company,” “we,” “our” or “us”) have been prepared in accordance with generally accepted accounting principles for interim financial information 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 have been included. Operating results for the three and nine months ended March 31, 2012 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, 2011 (the “2011 10-K”) filed with the Securities and Exchange Commission on August 26, 2011.
Effective July 1, 2011, $3.1 million and $8.8 million of selling, general and administrative expenses for the three and nine months ended March 31, 2011, respectively, were reclassified as CRS direct costs to conform to the presentation for the fiscal year ending June 30, 2012 (“Fiscal Year 2012”). These changes had no impact on total revenue, total expenses, operating income, net income, earnings per share or the balance sheet. We also reclassified $10.5 million of prepaid expenses to other current assets for the period ended June 30, 2011 to conform to the Fiscal Year 2012 presentation.
Recently Issued Accounting Standards
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which deferred the guidance to require entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement where net income is presented and the statement where other comprehensive income is presented for both interim and annual financial statements. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05 and did not change the effective date for ASU 2011-05. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU 2011-08 modifies the impairment test for goodwill and allows an entity the option to assess 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 is less than its carrying amount, including goodwill.  If, as a result of the qualitative assessment, the entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires companies to disclose information about offsetting and related arrangements to enable users of their financial statements to understand the effects of those arrangements on its financial position. ASU 2011-11 is effective for fiscal years beginning after January 1, 2013. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

NOTE 2 – EQUITY AND EARNINGS PER SHARE
We have authorized 5 million shares of preferred stock at $0.01 par value. As of both March 31, 2012 and June 30, 2011, we had 0 preferred shares issued and outstanding, respectively.
We have authorized 75 million shares of common stock with a $0.01 par value. As of March 31, 2012, we had 59,873,397 shares issued and outstanding. As of June 30, 2011, we had 59,004,028 shares 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/units. The following table

5



outlines the basic and diluted earnings per common share computations:
 
Three Months Ended

Nine Months Ended
(in thousands, except per share data)
March 31, 2012

March 31, 2011

March 31, 2012

March 31, 2011
Net income attributable to common stock
$
22,869

 
$
15,734

 
$
45,370

 
$
50,357

Weighted average number of shares outstanding, used in computing basic earnings per share
59,652

 
58,673

 
59,319

 
58,545

Dilutive common stock equivalents
842

 
1,135

 
953

 
1,172

Weighted average number of shares outstanding used in computing diluted earnings per share
60,494

 
59,808

 
60,272

 
59,717

Basic earnings per share
$0.38
 
$0.27
 
$0.76
 
$0.86
Diluted earnings per share
$0.38
 
$0.26
 
$0.75
 
$0.84
Anti-dilutive options (excluded from the calculation of diluted earnings per share)
1,869

 
1,537

 
2,209

 
1,396


NOTE 3 – COMPREHENSIVE INCOME
Comprehensive income has been calculated in accordance with FASB Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” Comprehensive income was as follows:
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Net income
$
22,869

 
$
15,734

 
$
45,370

 
$
50,357

Unrealized (loss) gain on derivative instruments
(245
)
 
2,523

 
(1,370
)
 
6,184

Foreign currency translation
13,557

 
18,519

 
(30,614
)
 
51,225

Comprehensive income
$
36,181

 
$
36,776

 
$
13,386

 
$
107,766

The unrealized (loss) gain on derivative instruments is net of $(0.1) million and $(0.5) million of taxes for the three and nine months ended March 31, 2012, respectively; and net of $1.0 million and $1.9 million of taxes for the three and nine months ended March 31, 2011, respectively.

NOTE 4 – 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.
(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Direct costs
$
418

 
$
362

 
$
1,347

 
$
1,205

Selling, general and administrative
2,333

 
2,213

 
6,889

 
6,216

Total stock-based compensation
$
2,751

 
$
2,575

 
$
8,236

 
$
7,421


NOTE 5 – RESTRUCTURING CHARGES
In April 2011, we adopted a plan to restructure our operations to reduce expenses, better align costs with current and future geographic sources of revenue, and improve operating efficiencies (the “2011 Restructuring Plan”). The 2011 Restructuring Plan focused primarily on the Early Phase business and corporate functions. The total cost of the 2011 Restructuring Plan was approximately $15.3 million and included the elimination of approximately 150 managerial and staff positions.
For the three and nine months ended March 31, 2012 and March 31, 2011, we recorded the following charges (benefits) to our restructuring plans.  

6



(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
2011 Restructuring Plan
 
 
 
 
 
 
 
Employee severance
$
1,966

 
$

 
$
5,378

 
$

Facilities-related
(105
)
 

 
1,051

 

Other

 

 
308

 

Total 2011 Plan
$
1,861

 
$

 
$
6,737

 
$

2010 Restructuring Plan
 
 
 
 
 
 
 
Employee severance
$

 
$
157

 
$
(984
)
 
$
(598
)
Facilities-related
(54
)
 
(13
)
 
(84
)
 
(189
)
Other

 


 

 
(31
)
Total 2010 Plan
$
(54
)
 
$
144

 
$
(1,068
)
 
$
(818
)
Total All Plans
$
1,807

 
$
144

 
$
5,669

 
$
(818
)
Current activity charged against restructuring accruals is presented in the following table.
(in thousands)
Balance at
 
Provisions/
Adjustments
 
Payments/Foreign
Currency Exchange
 
Balance at
 
June 30, 2011
 
 
 
March 31, 2012
2011 Restructuring Plan
 
 
 
 
 
 
 
Employee severance costs
$
1,622

 
$
5,378

 
$
(3,847
)
 
$
3,153

Facilities-related charges
3,720

 
1,051

 
(1,490
)
 
3,281

Other charges

 
308

 
(242
)
 
66

2010 Restructuring Plan
 
 
 
 
 
 
 
Employee severance costs
1,160

 
(984
)
 
(176
)
 

Facilities-related charges
855

 
(84
)
 
(75
)
 
696

Pre-2010 Plans
 
 
 
 
 
 
 
Facilities-related charges
2,041

 

 
(320
)
 
1,721

Total
$
9,398

 
$
5,669

 
$
(6,150
)
 
$
8,917


NOTE 6 – SEGMENT INFORMATION
PAREXEL is managed through three business segments:
Clinical Research Services (CRS) constitutes our core business and includes Phase I-IV clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory and investigator site services.
PAREXEL Consulting and Medical Communication Services (PCMS) provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PCMS consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.
Perceptive Informatics (Perceptive) provides information technology solutions designed to improve the product development processes of our clients. Perceptive offers a portfolio of products and services that includes medical imaging services, ClinPhone® randomization and trial supply management (“RTSM”), DataLabs® electronic data capture (“EDC”), IMPACT® and TrialWorks® clinical trials management systems (“CTMS”), web-based portals, systems integration, and electronic patient reported outcomes (“ePRO”). These services are often bundled together and integrated with other applications to provide an eClinical solution for our clients.
We evaluate our segment performance and allocate resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are allocated and evaluated on a geographic basis. Accordingly, we do not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other income (expense), and income tax expense in segment profitability. We attribute revenue to individual countries based upon external and internal contractual arrangements. Inter-segment transactions are not included in service revenue. Furthermore, PAREXEL has a global infrastructure supporting its business segments, and therefore, assets are not identified by reportable segment.  

7



(in thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Service revenue
 
 
 
 
 
 
 
CRS
$
263,372

 
$
227,006

 
$
746,652

 
$
690,009

PCMS
43,301

 
34,136

 
117,404

 
94,484

Perceptive
49,319

 
40,254

 
139,841

 
117,082

Total service revenue
$
355,992

 
$
301,396

 
$
1,003,897

 
$
901,575

Direct costs
 
 
 
 
 
 
 
CRS
$
188,520

 
$
152,149

 
$
539,111

 
$
460,654

PCMS
25,101

 
20,471

 
68,663

 
56,842

Perceptive
27,824

 
22,985

 
83,944

 
67,242

Total direct costs
$
241,445

 
$
195,605

 
$
691,718

 
$
584,738

Gross profit
 
 
 
 
 
 
 
CRS
$
74,852

 
$
74,857

 
$
207,541

 
$
229,355

PCMS
18,200

 
13,665

 
48,741

 
37,642

Perceptive
21,495

 
17,269

 
55,897

 
49,840

Total gross profit
$
114,547

 
$
105,791

 
$
312,179

 
$
316,837


NOTE 7 – 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.
As of June 30, 2011, we had $62.2 million of gross unrecognized tax benefits of which $16.6 million would impact the effective tax rate if recognized. As of March 31, 2012, we had $52.4 million of gross unrecognized tax benefits of which $10.4 million would impact the effective tax rate if recognized. The reserves for unrecognized tax positions primarily relate to exposures for income tax matters such as changes in the jurisdiction in which income is taxable and taxation of certain investments. The $9.8 million net decrease in gross unrecognized tax benefits is composed of a decrease of $9.0 million related to settlements with tax authorities and the expiration of statutes of limitation in Europe, and a decrease of $2.5 million attributable to currency translation adjustments, partly offset by an increase of $1.7 million related to prior year tax positions in Europe and Asia. As of March 31, 2012, we anticipate that the liability for unrecognized tax benefits for uncertain tax positions could decrease by approximately $4.7 million over the next twelve months primarily as a result of the expiration of statutes of limitation.
We recognize interest and penalties related to income tax matters in income tax expense. As of June 30, 2011, $9.1 million of gross interest and penalties were included in our liability for unrecognized tax benefits. Income tax expense recorded through March 31, 2012 includes a benefit of approximately $1.6 million of interest and penalties primarily as a result of the changes in gross unrecognized tax benefits described above. As of March 31, 2012, $6.8 million of gross interest and penalties were included in our liability for unrecognized tax benefits.
We are subject to U.S. federal income tax, as well as income tax in multiple state, local and foreign jurisdictions. All material federal, state, and local income tax matters through 2005 have been concluded. Substantially all material foreign income tax matters have been concluded for all years through 2000.
For the three and nine months ended March 31, 2012, we had effective income tax rates of (4.2)% and 17.2%, respectively. The tax rates for these periods were lower than the expected statutory rate primarily as a result of a $0.9 million quarter specific benefit recorded in the first quarter of fiscal year 2012 related to a reduction in the statutory tax rate in the United Kingdom, a $6.8 million quarter specific benefit recorded in the third quarter of fiscal year 2012 resulting from the release of income tax reserves and associated reserves for interest and penalties due to settlements with tax authorities and the expiration of statutes of limitation in Europe, as well as the effect of a lower projected annual effective tax rate for Fiscal Year 2012 on both the three and nine month periods. The projected annual effective tax rate is lower than the expected statutory rate because of the favorable effect of statutory rates applicable to income earned outside the United States on the projected annual effective tax rate.
For the three and nine months ended March 31, 2011, we had effective income tax rates of (5.9)% and 12.1%, respectively. The tax rates for these periods were lower than the expected statutory rate primarily because of quarter specific reductions in the

8



valuation allowance, as well as the effect of a lower projected annual effective tax rate for Fiscal Year 2011 on both the three and nine month periods. The projected annual effective tax rate is lower than the expected statutory rate because of additional reductions in valuation allowances resulting from improved profitability in the United Kingdom, as well as the favorable effect of statutory rates applicable to income earned outside the United States

NOTE 8 LINES OF CREDIT
2011 Credit Agreement
On June 30, 2011, we entered into an unsecured senior credit facility (the “2011 Credit Agreement”) providing for a five-year term loan of $100.0 million and a revolving credit facility in the principal amount of up to $300.0 million. The borrowings all carry a variable interest rate based on LIBOR, prime, or a similar index, plus a margin (margin not to exceed a per annum rate of 1.75%).
As of March 31, 2012, we had $133.0 million of principal borrowed under the revolving credit facility, $96.3 million of principal borrowed under the term loan, and borrowing availability of $167.0 million under the revolving credit facility.
In September 2011, we entered into a new interest rate swap and an interest rate cap agreement. These interest rate hedges were deemed to be fully effective in accordance with ASC 815, “Derivatives and Hedging,” and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income. Principal in the amount of $100.0 million under the 2011 Credit Agreement has been hedged with an interest rate swap agreement and carries a fixed interest rate of 1.3% plus an applicable margin. Principal in the amount of $50.0 million has been hedged with an interest rate cap arrangement with an interest rate cap of 2.0% plus an applicable margin. As of March 31, 2012, our debt under the 2011 Credit Agreement, including the $100.0 million of principal hedged with an interest swap agreement, carried an average annualized interest rate of 1.6%.
During the nine months ended March 31, 2012, we made principal payments of $3.8 million on the term loan. The term loan scheduled repayments under the 2011 Credit Agreement increase over time from 5% of the principal due in the first year to 60% of the principal due in the last year.

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% and 4%. We entered into this line of credit to facilitate business transactions. At March 31, 2012, 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 2.0% and 4.0%. We entered into this line of credit to facilitate business transactions. At March 31, 2012, we had 5.0 million Euros available under this line of credit.
We have a cash pooling arrangement with RBS Nederland, NV. Pooling occurs when debit balances are offset against credit balances and the overall net position is used as a basis by the bank for calculating the overall pool interest amount. Each legal entity owned by us and party to this arrangement remains the owner of either a credit (deposit) or a debit (overdraft) balance. Therefore, interest income is earned by legal entities with credit balances, while interest expense is charged to legal entities with debit balances. Based on the pool’s aggregate balance, the bank then (1) recalculates the overall interest to be charged or earned, (2) compares this amount with the sum of previously charged/earned interest amounts per account and (3) additionally pays/charges the difference. The gross overdraft balance related to this pooling arrangement was $36.1 million and $50.2 million at March 31, 2012 and June 30, 2011, respectively, and was included in cash and cash equivalents.

NOTE 9 – COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of March 31, 2012, we had approximately $45.6 million in purchase obligations with various vendors for the purchase of computer software and other services over the next five years.
The 2011 Credit Agreement is guaranteed by certain of our U.S. subsidiaries.
We have letter-of-credit agreements with banks totaling approximately $8.4 million guaranteeing performance under various operating leases and vendor agreements.
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.


9



NOTE 10 – DERIVATIVES
We are exposed to certain risks relating to our ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk and foreign exchange rate risk. Accordingly, we have instituted interest rate and foreign currency hedging programs that are accounted for in accordance with ASC 815, “Derivatives and Hedging.”
Our interest rate hedging program is a cash flow hedge program designed to minimize interest rate volatility. We swap the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount, at specified intervals. We also employ an interest rate cap that compensates us if variable interest rates rise above a pre-determined rate. Our interest rate contracts are designated as hedging instruments.
Our foreign currency hedging program is a cash flow hedge program designed to minimize foreign currency volatility related to the foreign exchange exposure related to intercompany debt obligations. We primarily utilize cross-currency swaps with maturities of no more than 12 months that are designated as hedging instruments.
We also enter into other economic hedges to mitigate foreign currency exchange risk and interest rate risk related to other intercompany transactions. These contracts are not designated as hedges in accordance with ASC 815.
The following table presents the notional amounts and fair values of our derivatives as of March 31, 2012 and June 30, 2011 (in thousands). All asset and liability amounts are reported in other current assets, other current liabilities, and other liabilities.
 
March 31, 2012
 
June 30, 2011
 
Notional
Amount
 
Asset
(Liability)
 
Notional
Amount
 
Asset
(Liability)
Derivatives designated as hedging instruments under ASC 815
 
 
Interest rate contracts
$
150,000

 
$
(1,978
)
 
$
150,000

 
$
(1,176
)
Cross-currency swap contracts
26,447

 
(1,587
)
 
31,016

 
620

Total designated derivatives
$
176,447

 
$
(3,565
)
 
$
181,016

 
$
(556
)
Derivatives not designated as hedging instruments under ASC 815
Cross-currency interest rate swap contracts
$
45,724

 
$
(3,363
)
 
$
49,633

 
$
419

Foreign exchange contracts
78,468

 
1,335

 
107,932

 
1,126

Total non-designated derivatives
$
124,192

 
$
(2,028
)
 
$
157,565

 
$
1,545

Total derivatives
$
300,639

 
$
(5,593
)
 
$
338,581

 
$
989

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 on the balance sheet, net of deferred taxes and any ineffective portion to miscellaneous expense on the consolidated statements of income. The gains (losses) recognized in other comprehensive income, net of taxes, are presented below (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Derivatives designated as hedging instruments under ASC 815
Interest rate contracts
$
(105
)
 
$
691

 
$
(517
)
 
$
1,806

Cross-currency swap contracts
(140
)
 
1,832

 
(853
)
 
4,378

Total designated derivatives
$
(245
)
 
$
2,523

 
$
(1,370
)
 
$
6,184

Under certain circumstances, such as the occurrence of significant differences between actual cash receipts and forecasted cash receipts, the ASC 815 programs could be deemed ineffective. During the nine months ended March 31, 2012 and March 31, 2011, no amounts were recorded to reflect ineffective portions of any hedges. The estimated net amount of the existing losses that are expected to be reclassified into earnings within the next twelve months is $0.6 million.
The change in the fair value of derivatives not designated as hedging instruments under ASC 815 is recorded to miscellaneous expense on the consolidated statements of income. The gains (losses) recognized are presented below (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
 
March 31, 2012
 
March 31, 2011
Derivatives not designated as hedging instruments under ASC 815
 
 
Cross-currency interest rate swap contracts
$
(667
)
 
$
1,194

 
$
(3,782
)
 
$
3,483

Foreign exchange contracts
1,469

 
1,200

 
209

 
2,103

Total non-designated derivatives
$
802

 
$
2,394

 
$
(3,573
)
 
$
5,586



10



NOTE 11 FAIR VALUE MEASUREMENTS
We apply the provisions of ASC 820, “Fair Value Measurements and Disclosures.” 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 values. ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 – Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.
Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
quoted prices for similar assets and liabilities in active markets
quoted prices for identical or similar assets or liabilities in markets that are not active
observable inputs other than quoted prices that are used in the valuation of the asset or liabilities (e.g., interest rate and yield curve quotes at commonly quoted intervals)
inputs that are derived principally from or corroborated by observable market data by correlation or other means
Level 3 – Unobservable inputs for the assets or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of March 31, 2012:
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
20,023

 
$

 
$

 
$
20,023

Marketable securities
53,385

 

 

 
53,385

Interest rate derivative instruments

 
(5,341
)
 

 
(5,341
)
Foreign currency exchange contracts

 
(252
)
 

 
(252
)
Total
$
73,408

 
$
(5,593
)
 
$

 
$
67,815

The following table sets forth by level, within the fair value hierarchy, our assets (liabilities) carried at fair value as of June 30, 2011: 
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents
$
15,436

 
$

 
$

 
$
15,436

Interest rate derivative instruments

 
(757
)
 

 
(757
)
Foreign currency exchange contracts

 
1,746

 

 
1,746

Total
$
15,436

 
$
989

 
$

 
$
16,425

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.
The marketable securities are held in foreign government treasury certificates that are actively traded, with original maturities over 90 days but less than one year. Our marketable securities are classified as held-to-maturity based on our intent and ability to hold the securities to maturity. We have elected to account for these investments under the fair value option to better represent the value of our assets. Interest and dividends related to these securities are reported as a component of interest income in our consolidated statements of income.
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.
For the three months and nine ended March 31, 2012, 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

11



assets or liabilities.
The carrying value of our short-term and long-term debt approximates fair value because all of the debt bears variable rate interest.

NOTE 12 – PURCHASE OF NON-CONTROLLING INTERESTS
In August 2010, we purchased all the remaining shares outstanding of PAREXEL International Clinical Research Private Limited from its minority shareholders for approximately $1.6 million, pursuant to a call option. The transaction was accounted for as an equity transaction following the guidance of ASC 810, “Consolidation,” because we controlled and consolidated PAREXEL International Clinical Research Private Limited prior to the transaction.


12



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained in this report regarding our strategy, future operations, financial position, future revenue, projected costs, prospects, plans and objectives of management, other than statements of historical facts, are forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “appears,” “intends,” “may,” “plans,” “projects,” “will,” “would,” “could,” “should,” “targets,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We cannot guarantee that we actually will achieve the plans, intentions or expectations expressed or implied in our forward-looking statements. There are a number of important factors that could cause actual results, levels of activity, performance or events to differ materially from those expressed or implied in the forward-looking statements we make. These important factors are described under the heading “Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011, filed with the Securities and Exchange Commission on August 26, 2011 (the “2011 10-K”), and under “Risk Factors” set forth in Part II, Item 1A below. In light of these risks, uncertainties, assumptions and factors, the forward-looking events discussed herein may not occur and our actual performance and results may vary from those anticipated or otherwise suggested by such statements. You are cautioned not to place undue reliance on these forward-looking statements. Although we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and you should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.

OVERVIEW
We are a leading biopharmaceutical services company, providing a broad range of expertise in clinical research, medical communications services, consulting, advanced technology and informatics products and services to the worldwide pharmaceutical, biotechnology, and medical device industries. Our primary objective is to provide 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, data management, biostatistical analysis, medical communications, clinical pharmacology, patient recruitment, regulatory and product development consulting, commercialization services (including health policy and reimbursement), performance improvement, medical imaging services, ClinPhone® randomization and trial supply management (“RTSM”), IMPACT® and TrialWorks® clinical trials management systems (“CTMS”), DataLabs® electronic data capture (“EDC”), web-based portals, systems integration, electronic patient reported outcomes (“ePRO”), and other drug development consulting 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 manage our business through three segments: Clinical Research Services (“CRS”), PAREXEL Consulting and Medical Communication Services (“PCMS”), and Perceptive Informatics (“Perceptive”).
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-Approval Clinical Excellence (“PACE”). Our services include clinical trials management and biostatistics, data management and clinical pharmacology, as well as related medical advisory, patient recruitment, clinical supply and drug logistics, pharmacovigilance, and investigator site services.
PCMS provides technical expertise and advice in such areas as drug development, regulatory affairs, product pricing and reimbursement, and strategic compliance. It also provides a full spectrum of market development, product development, and targeted communications services in support of product launch. Our PCMS consultants identify alternatives and propose solutions to address client issues associated with product development, registration, and commercialization.
Perceptive provides information technology solutions designed to help improve clients’ product development processes. Perceptive offers a portfolio of products and services that includes medical imaging services, ClinPhone®

13



RTSM, IMPACT® and TrialWorks® CTMS, DataLabs® EDC, web-based portals, systems integration, and ePRO. These services are often bundled together and integrated with other applications to provide an eClinical solution for our clients.
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.
For further information on our other critical accounting policies, please refer to the consolidated financial statements and footnotes thereto included in the 2011 10-K.
































14



RESULTS OF OPERATIONS
ANALYSIS BY SEGMENT
We evaluate our segment performance and allocate resources based on service revenue and gross profit (service revenue less direct costs), while other operating costs are allocated and evaluated on a geographic basis. Accordingly, we do not include the impact of selling, general, and administrative expenses, depreciation and amortization expense, other charges, interest income (expense), other income (loss), and income tax expense (benefit) in segment profitability. We attribute revenue to individual countries based upon external and internal contractual arrangements. Inter-segment transactions are not included in service revenue. Furthermore, we have a global infrastructure supporting our business segments, and therefore, we do not identify assets by reportable segment. Service revenue, direct costs and gross profit on service revenue for the three and nine months ended March 31, 2012 and March 31, 2011 were as follows:
(in thousands)
Three Months Ended
 
Increase
 
 
 
March 31, 2012
 
March 31, 2011
 
(Decrease)
 
%
Service revenue
 
 
 
 
 
 
 
CRS
$
263,372

 
$
227,006

 
$
36,366

 
16.0
 %
PCMS
43,301

 
34,136

 
9,165

 
26.8
 %
Perceptive
49,319

 
40,254

 
9,065

 
22.5
 %
Total service revenue
$
355,992

 
$
301,396

 
$
54,596

 
18.1
 %
Direct costs*
 
 
 
 

 

CRS
$
188,520

 
$
152,149

 
$
36,371

 
23.9
 %
PCMS
25,101

 
20,471

 
4,630

 
22.6
 %
Perceptive
27,824

 
22,985

 
4,839

 
21.1
 %
Total direct costs
$
241,445

 
$
195,605

 
$
45,840

 
23.4
 %
Gross profit
 
 
 
 

 

CRS
$
74,852

 
$
74,857

 
$
(5
)
 
 %
PCMS
18,200

 
13,665

 
4,535

 
33.2
 %
Perceptive
21,495

 
17,269

 
4,226

 
24.5
 %
Total gross profit
$
114,547

 
$
105,791

 
$
8,756

 
8.3
 %
(in thousands)
Nine Months Ended
 
Increase
 
 
 
March 31, 2012
 
March 31, 2011
 
(Decrease)
 
%
Service revenue
 
 
 
 
 
 
 
CRS
$
746,652

 
$
690,009

 
$
56,643

 
8.2
 %
PCMS
117,404

 
94,484

 
22,920

 
24.3
 %
Perceptive
139,841

 
117,082

 
22,759

 
19.4
 %
Total service revenue
$
1,003,897

 
$
901,575

 
$
102,322

 
11.3
 %
Direct costs*
 
 
 
 
 
 
 
CRS
$
539,111

 
$
460,654

 
$
78,457

 
17.0
 %
PCMS
68,663

 
56,842

 
11,821

 
20.8
 %
Perceptive
83,944

 
67,242

 
16,702

 
24.8
 %
Total direct costs
$
691,718

 
$
584,738

 
$
106,980

 
18.3
 %
Gross profit
 
 
 
 
 
 
 
CRS
$
207,541

 
$
229,355

 
$
(21,814
)
 
(9.5
)%
PCMS
48,741

 
37,642

 
11,099

 
29.5
 %
Perceptive
55,897

 
49,840

 
6,057

 
12.2
 %
Total gross profit
$
312,179

 
$
316,837

 
$
(4,658
)
 
(1.5
)%
*
Effective July 1, 2011, $3.1 million and $8.8 million of selling, general and administrative expenses for the three and nine months ended March 31, 2011, respectively, were reclassified as CRS direct costs to conform to the presentation for the fiscal year ending June 30, 2012 (“Fiscal Year 2012”). These changes had no impact on total revenue, total expenses, operating income, net income, earnings per share or the balance sheet.

15



Three Months Ended March 31, 2012 Compared With Three Months Ended March 31, 2011:
Revenue
Service revenue increased by $54.6 million, or 18.1%, to $356.0 million for the three months ended March 31, 2012 from $301.4 million for the three months ended March 31, 2011. On a geographic basis, service revenue was distributed as follows (in millions):
 
Three Months Ended
 
Three Months Ended
 
March 31, 2012
 
March 31, 2011
Region
Service Revenue
 
% of Total
 
Service Revenue
 
% of Total
The Americas
$
165.7

 
46.5
%
 
$
107.0

 
35.5
%
Europe, Middle East & Africa
$
140.3

 
39.4
%
 
$
146.0

 
48.4
%
Asia/Pacific
$
50.0

 
14.1
%
 
$
48.4

 
16.1
%
For the three months ended March 31, 2012 compared with the same period in 2011, service revenue in the Americas increased by $58.7 million, or 54.8%; Europe, Middle East & Africa service revenue decreased by $5.7 million, or 3.9%; and Asia/Pacific service revenue increased by $1.6 million, or 3.3%. Growth in the Americas region was due, in part, to continuing demand in the Phase II-III/PACE portion of the CRS business and the success of our strategic partnerships.
On a segment basis, CRS service revenue increased by $36.4 million, or 16.0%, to $263.4 million for the three months ended March 31, 2012 from $227.0 million for the three months ended March 31, 2011. The increase was primarily attributable to a $40.0 million increase in Phase II-III/PACE; offset in part by a $0.8 million decrease in our Early Phase business (including a $1.5 million decrease due to the disposition of two South African facilities) and the $2.9 million impact of foreign currency exchange movements. The increase in Phase II-III/PACE was due to our success in new business awards and the continued positive impact of strategic partnerships. The decrease in Early Phase was due to weakening demand, which led, in part, to our restructuring efforts in this business unit announced in April 2011, including the disposition of the two South African facilities.
PCMS service revenue increased by $9.2 million, or 26.8%, to $43.3 million for the three months ended March 31, 2012 from $34.1 million for the same period in 2011. Higher service revenue was due primarily to a $10.8 million increase in consulting services associated with growth in start-up Phase II-III activities and growth in strategic compliance work. These increases were partly offset by a $1.8 million decrease in our medical communications business due to lower demand.
Perceptive service revenue increased by $9.1 million, or 22.5%, to $49.3 million for the three months ended March 31, 2012 from $40.3 million for the three months ended March 31, 2011. The growth was due primarily to a $4.0 million increase in our RTSM services, a $3.0 million increase in Medical Imaging, and $2.6 million in other eClinical services. The continued growth in Perceptive service revenue was due to higher demand for technology usage in clinical trials.
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 $45.8 million, or 23.4%, to $241.4 million for the three months ended March 31, 2012 from $195.6 million for the three months ended March 31, 2011. As a percentage of total service revenue, direct costs increased to 67.8% from 64.9% for the respective periods.
On a segment basis, CRS direct costs increased by $36.4 million, or 23.9%, to $188.5 million for the three months ended March 31, 2012 from $152.1 million for the three months ended March 31, 2011. This increase resulted primarily from higher levels of clinical trial activity and increased labor costs (partly related to higher staffing levels in advance of the revenue curve and upward pressure on labor rates), offset in part by $3.4 million related to foreign currency exchange movements. As a percentage of service revenue, CRS direct costs increased to 71.6% for the three months ended March 31, 2012 from 67.0% for the three months ended March 31, 2011 due primarily to higher staffing levels in advance of the revenue curve in response to the continued substantial strength in new business wins.
PCMS direct costs increased by $4.6 million, or 22.6%, to $25.1 million for the three months ended March 31, 2012 from $20.5 million for the three months ended March 31, 2011. This increase was primarily due to higher hiring and labor costs in our consulting business due to increased demand for these services. This increase was offset in part by a $0.7 million decline in the medical communications business due to lower demand. As a percentage of service revenue, PCMS direct costs decreased to 58.0% from 60.0% for the respective periods as a result of improved revenue mix and more effective utilization of staff in a high demand environment.
Perceptive direct costs increased by $4.8 million, or 21.1%, to $27.8 million for the three months ended March 31, 2012 from $23.0 million for the three months ended March 31, 2011 due primarily to a $2.0 million increase in labor costs and a $1.9 million increase in expenses in medical imaging. As a percentage of service revenue, Perceptive direct costs decreased to 56.4%

16



for the three months ended March 31, 2012 from 57.1% for the three months ended March 31, 2011. This decrease was due to strong revenue growth and effective management of costs.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expense decreased slightly to $67.2 million for the three months ended March 31, 2012 from $67.7 million for the three months ended March 31, 2011. This $0.5 million decrease was due primarily to the $0.8 million decrease related to the two South African facilities that were sold and the $0.8 million impact of foreign exchange rate movements; partly offset by a $0.9 million increase in office-related expenses and a $0.5 million increase in commissions expense. As a percentage of service revenue, SG&A decreased to 18.9% for the three months ended March 31, 2012 compared with 22.5% for the three months ended March 31, 2011. This decrease was due to our recent restructuring efforts, effective cost management, and revenue growth.
Depreciation and Amortization
Depreciation and amortization expense increased by $1.3 million, or 8.0%, to $17.4 million for the three months ended March 31, 2012 from $16.1 million for the three months ended March 31, 2011. As a percentage of service revenue, depreciation and amortization was 4.9% for the three months ended March 31, 2012 versus 5.3% for the same period in 2011.
Restructuring Charge (Benefit)
During the three months ended March 31, 2012, we completed the restructuring plan adopted in Fiscal Year 2011 ("2011 Restructuring Plan") and recorded $1.8 million of net charges primarily for employee separation benefits related to our previously announced restructuring plans. For the three months ended March 31, 2011, we recorded $0.1 million in restructuring charges for employee separation benefits.
Income from Operations
Income from operations increased to $28.2 million for the three months ended March 31, 2012 from $21.9 million for the same period in 2011. Income from operations as a percentage of service revenue, or operating margin, increased to 7.9% from 7.3% for the respective periods. This increase in operating margin was due primarily to better management of our SG&A expenses during the quarter.
Other Expense
We recorded net other expense of $6.3 million for the three months ended March 31, 2012 compared with net other expense of $7.0 million for the three months ended March 31, 2011. The $0.7 million decrease was primarily due to a $0.6 million reduction in interest expense, net of interest income. The lower interest expense was due primarily to the refinancing of our primary line of credit in June 2011 and a new interest hedging program that was put in place in Fiscal Year 2012.
Miscellaneous expense for the three months ended March 31, 2012 was $4.4 million and consisted primarily of $5.3 million of losses related to the revaluation of certain foreign denominated assets and liabilities, partly offset by an $0.8 million gain related to our non-designated derivatives.
Miscellaneous expense for the three months ended March 31, 2011 was $4.5 million and consisted primarily of $6.5 million of losses related to the revaluation of certain foreign denominated assets and liabilities, partly offset by a $2.4 million gain related to our non-designated derivatives.
Taxes
For the three months ended March 31, 2012 and 2011, we had effective income tax rates of (4.2)% and (5.9)%, respectively. The low tax rate for the three months ended March 31, 2012 was primarily the result of a $6.8 million quarter specific release of income tax reserves and associated reserves for interest and penalties resulting from settlements with tax authorities and the expiration of statutes of limitation in Europe. The low tax rate for the three months ended March 31, 2011 was attributable to a low projected annual effective tax rate for Fiscal Year 2011, as well as the impact of quarter specific items on the quarter ended March 31, 2011. The projected annual effective tax rate benefitted from a reduction in valuation reserves resulting from improved profitability in the United Kingdom. Improved profitability also resulted in the recognition of a quarter specific reduction in valuation allowances in the United States recorded in the third quarter of Fiscal Year 2011 which reduced the effective tax rate for the quarter.



17



Nine Months Ended March 31, 2012 Compared With Nine Months Ended March 31, 2011:
Revenue
Service revenue increased by $102.3 million, or 11.3%, to $1,003.9 million for the nine months ended March 31, 2012 from $901.6 million for the nine months ended March 31, 2011. On a geographic basis, service revenue was distributed as follows (in millions):
 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2012
 
March 31, 2011
Region
Service Revenue
 
% of Total
 
Service Revenue
 
% of Total
The Americas
$
443.9

 
44.2
%
 
$
367.1

 
40.7
%
Europe, Middle East & Africa
$
408.3

 
40.7
%
 
$
407.7

 
45.2
%
Asia/Pacific
$
151.7

 
15.1
%
 
$
126.8

 
14.1
%
For the nine months ended March 31, 2012 compared with the same period in 2011, service revenue in the Americas increased by $76.8 million, or 20.9%, due to the positive impact of our strategic partnerships. Europe, Middle East & Africa service revenue remained relatively flat, growing by 0.1%. Asia/Pacific service revenue increased by $24.9 million, or 19.7%, due, in part, to continuing demand for international trials, particularly in the Phase II-III/PACE portion of the CRS business.
On a segment basis, CRS service revenue increased by $56.6 million, or 8.2%, to $746.7 million for the nine months ended March 31, 2012 from $690.0 million for the nine months ended March 31, 2011. The increase was primarily attributable to a $67.3 million increase in Phase II-III/PACE and the $2.8 million impact of foreign currency exchange movements; offset in part by an $11.5 million decrease in our Early Phase business. The increase in Phase II-III/PACE was due to our success in winning new business awards and the continued positive impact of strategic partnerships. The decrease in Early Phase was due to weakening demand, which led, in part, to our restructuring efforts in this business unit announced in April 2011, including the disposition of two South African facilities.
PCMS service revenue increased by $22.9 million, or 24.3%, to $117.4 million for the nine months ended March 31, 2012 from $94.5 million for the same period in 2011. The increase was due primarily to a $27.6 million expansion in consulting services associated with growth in start-up Phase II-III activities and strategic compliance work. These increases were partly offset by a $5.1 million decrease in our medical communications business.
Perceptive service revenue increased by $22.8 million, or 19.4%, to $139.8 million for the nine months ended March 31, 2012 from $117.1 million for the nine months ended March 31, 2011. The increase was due primarily to a $12.2 million increase in our RTSM business and a $9.4 million increase in Medical Imaging. The continued growth in Perceptive was due to higher demand for technology usage in clinical trials.
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 $107.0 million, or 18.3%, to $691.7 million for the nine months ended March 31, 2012 from $584.7 million for the nine months ended March 31, 2011. As a percentage of total service revenue, direct costs increased to 68.9% from 64.9% for the respective periods.
On a segment basis, CRS direct costs increased by $78.5 million, or 17.0%, to $539.1 million for the nine months ended March 31, 2012 from $460.7 million for the nine months ended March 31, 2011. This increase resulted primarily from higher levels of project activity and increased labor costs (due to higher headcount) and the $4.6 million impact of foreign currency exchange movements. As a percentage of service revenue, CRS direct costs increased to 72.2% for the nine months ended March 31, 2012 from 66.8% for the nine months ended March 31, 2011 due primarily to higher staffing levels, in advance of the revenue curve from continued strength in new business wins.
PCMS direct costs increased by $11.8 million, or 20.8%, to $68.7 million for the nine months ended March 31, 2012 from $56.8 million for the nine months ended March 31, 2011. This increase was primarily due to higher labor costs in our consulting services unit due to increased demand related to growth in start-up Phase II-III activities and strategic compliance work. Offsetting this increase was a $2.1 million decline in labor costs within the medical communications business. As a percentage of service revenue, PCMS direct costs decreased to 58.5% from 60.2% for the respective periods as a result of a more favorable revenue mix and improved productivity and efficiency.
Perceptive direct costs increased by $16.7 million, or 24.8%, to $83.9 million for the nine months ended March 31, 2012 from $67.2 million for the nine months ended March 31, 2011. This increase was due primarily to $6.9 million in higher labor costs and $5.7 million in additional expenses in medical imaging. As a percentage of service revenue, Perceptive direct costs increased to 60.0% for the nine months ended March 31, 2012 from 57.4% for the nine months ended March 31, 2011. This

18



increase was largely due to investments in the business to build our capabilities in low-cost locations, increased hiring related to new strategic partnership support, a change in revenue mix, and higher compensation costs.
Selling, General and Administrative
SG&A expense increased by $2.8 million, or 1.5%, to $192.5 million for the nine months ended March 31, 2012 from $189.7 million for the nine months ended March 31, 2011. The increase was due primarily to $2.6 million in higher rent and office-related costs and the $1.4 million impact of foreign currency exchange movements, offset, in part, by a $2.0 million decrease in expenses related to the South African facilities that were sold in Fiscal Year 2012. As a percentage of service revenue, SG&A decreased to 19.2% for the nine months ended March 31, 2012 compared with 21.0% for the nine months ended March 31, 2011. This decrease was due, in part, to our recent restructuring efforts, effective cost management, and revenue growth.
Depreciation and Amortization
Depreciation and amortization expense increased by $2.9 million, or 6.1%, to $50.7 million for the nine months ended March 31, 2012 from $47.8 million for the nine months ended March 31, 2011. As a percentage of service revenue, depreciation and amortization was 5.1% for the nine months ended March 31, 2012 versus 5.3% for the same period in 2011.
Restructuring Charge (Benefit)
For the nine months ended March 31, 2012, we recorded $5.7 million in charges related to our restructuring plans. This included $6.7 million in charges related to the 2011 Restructuring Plan, which was completed in the third quarter of Fiscal Year 2012. This charge was partly offset by a $1.0 million benefit primarily related to a reduction in estimated separation benefits of the restructuring plan adopted in our 2010 fiscal year. The $6.7 million charge included approximately $5.4 million in employee separation benefits associated with the elimination of approximately 85 managerial and staff positions, $1.0 million in costs related to the exit of certain property leases, and $0.3 million in other charges.
For the nine months ended March 31, 2011, we recorded $0.8 million in restructuring benefits for changes in estimates related to reserves for our restructuring plans.
Income from Operations
Income from operations decreased to $63.3 million for the nine months ended March 31, 2012 from $80.1 million for the same period in 2011. Income from operations as a percentage of service revenue, or operating margin, decreased to 6.3% from 8.9% for the respective periods. This decrease in operating margin was due primarily to lower gross margins, primarily as a result of hiring ahead of the revenue curve.
Other Expense
We recorded net other expense of $8.4 million for the nine months ended March 31, 2012 compared with net other expense of $22.8 million for the nine months ended March 31, 2011. The $14.3 million reduction in expense was due to an $11.7 million decrease in miscellaneous expense and a $2.7 million decrease in interest expense, net of interest income. The lower interest expense was due primarily to the new interest hedging program that was put in place in Fiscal Year 2012 and lower average debt balances. The decrease in miscellaneous expense was due primarily to a $20.2 million change on the revaluation of certain foreign denominated assets and liabilities, offset by a $9.2 million change related to derivative contracts.
Miscellaneous expense for the nine months ended March 31, 2012 was $2.9 million and consisted primarily of $3.6 million of losses related to our non-designated derivatives, partly offset by a $1.8 million gain related to the revaluation of certain foreign denominated assets and liabilities.
Miscellaneous expense for the nine months ended March 31, 2011 was $14.5 million and consisted primarily of $18.4 million of losses related to the revaluation of certain foreign denominated assets and liabilities, partly offset by a $5.6 million gain related to our non-designated derivatives.
Taxes
For the nine months ended March 31, 2012 and March 31, 2011, we had effective income tax rates of 17.2% and 12.1%, respectively. The low tax rate for the nine months ended March 31, 2012 was primarily the result of a $6.8 million quarter specific release of income tax reserves and associated reserves for interest and penalties resulting from settlements with tax authorities and the expiration of statutes of limitation in Europe which was recorded in the third quarter. The low tax rate for the nine months ended March 31, 2011 was primarily the result of a low projected annual effective tax rate attributable to reductions in valuation allowances resulting from projected profitability improvements in the United States and United Kingdom. The tax rate for the nine months ended March 31, 2011 was also significantly impacted by the benefit from quarter specific reductions in the valuation allowance in the United States which were recorded in the second and third quarters of Fiscal Year 2011.



19



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, more recently, credit facilities to fund business acquisitions and working capital. Investing activities primarily reflect the costs of acquisitions and capital expenditures for computer hardware, software, and leasehold improvements. As of March 31, 2012, we had cash, cash equivalents and marketable securities of approximately $183.3 million. Our cash is held in deposit accounts and money market funds, 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 little or no such legal restrictions.
DAYS SALES OUTSTANDING
Our operating cash flow is heavily influenced by changes in the levels of billed and unbilled receivables and deferred revenue. These account balances as well as days sales outstanding (“DSO”) in accounts receivable, net of deferred revenue, can vary based on contractual milestones and the timing and size of cash receipts. We calculate DSO by adding the end-of-period balances for billed and unbilled account receivables, net of deferred revenue (short-term and long-term) and the provision for losses on receivables, then dividing the resulting amount by the sum of total revenue plus investigator fees billed for the most recent quarter, and multiplying the resulting fraction by the number of days in the quarter. The following table presents the DSO, account receivables balances, and deferred revenue as of March 31, 2012 and June 30, 2011.
(in millions)
March 31, 2012
 
June 30, 2011
Billed accounts receivable, net
$
362.0

 
$
341.3

Unbilled accounts receivable, net
281.5

 
308.4

Total accounts receivable
643.5

 
649.7

Deferred revenue
349.8

 
332.7

Net receivables
$
293.7

 
$
317.0

 
 
 
 
DSO
56

 
69

The improvement in DSO was primarily due to improved billing, cash collections and increased client advances.

CASH FLOWS
Net cash provided by operating activities was $156.0 million for the nine months ended March 31, 2012 as compared to net cash used in operating activities of $40.0 million for the nine months ended March 31, 2011. The $195.9 million increase in operating cash flows primarily reflects the effects of improved customer billings and collections, increased client advances and other changes to working capital requirements.
Net cash used in investing activities was $91.8 million for the nine months ended March 31, 2012 as compared to $25.6 million for the nine months ended March 31, 2011. The increase of $66.2 million was due primarily to the purchases of marketable securities.
Net cash used in financing activities was $8.3 million for the nine months ended March 31, 2012 as compared to net cash provided by financing activities of $76.7 million for the nine months ended March 31, 2011. The $85.1 million decrease was due primarily to net repayments of debt in Fiscal Year 2012 compared to net borrowing in Fiscal Year 2011.

LINES OF CREDIT
2011 Credit Agreement
On June 30, 2011, we entered into an unsecured senior credit facility (the “2011 Credit Agreement”) providing for a five-year term loan of $100.0 million and a revolving credit facility in the principal amount of up to $300.0 million. The borrowings all carry a variable interest rate based on LIBOR, prime, or a similar index, plus a margin (margin not to exceed a per annum rate of 1.75%).
Loans outstanding under the 2011 Credit Agreement may be prepaid at any time in whole or in part without premium or penalty, other than customary breakage costs, if any. The 2011 Credit Agreement terminates and any outstanding loans under it mature on June 30, 2016. Repayment of the principal borrowed under the revolving credit facility (other than a swingline loan) is due on June 30, 2016. Repayment of principal borrowed under the term loan facility is due in equal quarterly installments for the annual periods as summarized below, with the final payment of all amounts outstanding, plus accrued interest, being due on June 30, 2016:

20



5% of principal borrowed must be repaid by June 30, 2012;
5% of principal borrowed must be repaid during the one-year period from July 1, 2012 to June 30, 2013;
10% of principal borrowed must be repaid during the one-year period from July 1, 2013 to June 30, 2014;
20% of principal borrowed must be repaid during the one-year period from July 1, 2014 to June 30, 2015; and
60% of principal borrowed must be repaid during the one-year period from July 1, 2015 to June 30, 2016.
On June 30, 2011, our outstanding borrowings were $245 million under the 2011 Credit Agreement. The proceeds of the borrowing were used to repay indebtedness owed under our previous credit arrangements.
We agreed to pay a commitment fee on the revolving loan commitment calculated as a percentage of the unused amount of the revolving loan commitments at a per annum rate of up to 0.4%. 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.
Our obligations under the 2011 Credit Agreement may be accelerated upon the occurrence of an event of default under the 2011 Credit Agreement, which include 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 2011 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 March 31, 2012, we were in compliance with all covenants under the 2011 Credit Agreement.
As of March 31, 2012, we had $133.0 million of principal borrowed under the revolving credit facility, $96.3 million of principal borrowed under the term loan, and borrowing availability of $167.0 million under the revolving credit facility.
In September 2011, we entered into a new interest rate swap and an interest rate cap agreement. These interest rate hedges were deemed to be fully effective in accordance with ASC 815, “Derivatives and Hedging,” and, as such, unrealized gains and losses related to these derivatives are recorded as other comprehensive income. Principal in the amount of $100.0 million under the 2011 Credit Agreement has been hedged with an interest rate swap agreement and carries a fixed interest rate of 1.3% plus an applicable margin. Principal in the amount of $50.0 million has been hedged with an interest rate cap arrangement with an interest rate cap of 2.0% plus an applicable margin. As of March 31, 2012, our debt under the 2011 Credit Agreement, including the $100.0 million of principal hedged with an interest swap agreement, carried an average annualized interest rate of 1.6%.
2010 Credit Facility
In September 2010, we entered into three short-term credit facilities of $25 million with each of JPMorgan, Bank of America, and KeyBank National Association (“KeyBank”), for an aggregate of $75 million (collectively, the “2010 Credit Facility”). In December 2010, we amended the credit facilities with JPMorgan and Bank of America to extend their respective expiration dates to June 30, 2011, and we replaced the credit facility with KeyBank with a short-term credit facility from HSBC in the amount of $25 million, which on December 31, 2010 was fully drawn and the proceeds of which were used to repay the borrowing under the credit facility with KeyBank that matured on December 31, 2010. All outstanding amounts under the 2010 Credit Facility were fully repaid with the proceeds from borrowings under the 2011 Credit Agreement.
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% and 4%. We entered into this line of credit to facilitate business transactions. At March 31, 2012, 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 2.0% and 4.0%. We entered into this line of credit to facilitate business transactions. At March 31, 2012, we had 5.0 million Euros available under this line of credit.
We have a cash pooling arrangement with RBS Nederland, NV. Pooling occurs when debit balances are offset against credit balances and the overall net position is used as a basis by the bank for calculating the overall pool interest amount. Each legal entity owned by us and party to this arrangement remains the owner of either a credit (deposit) or a debit (overdraft) balance. Therefore, interest income is earned by legal entities with credit balances, while interest expense is charged to legal entities with debit balances. Based on the pool’s aggregate balance, the bank then (1) recalculates the overall interest to be charged or earned, (2) compares this amount with the sum of previously charged/earned interest amounts per account and (3) additionally pays/charges the difference. The gross overdraft balance related to this pooling arrangement was $36.1 million and $50.2 million at March 31, 2012 and June 30, 2011, respectively, and was included in cash and cash equivalents.


21



COMMITMENTS, CONTINGENCIES AND GUARANTEES
As of March 31, 2012, we had approximately $45.6 million in purchase obligations with various vendors for the purchase of computer software and other services over the next five years.
The 2011 Credit Agreement is guaranteed by certain of our U.S. subsidiaries.
We have letter-of-credit agreements with banks totaling approximately $8.4 million guaranteeing performance under various operating leases and vendor agreements.
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.

FINANCING NEEDS
Our primary cash needs are for operating expenses (such as salaries and fringe benefits, hiring and recruiting, business development and facilities), business acquisitions, capital expenditures, and repayment of principal and interest on our borrowings. Our requirements for cash to pay principal and interest on our borrowings will increase significantly in future periods because we borrowed $245 million in Fiscal Year 2011 under the 2011 Credit Agreement to refinance prior debt facilities and to provide working capital. Our primary committed external source of funds is the 2011 Credit Agreement, described above. 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). 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 lines of credit 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 2011 Credit Agreement upon its maturity in 2016.
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 under the 2011 Credit Agreement.
Under the terms of the 2011 Credit Agreement, interest rates are fixed based on market indices at the time of borrowing and, depending upon the interest mechanism selected by us, may float thereafter. As a result, the amount of interest payable by us on our borrowings may increase if market interest rates change. However, we expect to mitigate the risk of increasing market interest rates with our hedging programs described below under Part I. Item 3 “Foreign Currency Exchange Rates and Interest Rates.”
We made capital expenditures of approximately $38.2 million during the nine months ended March 31, 2012, primarily for computer software (including internally developed software), hardware, and leasehold improvements. We expect capital expenditures to total approximately $60 to $65 million in Fiscal Year 2012, primarily for computer software and hardware and leasehold improvements.

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 condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our investors.

RESTRUCTURING PLANS
In April 2011, we adopted the 2011 Restructuring Plan to restructure our operations to reduce expenses, better align costs with current and future geographic sources of revenue, and improve operating efficiencies. The plan focused primarily on the Early Phase business and corporate functions and was completed in the third quarter of Fiscal Year 2012. The total cost of the 2011 Restructuring Plan was approximately $15.3 million and included the elimination of approximately 150 managerial and staff positions.


22



INFLATION
We believe the effects of inflation generally do not have a material adverse impact on our operations or financial condition.

RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 1 to our consolidated financial statements included in this quarterly report on Form 10-Q for more information on recently issued accounting standards.


23



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates, and other relevant market rates or price changes. In the ordinary course of business, we are exposed to market risk resulting from changes in foreign currency exchange rates and interest rates, and we regularly evaluate our exposure to such changes. Our overall risk management strategy seeks to balance the magnitude of the exposure and the costs and availability of appropriate financial instruments.
FOREIGN CURRENCY EXCHANGE RATES AND INTEREST RATES
We derived approximately 57.5% of our consolidated service revenue for the nine months ended March 31, 2012 from operations outside of the United States and 62.6% for the nine months ended March 31, 2011. In addition, 21.5% was denominated in Euros and 11.1% was denominated in pounds sterling for the nine months ended March 31, 2012 while 24.0% was denominated in Euros and 13.4% was denominated in pounds sterling for the nine months ended March 31, 2011. We have no significant operations in countries in which the economy is considered to be highly inflationary. Our financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between foreign currencies and the U.S. dollar will affect the translation of financial results into U.S. dollars for purposes of reporting our consolidated financial results.
It is our policy to mitigate the risks associated with fluctuations in foreign exchange rates and in market rates of interest. Accordingly, we have instituted foreign currency hedging programs and an interest rate swap/cap program. See Note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information on our hedging programs and interest rate swap program.
As of March 31, 2012, the programs with derivatives designated as hedging instruments under ASC 815 were deemed effective and the notional values of the derivatives were approximately $176.4 million, including interest rate swap and interest rate cap agreements with a total notional value of $150.0 million executed in connection with the borrowings under our 2011 Credit Agreement. Under certain circumstances, such as the occurrence of significant differences between actual cash receipts and forecasted cash receipts, the ASC 815 programs could be deemed ineffective. In that event, the unrealized gains and losses related to these derivatives, which are currently reported in accumulated other comprehensive income, would be recognized in earnings. As of March 31, 2012, the estimated amount that could be recognized in earnings was a loss of approximately $1.2 million, net of tax.
As of March 31, 2012, the notional value of derivatives that were not designated as hedging instruments under ASC 815 was approximately $124.2 million.
During the nine months ended March 31, 2012 and 2011, we recorded foreign exchange losses of $1.8 million and $12.9 million, respectively. We also have exposure to additional foreign exchange risk as it relates to assets and liabilities that are not part of the economic hedge or designated hedging programs, but quantification of this risk is difficult to assess at any given point in time.
Our exposure to interest rate changes relates primarily to the amount of our short-term and long-term debt. Short-term debt was $5.0 million at March 31, 2012 and $5.9 million at June 30, 2011. Long-term debt was $224.2 million at March 31, 2012 and $240.1 million at June 30, 2011. Based on average short-term and long-term debt for the nine months ended March 31, 2012, an increase in the average interest rate of 100 basis points would decrease our pre-tax earnings and cash flows by approximately $1.5 million on an annual basis.
MARKETABLE SECURITIES
During the nine months ended March 31, 2012, we purchased marketable securities in the form of foreign government treasury certificates that are actively traded. We expect to hold these securities to maturity and have elected to account for them under the fair value method. As of March 31, 2012, the value of these marketable securities was $53.4 million. Since the counterparty is a stable sovereign and due to the relatively short terms of maturity (less than one year), we do not believe that these investments are at high risk of default. Nevertheless, these investments are still at risk for changes in market rates and prices.


24



ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2012, our chief executive officer and chief financial officer concluded that, as of such date, PAREXEL’s disclosure controls and procedures were effective at the reasonable assurance level.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


25



PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We periodically become involved in various claims and lawsuits that are incidental to our business. We believe, after consultation with counsel, that no matters currently pending would, in the event of an adverse outcome, have a material impact on our consolidated financial position, results of operations, or liquidity.

ITEM 1A. RISK FACTORS
In addition to other information in this report, the following risk factors should be considered carefully in evaluating our company and our business. These important factors could cause our actual results to differ from those indicated by forward-looking statements made in this report, including in the section of this report entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other forward-looking statements that we may make from time to time. If any of the following risks occur, our business, financial condition, or results of operations would likely suffer.
The following discussion includes 9 revised or new risk factors that reflect material developments subsequent to the risk factors included in the 2011 10-K:
“We face risks arising from the restructuring of our operations;”
“The current economic environment may negatively impact our financial performance as a result of client defaults and other factors;”
“Our business is subject to international economic, political, and other risks that could negatively affect our results of operations or financial position;”
“Our operating results have fluctuated between quarters and years and may continue to fluctuate in the future, which could affect the price of our common stock;”
“Our revenue and earnings are exposed to exchange rate fluctuations, which has substantially affected our operating results;”
“Our results of operations may be adversely affected if we fail to realize the full value of our goodwill and intangible assets;”
“Existing and proposed laws and regulations regarding confidentiality of patients’ and other individuals’ personal information could result in increased risks of liability or increased cost to us or could limit our product and service offerings;”
“Our indebtedness may limit cash flow available to invest in the ongoing needs of our business;” and
“Our stock price has been, and may in the future be volatile, which could lead to losses by investors.”
Additional risks not currently known to us or other factors not perceived by us to present significant risk to our business at this time also may impair our business operations.

Risks Associated with our Business and Operations
The loss, modification, or delay of large or multiple contracts may negatively impact our financial performance.
Our clients generally can terminate their contracts with us upon 30 to 60 days notice or can delay the execution of services. The loss or delay of a large contract or the loss or delay of multiple contracts could adversely affect our operating results, possibly materially. We have in the past experienced large contract cancellations and delays, which have adversely affected our operating results.
Clients may terminate or delay their contracts for a variety of reasons, including:
failure of products being tested to satisfy safety requirements;
failure of products being tested to satisfy efficacy criteria;
products having unexpected or undesired clinical results;
client cost reductions as a result of budgetary limits or changing priorities;
client decisions to forego a particular study, perhaps for economic reasons;
merger or potential merger related activities involving the client;

26



insufficient patient enrollment in a study;
insufficient investigator recruitment;
clinical drug manufacturing problems resulting in shortages of the product;
product withdrawal following market launch; and
shut down of manufacturing facilities.

The current economic environment may negatively impact our financial performance as a result of client defaults and other factors.
Our ability to attract and retain clients, invest in and grow our business and meet our financial obligations depends on our operating and financial performance, which, in turn, is subject to numerous factors. In addition to factors specific to our business, prevailing economic conditions and financial, business and other factors beyond our control can also affect us, including, but not limited to, the current Greek debt crisis and related European financial restructuring efforts. The world has recently experienced a global macroeconomic downturn, and if global economic and market conditions, or economic conditions in Europe, the United States or other key markets, remain uncertain, persist, or deteriorate further, demand for our services could decline, and we may experience material adverse impacts on our business, operating results, and financial condition. We cannot anticipate all the ways in which the current economic climate and financial market conditions could adversely impact our business.
We are exposed to risks associated with reduced profitability and the potential financial instability of our clients, many of whom may be adversely affected by volatile conditions in the financial markets, the economy in general and disruptions to the demand for health care services and pharmaceuticals. These conditions could cause clients to experience reduced profitability and/or cash flow problems that could lead them to modify, delay or cancel contracts with us, including contracts included in our current backlog.
Some of our clients do not generate revenue and rely upon equity and debt investments and other external sources of capital to meet their cash requirements. Due to the poor condition of the current global economy and other factors outside of our control, these clients may lack the funds necessary to meet outstanding liabilities to us, despite contractual obligations. For example, in the second quarter of Fiscal Year 2009, one of our biopharma clients informed us that it had encountered funding difficulties when one of its major investors defaulted on a contractual investment commitment, and that, as a result, the client would be unable to make payments due to us in connection with an on-going service contract for a large Phase III clinical trial. Consequently, we recorded approximately $14.0 million in reserves related to this late-stage trial, including $12.3 million in bad debt reserves. In Fiscal Year 2012, we recovered $2.3 million of proceeds from the final bankruptcy settlement. It is possible that similar situations could arise in the future, and such defaults could negatively affect our financial performance, possibly materially.
We face risks arising from the restructuring of our operations.
In October 2009, we adopted a plan to restructure our operations to reduce expenses, better align costs with current and future geographic sources of revenue, and improve operating efficiencies. During Fiscal Year 2010, we recorded $16.8 million in restructuring charges related to this plan, including approximately $11.6 million in employee separation benefits associated with the elimination of 238 managerial and staff positions and $5.2 million in costs related to the abandonment of certain property leases.
In April 2011, we adopted the 2011 Restructuring Plan to restructure our operations to reduce expenses, better align costs with current and future geographic sources of revenue, and improve operating efficiencies. The plan focused primarily on the Early Phase business and corporate functions and was completed in the third quarter of Fiscal Year 2012. The total cost of the plan was approximately $15.3 million and included the elimination of approximately 150 managerial and staff positions. Although we expect that all costs associated with this restructuring plan have been recorded as of March 31, 2012, if we incur additional restructuring charges, our financial condition and results of operations may be adversely impacted.
Restructuring also presents significant potential risks of events occurring that could adversely affect us, including a decrease in employee morale, the failure to achieve targeted cost savings and the failure to meet operational targets and customer requirements due to the loss of employees and any work stoppages that might occur.
The fixed price nature of our contracts could hurt our operating results.
Approximately 90% of our contracts are fixed price. If we fail to accurately price our contracts, or if we experience significant cost overruns that are not recovered from our clients, our gross margins on the contracts would be reduced and we could lose money on contracts. In the past, we have had to commit unanticipated resources to complete projects, resulting in lower gross margins on those projects. We might experience similar situations in the future.

27



If we are unable to attract suitable investigators and volunteers for our clinical trials, our clinical development business might suffer.
The clinical research studies we run in our CRS segment rely upon the ready accessibility and willing participation of physician investigators and volunteer subjects. Investigators are typically located at hospitals, clinics or other sites and supervise administration of the study drug to patients during the course of a clinical trial. Volunteer subjects generally include people from the communities in which the studies are conducted, and the rate of completion of clinical trials is significantly dependent upon the rate of participant enrollment.
Our clinical research development business could be adversely affected if we were unable to attract suitable and willing investigators or volunteers on a consistent basis. If we are unable to obtain sufficient patient enrollment or investigators to conduct clinical trials as planned, we might need to expend substantial additional funds to obtain access to resources or else be compelled to delay or modify our plans significantly. These considerations might result in our being unable to successfully achieve projected development timelines as agreed with sponsors. In rare cases, it potentially may even lead us to recommend that trial sponsors terminate ongoing clinical trials or development of a product for a particular indication.
If our Perceptive business is unable to maintain continuous, effective, reliable and secure operation of its computer hardware, software and internet applications and related tools and functions, its business will be harmed.
Our Perceptive business involves collecting, managing, manipulating and analyzing large amounts of data, and communicating data via the Internet. In our Perceptive business, we depend on the continuous, effective, reliable and secure operation of computer hardware, software, networks, telecommunication networks, Internet servers and related infrastructure. If the hardware or software malfunctions or access to data by internal research personnel or customers through the Internet is interrupted, our Perceptive business could suffer. In addition, any sustained disruption in Internet access provided by third parties could adversely impact our Perceptive business.
Although the computer and communications hardware used in our Perceptive business is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, and similar events. And while certain of our operations have appropriate disaster recovery plans in place, we currently do not have redundant facilities everywhere in the world to provide IT capacity in the event of a system failure. In addition, the Perceptive software products are complex and sophisticated, and could contain data, design or software errors that could be difficult to detect and correct. If Perceptive fails to maintain and further develop the necessary computer capacity and data to support the needs of our Perceptive customers, it could result in a loss of or a delay in revenue and market acceptance. Additionally, significant delays in the planned delivery of system enhancements or inadequate performance of the systems once they are completed could damage our reputation and harm our business.
Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, and acts of terrorism (particularly in areas where we have offices) could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur.
Our business is subject to international economic, political, and other risks that could negatively affect our results of operations or financial position.
We provide most of our services on a worldwide basis. Our service revenue from non-U.S. operations represented approximately 57.5% and 62.6% of total consolidated service revenue for the nine months ended March 31, 2012 and March 31, 2011, respectively. More specifically, our service revenue from operations in Europe, Middle East and Africa represented 40.7% and 45.2% of total consolidated service revenue for the corresponding periods. Our service revenue from operations in the Asia/Pacific region represented 15.1% and 14.1% of total consolidated service revenue for the respective periods. Accordingly, our business is subject to risks associated with doing business internationally, including:
changes in a specific country’s or region’s political or economic conditions, including Western Europe, in particular;
potential negative consequences from changes in tax laws affecting our ability to repatriate profits;
difficulty in staffing and managing widespread operations;
unfavorable labor regulations applicable to our European or other international operations;
changes in foreign currency exchange rates; and
the need to ensure compliance with the numerous regulatory and legal requirements applicable to our business in each of these jurisdictions and to maintain an effective compliance program to ensure compliance.

28



Our operating results are impacted by the health of the North American, European and Asian economies, among others. Our business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, rising interest rates, financial market volatility and recession.
If we cannot retain our highly qualified management and technical personnel, our business would be harmed.
We rely on the expertise of our Chairman and Chief Executive Officer, Josef H. von Rickenbach, and our Chief Operating Officer, Mark A. Goldberg, and it would be difficult and expensive to find qualified replacements with the level of specialized knowledge of our products and services and the biopharmaceutical services industry. While we are a party to an employment agreement with Mr. von Rickenbach, it may be terminated by either party upon notice to the counterparty.
In addition, in order to compete effectively, we must attract and retain qualified sales, professional, scientific, and technical operating personnel. Competition for these skilled personnel, particularly those with a medical degree, a Ph.D. or equivalent degrees, is intense. We may not be successful in attracting or retaining key personnel.
Changes to our computer operating systems, programs or software could adversely impact our business.
We may make changes to our existing computer operating systems, programs and/or software in an effort to increase our operating efficiency and/or deliver better value to our clients. Such changes may cause disruptions to our operations and have an adverse impact on our business in the short term.

Risks Associated with our Financial Results
Our operating results have fluctuated between quarters and years and may continue to fluctuate in the future, which could affect the price of our common stock.
Our quarterly and annual operating results have varied and will continue to vary in the future as a result of a variety of factors. For example, our income from operations totaled $28.2 million for the fiscal quarter ended March 31, 2012, $22.6 million for the fiscal quarter ended December 31, 2011, $12.5 million for the fiscal quarter ended September 30, 2011, $1.6 million for the fiscal quarter ended June 30, 2011, and $21.9 million for the fiscal quarter ended March 31, 2011. Factors that cause these variations include:
the level of new business authorizations in particular quarters or years;
the timing of the initiation, progress, or cancellation of significant projects;
exchange rate fluctuations between quarters or years;
restructuring charges;
seasonality;
the mix of services offered in a particular quarter or year;
the timing of the opening of new offices or internal expansion;
timing, costs and the related financial impact of acquisitions;
the timing and amount of costs associated with integrating acquisitions;
the timing and amount of startup costs incurred in connection with the introduction of new products, services or subsidiaries
the dollar amount of changes in contract scope finalized during a particular period; and
the amount of any reserves we are required to record.
Many of these factors, such as the timing of cancellations of significant projects and exchange rate fluctuations between quarters or years, are beyond our control.
If our operating results do not match the expectations of securities analysts and investors, the trading price of our common stock will likely decrease.
Backlog may not result in revenue and the rate at which backlog converts into revenue may be slower than historical conversion rates.
Our backlog is not necessarily a meaningful predictor of future results because backlog can be affected by a number of factors, including the size and duration of contracts, many of which are performed over several years. Additionally, as described above, contracts relating to our clinical development business are subject to early termination by the client and clinical trials can be

29



delayed or canceled for many reasons, including unexpected test results, safety concerns, regulatory developments or economic issues. Also, the scope of a contract can be reduced significantly during the course of a study. If the scope of a contract is revised, the adjustment to backlog occurs when the revised scope is approved by the client. For these and other reasons, we do not fully realize our entire backlog as net revenue.
In addition, the rate at which our backlog converts into revenue may slow. A slowdown in this conversion rate means that the rate of revenue recognized on contract awards may be slower than what we have experienced in the past, particularly in connection with the ramp-up and initiation of strategic partnerships, which could impact our net revenue and results of operations on a quarterly and annual basis. The rate of conversion of backlog from strategic partnerships into revenue has been slower than that experienced historically from traditional client contracts.
Our revenue and earnings are exposed to exchange rate fluctuations, which has substantially affected our operating results.
We conduct a significant portion of our operations in foreign countries. Because our financial statements are denominated in U.S. dollars, changes in foreign currency exchange rates could have and have had a significant effect on our operating results. For example, as a result of year-over-year foreign currency fluctuation, service revenue for the nine months ended March 31, 2012 was positively impacted by approximately $3.2 million as compared with the same period in the previous year. Exchange rate fluctuations between local currencies and the U.S. dollar create risk in several ways, including:
Foreign Currency Translation Risk. The revenue and expenses of our foreign operations are generally denominated in local currencies, primarily the pound sterling and the Euro, and are translated into U.S. dollars for financial reporting purposes. For the nine months ended March 31, 2012 and March 31, 2011, approximately 21.5% and 24.0% of consolidated service revenue was denominated in Euros, respectively. Service revenue denominated in pounds sterling was 11.1% and 13.4%, respectively. Accordingly, changes in exchange rates between foreign currencies and the U.S. dollar will affect the translation of foreign results into U.S. dollars for purposes of reporting our consolidated results.
Foreign Currency Transaction Risk. We may be subjected to foreign currency transaction risk when our foreign subsidiaries enter into contracts or incur liabilities denominated in a currency other than the foreign subsidiaries functional (local) currency. To the extent we are unable to shift the effects of currency fluctuations to the clients; foreign exchange rate fluctuations as a result of foreign currency exchange losses could have a material adverse effect on our results of operations.
Although we try to limit these risks through exchange rate fluctuation provisions stated in our service contracts, or by hedging transaction risk with foreign currency exchange contracts, we do not succeed in all cases. Even in those cases where we are successful, we may still experience fluctuations in financial results from our operations outside of the U.S., and we may not be able to favorably reduce the currency transaction risk associated with our service contracts.
Our effective income tax rate may fluctuate from quarter-to-quarter, which may affect our earnings and earnings per share.
Our quarterly effective income tax rate is influenced by our projected profitability in the various taxing jurisdictions in which we operate. Changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate, which in turn could have a material adverse effect on our net income and earnings per share. Factors that affect the effective income tax rate include, but are not limited to:
the requirement to exclude from our quarterly worldwide effective income tax calculations losses in jurisdictions where no tax benefit can be recognized;
actual and projected full year pretax income;
changes in tax laws in various taxing jurisdictions;
audits by taxing authorities; and
the establishment of valuation allowances against deferred tax assets if it is determined that it is more likely than not that future tax benefits will not be realized.
These changes may cause fluctuations in our effective income tax rate that could cause fluctuation in our earnings and earnings per share, which could affect our stock price.
Our results of operations may be adversely affected if we fail to realize the full value of our goodwill and intangible assets.
As of March 31, 2012, our total assets included $331.1 million of goodwill and net intangible assets. We assess the realizability of our indefinite-lived intangible assets and goodwill annually as well as whenever events or changes in circumstances indicate that these assets may be impaired. These events or circumstances generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill and indefinite-lived intangible assets will depend on the future cash flows of these businesses. These cash flows in turn depend in part on how well we have integrated these businesses. If we are not able to realize the value of the goodwill and indefinite-lived intangible assets, we may be required to incur material charges relating to the impairment of those assets.

30



Our business has experienced substantial expansion in the past and such expansion and any future expansion could strain our resources if not properly managed.
We have expanded our business substantially in the past. For example, in August 2008, we completed the acquisition of ClinPhone, a leading clinical technology organization, for a purchase price of approximately $190 million. Future rapid expansion could strain our operational, human and financial resources. In order to manage expansion, we must:
continue to improve operating, administrative, and information systems;
accurately predict future personnel and resource needs to meet client contract commitments;
track the progress of ongoing client projects; and
attract and retain qualified management, sales, professional, scientific and technical operating personnel.
If we do not take these actions and are not able to manage the expanded business, the expanded business may be less successful than anticipated, and we may be required to allocate additional resources to the expanded business, which we would have otherwise allocated to another part of our business.
If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to our business. The success of an acquisition will depend upon, among other things, our ability to:
assimilate the operations and services or products of the acquired company;
integrate acquired personnel;
retain and motivate key employees;
retain customers;
identify and manage risks facing the acquired company; and
minimize the diversion of management’s attention from other business concerns.
Acquisitions of foreign companies may also involve additional risks, including assimilating differences in foreign business practices and overcoming language and cultural barriers.
In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.

Risks Associated with our Industry
We depend on the pharmaceutical and biotechnology industries, either or both of which may suffer in the short or long term.
Our revenues depend greatly on the expenditures made by the pharmaceutical and biotechnology industries in research and development. In some instances, companies in these industries are reliant on their ability to raise capital in order to fund their research and development projects. Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business. If companies in these industries were to reduce the number of research and development projects they conduct or outsource, our business could be materially adversely affected.
In addition, we are dependent upon the ability and willingness of pharmaceutical and biotechnology companies to continue to spend on research and development and to outsource the services that we provide. We are therefore subject to risks, uncertainties and trends that affect companies in these industries. We have benefited to date from the tendency of pharmaceutical and biotechnology companies to outsource clinical research projects, but any downturn in these industries or reduction in spending or outsourcing could adversely affect our business. For example, if these companies expanded upon their in-house clinical or development capabilities, they would be less likely to utilize our services.
Because we depend on a small number of industries and clients for all of our business, the loss of business from a significant client could harm our business, revenue and financial condition.
The loss of, or a material reduction in the business of, a significant client could cause a substantial decrease in our revenue and adversely affect our business and financial condition, possibly materially. In Fiscal Years 2011, 2010, and 2009, our five largest clients accounted for approximately 35%, 27%, and 28% of our consolidated service revenue, respectively. In addition for the nine months ended March 31, 2012, our five largest clients accounted for approximately 39% of our consolidated service revenue. We expect that a small number of clients will continue to represent a significant part of our consolidated revenue. This concentration may increase as a result of the increasing number of strategic partnerships into which we have been entering with sponsors. Our contracts with these clients generally can be terminated on short notice. We have in the past experienced contract cancellations with significant clients.

31



In addition, the portion of our backlog that consists of large, multi-year awards from strategic partnerships has grown in recent years and this trend may continue in the future. A higher concentration of backlog from strategic partnerships may result in an imbalance across our project portfolio among projects in the start-up phase, which typically generate lower revenue, and projects in later stages, which typically generate higher revenue. This in turn may cause fluctuations in our revenue and profitability from period to period.
We face intense competition in many areas of our business; if we do not compete effectively, our business will be harmed.
The biopharmaceutical services industry is highly competitive and we face numerous competitors in many areas of our business. If we fail to compete effectively, we may lose clients, which would cause our business to suffer.
We primarily compete against in-house departments of pharmaceutical companies, other full service clinical research organizations (“CROs”), small specialty CROs, and, to a lesser extent, universities, teaching hospitals, and other site organizations. Some of the larger CROs against which we compete include Quintiles Transnational Corporation, Covance, Inc., Pharmaceutical Product Development Inc., and Icon plc. In addition, our PCMS business competes with a large and fragmented group of specialty service providers, including advertising/promotional companies, major consulting firms with pharmaceutical industry groups and smaller companies with pharmaceutical industry focus. Perceptive competes primarily with CROs, information technology companies and other software companies. Some of these competitors, including the in-house departments of pharmaceutical companies, have greater capital, technical and other resources than we have. In addition, our competitors that are smaller specialized companies may compete effectively against us because of their concentrated size and focus.
In recent years, a number of the large pharmaceutical companies have established formal or informal alliances with one or more CROs relating to the provision of services for multiple trials over extended time periods. Our success depends in part on successfully establishing and maintaining these relationships. If we fail to do so, our revenues and results of operations could be adversely affected, possibly materially.
If we do not keep pace with rapid technological changes, our products and services may become less competitive or obsolete, especially in our Perceptive business.
The biotechnology, pharmaceutical and medical device industries generally, and clinical research specifically, are subject to increasingly rapid technological changes. Our competitors or others might develop technologies, products or services that are more effective or commercially attractive than our current or future technologies, products or services, or render our technologies, products or services less competitive or obsolete. If our competitors introduce superior technologies, products or services and we cannot make enhancements to our technologies, products and services necessary to remain competitive, our competitive position would be harmed. If we are unable to compete successfully, we may lose clients or be unable to attract new clients, which could lead to a decrease in our revenue.

Risks Associated with Regulation or Legal Liabilities
If governmental regulation of the drug, medical device and biotechnology industry changes, the need for our services could decrease.
Governmental regulation of the drug, medical device and biotechnology product development process is complicated, extensive, and demanding. A large part of our business involves assisting pharmaceutical, biotechnology and medical device companies through the regulatory approval process. Changes in regulations that, for example, streamline procedures or relax approval standards, could eliminate or reduce the need for our services. If companies regulated by the United States Food and Drug Administration (the “FDA”) or similar foreign regulatory authorities needed fewer of our services, we would have fewer business opportunities and our revenues would decrease, possibly materially.
In the United States, the FDA and the Congress have attempted to streamline the regulatory process by providing for industry user fees that fund the hiring of additional reviewers and better management of the regulatory review process. In Europe, governmental authorities have approved common standards for clinical testing of new drugs throughout the European Union by adopting standards for Good Clinical Practices (“GCP”) and by making the clinical trial application and approval process more uniform across member states. The FDA has had GCP in place as a regulatory standard and requirement for new drug approval for many years and Japan adopted GCP in 1998.
The United States, Europe and Japan have also collaborated for over 15 years on the International Conference on Harmonisation (“ICH”), the purpose of which is to eliminate duplicative or conflicting regulations in the three regions. The ICH partners have agreed upon a common format (the Common Technical Document) for new drug marketing applications that reduces the need to tailor the format to each region. Such efforts and similar efforts in the future that streamline the regulatory process may reduce the demand for our services.
Parts of our PCMS business advise clients on how to satisfy regulatory standards for manufacturing and clinical processes and

32



on other matters related to the enforcement of government regulations by the FDA and other regulatory bodies. Any reduction in levels of review of manufacturing or clinical processes or levels of regulatory enforcement, generally, would result in fewer business opportunities for our business in this area.
If we fail to comply with existing regulations, our reputation and operating results would be harmed.
Our business is subject to numerous governmental regulations, primarily relating to worldwide pharmaceutical and medical device product development and regulatory approval and the conduct of clinical trials. In addition, we may be obligated to comply with regulations that apply to our clients, including, but not limited to, the Physician Payment Sunshine Act. If we fail to comply with these governmental regulations, non-compliance could result in the termination of our ongoing research, development or sales and marketing projects, or the disqualification of data for submission to regulatory authorities. We also could be barred from providing clinical trial services in the future or could be subjected to fines. Any of these consequences would harm our reputation, our prospects for future work and our operating results. In addition, we may have to repeat research or redo trials. If we are required to repeat research or redo trials, we may be contractually required to do so at no further cost to our clients, but at substantial cost to us.
We may lose business opportunities as a result of healthcare reform and the expansion of managed-care organizations.
Numerous governments, including the U.S. government, have undertaken efforts to control growing healthcare costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. In March 2010, the United States Congress enacted healthcare reform legislation intended over time to expand health insurance coverage and impose health industry cost containment measures. This legislation may significantly impact the pharmaceutical industry. The U.S. Congress has also considered and may adopt legislation that could have the effect of putting downward pressure on the prices that pharmaceutical and biotechnology companies can charge for prescription drugs. In addition, various state legislatures and European and Asian governments may consider various types of healthcare reform in order to control growing healthcare costs. We are presently uncertain as to the effects of the recently enacted legislation on our business and are unable to predict what legislative proposals will be adopted in the future, if any.
If these efforts are successful, drug, medical device and biotechnology companies may react by spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenue could decrease, possibly materially. In addition, new laws or regulations may create a risk of liability, increase our costs or limit our service offerings.
In addition to healthcare reform proposals, the expansion of managed-care organizations in the healthcare market and managed-care organizations’ efforts to cut costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenue could decrease, possibly materially.
We may have substantial exposure to payment of personal injury claims and may not have adequate insurance to cover such claims.
Our CRS business primarily involves the testing of experimental drugs and medical devices on consenting human volunteers pursuant to a study protocol. Clinical research involves a risk of liability for a number of reasons, including, but not limited to:
personal injury or death to patients who participate in the study or who use a product approved by regulatory authorities after the clinical research has concluded;
general risks associated with clinical pharmacology facilities, including professional malpractice of clinical pharmacology medical care providers; and
errors and omissions during a trial that may undermine the usefulness of a trial or data from the trial or study.
In order to mitigate the risk of liability, we seek to include indemnification provisions in our CRS contracts with clients and with investigators. However, we are not able to include indemnification provisions in all of our contracts. In addition, even if we are able to include an indemnification provision in our contracts, the indemnification provisions may not cover our exposure if:
we had to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; or
a client failed to indemnify us in accordance with the terms of an indemnification agreement because it did not have the financial ability to fulfill its indemnification obligation or for any other reason.
In addition, contractual indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct.

33



We also carry insurance to cover our risk of liability. However, our insurance is subject to deductibles and coverage limits and may not be adequate to cover claims. In addition, liability coverage is expensive. In the future, we may not be able to maintain or obtain the same levels of coverage on reasonable terms, at a reasonable cost, or in sufficient amounts to protect us against losses due to claims.
Existing and proposed laws and regulations regarding confidentiality of patients’ and other individuals’ personal information could result in increased risks of liability or increased cost to us or could limit our product and service offerings.
The confidentiality, security, use and disclosure of patient-specific information are subject to governmental regulation. Regulations to protect the safety and privacy of human subjects who participate in or whose data are used in clinical research generally require clinical investigators to obtain affirmative informed consent from identifiable research subjects before research is undertaken. Under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the U.S. Department of Health and Human Services has issued regulations mandating privacy and security protections for certain types of individually identifiable health information, or protected health information, when used or disclosed by health care providers and other HIPAA-covered entities or business associates that provide services to or perform functions on behalf of these covered entities. HIPAA regulations require individuals’ written authorization before identifiable health information may be used for research, in addition to any required informed consent. HIPAA regulations also specify standards for de-identifying health information so that information can be handled outside of the HIPAA requirements and for creating limited data sets that can be used for research purposes under less stringent HIPAA restrictions. The European Union and its member states, as well as other countries, such as Canada, Argentina, Japan and other Asian countries, and state governments in the United States, have adopted and continue to issue new medical privacy and general data protection laws and regulations. In those countries, collecting, processing, using and transferring an individual’s personal data is subject to specific requirements, such as obtaining explicit consent, processing the information for limited purposes and restrictions with respect to cross-border transfers. Many countries and almost all states in the United States have adopted stringent data security breach laws that require informing the affected individuals and the authorities of security breaches. In order to comply with these laws and regulations and corresponding contractual demands from our clients, we may need to implement new privacy and security measures, which may require us to make substantial expenditures or cause us to limit the products and services we offer. In addition, if we violate applicable laws, regulations, contractual commitments, or other duties relating to the use, privacy or security of health information, we could be subject to civil liability or criminal penalties and it may be necessary to modify our business practices.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, and delays in completing our internal controls and financial audits, could have a material adverse effect on our business and stock price.
If we fail to achieve and maintain effective internal controls, we will not be able to conclude that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Failure to achieve and maintain an effective internal control environment, and delays in completing our internal controls and financial audits, could cause investors to lose confidence in our reported financial information and us, which could result in a decline in the market price of our common stock, and cause us to fail to meet our reporting obligations in the future, which in turn could impact our ability to raise equity financing if needed in the future. Our Fiscal Year 2009 management assessment revealed a material weakness in our internal controls over financial reporting due to insufficient controls associated with accounting for the ClinPhone business combination, specifically the adoption by ClinPhone of an accounting policy for revenue recognition in accordance with U.S. GAAP for interactive voice response ("IVR") sales contracts with multiple revenue elements and the determination of the fair value of deferred revenue assumed in the business combination. We have changed our internal controls to address this material weakness, but we have not yet tested the effectiveness of our remediation since we have not completed any further acquisitions. There can be no assurance that our remediation will be successful. During the course of our continued testing, we also may identify other significant deficiencies or material weaknesses, in addition to the ones already identified, which we may not be able to remediate in a timely manner or at all.
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.
The U.S. Foreign Corrupt Practices Act (FCPA) and similar worldwide anti-corruption laws, including the U.K. Bribery Act of 2010, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in many parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, anti-corruption laws have appeared to conflict with local customs and practices. Despite our training and compliance programs, we cannot assure that our internal control policies and procedures always will protect us from reckless or criminal acts committed by persons associated with PAREXEL. Our continued global expansion, including in developing countries, could increase such risk in the future. Violations of these laws, or even allegations of such violations, could disrupt our business and result in a material adverse effect on our results of operations or financial condition.

34



Risks Associated with Leverage
Our indebtedness may limit cash flow available to invest in the ongoing needs of our business.
As of March 31, 2012, we had $229.2 million principal amount of debt outstanding and remaining borrowing availability of $167.0 million under our lines of credit. We may incur additional debt in the future. Our leverage could have significant adverse consequences, including:
requiring us to dedicate a substantial portion of any cash flow from operations to the payment of interest on, and principal of, our debt, which will reduce the amounts available to fund working capital and capital expenditures, and for other general corporate purposes;
increasing our vulnerability to general adverse economic and industry conditions;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
placing us at a competitive disadvantage compared to our competitors that have less debt.
Under the terms of our various credit facilities, interest rates are fixed based on market indices at the time of borrowing and, depending upon the interest mechanism selected by us, may float thereafter. Some of our other smaller credit facilities also bear interest at floating rates. As a result, the amount of interest payable by us on our borrowings may increase if market interest rates change.
We may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under our existing or any future debt. In addition, a failure to comply with the covenants under our existing debt instruments could result in an event of default under those instruments. In the event of an acceleration of amounts due under our debt instruments as a result of an event of default, we may not have sufficient funds or may be unable to arrange for additional financing to repay our indebtedness or to make any accelerated payments.
In addition, the terms of the 2011 Credit Agreement provide that upon the occurrence of a change in control, as defined in the credit facility agreement, all outstanding indebtedness under the facility would become due. This provision may delay or prevent a change in control that stockholders may consider desirable.
Our existing debt instruments contain covenants that limit our flexibility and prevent us from taking certain actions.
The agreements in connection with our 2011 Credit Agreement include a number of significant restrictive covenants. These covenants could adversely affect us by limiting our ability to plan for or react to market conditions, meet our capital needs and execute our business strategy. These covenants, among other things, limit our ability and the ability of our restricted subsidiaries to:
incur additional debt;
make certain investments;
enter into certain types of transactions with affiliates;
make specified restricted payments; and
sell certain assets or merge with or into other companies.
These covenants may limit our operating and financial flexibility and limit our ability to respond to changes in our business or competitive activities. Our failure to comply with these covenants could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their scheduled due date.

Risks Associated with our Common Stock
Our corporate governance structure, including provisions of our articles of organization, by-laws, shareholder rights plan, as well as Massachusetts law, may delay or prevent a change in control or management that stockholders may consider desirable.
Provisions of our articles of organization, by-laws and our shareholder rights plan, as well as provisions of Massachusetts law, may enable our management to resist acquisition of us by a third party, or may discourage a third party from acquiring us. These provisions include the following:
we have divided our board of directors into three classes that serve staggered three-year terms;
we are subject to Section 8.06 of the Massachusetts Business Corporation Law, which provides that directors may only be removed by stockholders for cause, vacancies in our board of directors may only be filled by a vote of our board of

35



directors, and the number of directors may be fixed only by our board of directors;
we are subject to Chapter 110F of the Massachusetts General Laws, which may limit the ability of some interested stockholders to engage in business combinations with us;
our stockholders are limited in their ability to call or introduce proposals at stockholder meetings; and
our shareholder rights plan would cause a proposed acquirer of 20% or more of our outstanding shares of common stock to suffer significant dilution.
These provisions could have the effect of delaying, deferring, or preventing a change in control of us or a change in our management that stockholders may consider favorable or beneficial. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our stock.
In addition, our board of directors may issue preferred stock in the future without stockholder approval. If our board of directors issues preferred stock, the rights of the holders of common stock would be subordinate to the rights of the holders of preferred stock. Our board of directors’ ability to issue the preferred stock could make it more difficult for a third party to acquire, or discourage a third party from acquiring, a majority of our stock.
Our stock price has been, and may in the future be volatile, which could lead to losses by investors.
The market price of our common stock has fluctuated widely in the past and may continue to do so in the future. On May 2, 2012, the closing sales price of our common stock on the Nasdaq Global Select Market was $25.43 per share. During the period from May 2, 2010 to May 2, 2012, our common stock traded at prices ranging from a high of $28.74 per share to a low of $15.26 per share. Investors in our common stock must be willing to bear the risk of such fluctuations in stock price and the risk that the value of an investment in our stock could decline.
Our stock price can be affected by quarter-to-quarter variations in a number of factors including, but not limited to:
operating results;
earnings estimates by analysts;
market conditions in our industry;
prospects of healthcare reform;
changes in government regulations;
general economic conditions, and
our effective income tax rate.
In addition, the stock market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may adversely affect the market price of our common stock. Although our common stock has traded in the past at a relatively high price-earnings multiple, due in part to analysts’ expectations of earnings growth, the price of the stock could quickly and substantially decline as a result of even a relatively small shortfall in earnings from, or a change in, analysts’ expectations.

ITEM 6. EXHIBITS
See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated by this reference.

36



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
 
 
 
 
 
 
PAREXEL International Corporation
 
 
 
 
 
 
 
 
Date:
May 10, 2012
 
By: /s/ Josef H. von Rickenbach
 
 
 
 
 
 
Josef H. von Rickenbach
 
 
 
Chairman of the Board and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
 
 
 
Date:
May 10, 2012
 
By: /s/ James F. Winschel, Jr.
 
 
 
 
 
 
 
James F. Winschel, Jr.
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
(Principal Financial Officer)

37



EXHIBIT INDEX
Exhibit
Number
 
Description
 
 
 
31.1
 
Principal executive officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Principal financial officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Principal executive officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Principal financial officer certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101.INS**
 
XBRL Instance Document
 
 
 
101.SCH**
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase
**    In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

38

XNAS:PRXL Quarterly Report 10-Q Filling

XNAS:PRXL Stock - Get Quarterly Report SEC Filing of XNAS:PRXL stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:PRXL Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:PRXL Insider Activity 4 Filing - 9/6/2012  |  Next: XNAS:PSBH Annual Report 10-K Filing - 6/30/2012