Executives
Jill Baker - Corporate Vice President of Investor Relation
Josef H. Von Rickenbach - Founder, Chairman and Chief Executive Officer
James F. Winschel - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer
Analysts
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Douglas D. Tsao - Barclays Capital, Research Division
Robert P. Jones - Goldman Sachs Group Inc., Research Division
David H. Windley - Jefferies LLC, Research Division
Evan A. Stover - Robert W. Baird & Co. Incorporated, Research Division
Todd Van Fleet - First Analysis Securities Corporation, Research Division
Roberto Fatta
Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division
PAREXEL International (PRXL) Q4 2013 Earnings Call August 8, 2013 10:00 AM ET
Operator
Good day, ladies and gentlemen, and welcome to the PAREXEL International Fourth Quarter and Fiscal Year 2013 Earnings Call. [Operator Instructions] I would like to hand the conference over to Jill Baker, Corporate Vice President of Investor Relations. Ma'am, please go ahead.
Jill Baker
Good morning, everyone. The purpose of this call is to review the financial results for PAREXEL's fourth quarter and fiscal year 2013. With me on the call in the room today is Josef Von Rickenbach, our Chairman and Chief Executive Officer; and James Winschel, Senior Vice President and Chief Financial Officer. Ingo Bank, who will be formally assuming CFO responsibilities on September 1 is also on the call, but he will not be a speaker today. He looks forward to speaking with you on the first quarter earnings call on October and to meeting with investors as we go forward.
We would like to begin by stating our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of the company's 10-Q report as filed with the Securities and Exchange Commission on May 6, 2013, and in our earnings press release issued yesterday.
In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. Therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.
During this call, we will refer to certain financial measures, which have not been prepared in accordance with Generally Accepted Accounting Principles. When discussing numbers or margins related to revenue, selling, general and administrative expenses, income from operations, income taxes, net income and earnings per share, we may refer to adjusted results.
These adjusted results may exclude the impact of unusual positive or negative items, including those related to foreign exchange, special charges, tax items and restructuring reserves and adjustments to those reserves. In each instance, a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures may be found in the press release, in the Additional Financials portion of the Investor Relations section of our website, or will be discussed during the course of this teleconference.
[Operator Instructions] I would now like to turn the call over to Mr. Von Rickenbach.
Josef H. Von Rickenbach
Thank you, Jill, and good morning, everyone. I'd like to start today by providing some commentary on our results for the fourth quarter and the fiscal year and then discuss our outlook for fiscal year 2014. Following that, Jim will provide more detailed information on the financials, and we will then open the call to questions.
Before I dive in, I'd like to pause a moment to thank Jim for his hard work over the past 13 years. He's done a great job for the company and has made many valuable contributions that have helped PAREXEL to grow and retain its role as a leader in the CRO industry. During Jim's tenure, the company's service revenue increased by $1.4 billion, backlog grew by over $4 billion and there has been an increase in the market capitalization of the company from $225 million to almost $3 billion.
On a personal note, I'd like to thank him for his leadership and counsel over the years. As you know, Jim will be moving on soon to the position of Executive Vice President and plans to retire in June 2014. I look forward to continuing to work with him in the interim.
Fiscal year 2013 was a very productive and successful year for the company. Many of our plans and investments came to fruition and our progress was well received by the market. We delivered strong growth in revenue and earnings per share and achieved an operating margin of 8%, up 120 basis points over fiscal year 2012. I'm very pleased with the progress we made in our business units and believe that we are well positioned for additional growth and improvements as we start a new fiscal year.
Speaking now to the results of the fourth quarter. Service revenue was $463.1 million compared with $392.6 million in the same quarter of the prior year, an increase of 18%. Excluding the negative impact from foreign exchange movements of $2.6 million in the current quarter, revenue increased 18.6%. Recent acquisitions contributed $12.7 million in revenue to the quarter's results. And on a same-store basis, revenue increased by 14.7%. On a constant currency, same-store basis, revenue increased 15.4% year-over-year. For the entire fiscal year, revenue was approximately $1.7 billion compared with $1.4 billion in fiscal year 2012, a year-over-year increase of 24%. Foreign exchange and M&A activities had a minimum impact on the growth rate.
With regard to client concentration, the largest client in the June quarter represented 17% of revenue as compared to 11% in the fourth quarter, 1 year ago. The top 5 clients represented 49% versus 45% and the top 20 clients were 80% as compared to 74%. For the full fiscal year, the top client was 17% of service revenue, up from 9% in fiscal year 2012. The top 5 represented 50%, up from 40% a year ago and the top 20 comprised 79% of the total as compared with 74%, 1 year ago.
As you may recall, given the increasing level of client concentration, which became evident 1 year ago, we intensified our efforts to further diversify our client base. We created our BioPharm unit, which focuses on meeting the needs of small and midsized clients. The amount of work that we have won from large biopharma companies in Strategic Partnerships continues to impact the client concentration numbers. However, we are pleased with the results of our diversification efforts with respect to small and midsized clients, and expect to remain competitive in this area of the market.
During the fourth quarter, Clinical Research Services or CRS, represented 74% of the company's total revenue, which was the same as in the prior year. PAREXEL Consulting and Medical Communication Services or PCMS, comprised 12% as compared to 13%, 1 year ago and Perceptive Informatics was approximately 14% of the total versus 13%, 1 year ago. The result for the full year had a similar split.
Now I'd like to make some comments about each of our businesses. In our CRS segment, gross margin in the fourth quarter improved 3.6 points year-over-year. Part of the improvement was achieved by continuing to replace high-cost contractors. We expect to achieve more progress in this regard and to reach our sustainable target by the end of the current calendar year. We also expect to see the continued benefits of ongoing improvement initiatives reflected in the CRS gross margin in the first quarter and beyond.
There are other opportunities for margin improvement for the business. For example, we are enhancing our resource allocations to improve project utilization. We are simplifying our processes with the goal to have fewer handoffs in order to improve productivity. And another initiative is focused on adding staff to lower-cost countries as appropriate.
On the recruitment, hiring and training front, we are now moving into a more steady-state mode. As our revenue growth rate normalizes, we expect the rate of hiring to decrease in fiscal year 2014, and for utilization to improve.
Moving to PCMS, the business had an outstanding year of progress and success with organic revenue growth of approximately 20% while maintaining a gross margin above 40%. We are continuing to identify new revenue growth opportunities for PCMS while maintaining our focus on profitability. The business had a leadership change during the fiscal year and we implemented our internal succession plan smoothly. The business is currently focused on integrating the acquisition of HERON and on deriving synergies by cross-selling services with recently acquired Liquent.
In Perceptive Informatics, our long-term strategy to provide a robust platform of technology products and services to our clients has continued to pay off. Under the new leadership, we have tightened the organizational structure and positioned the business more optimally for the future. Increasingly, technology is becoming a more integral part of clinical research and the tie-in with CRS is becoming closer. We will continue to ensure that we are deriving the highest possible value from our substantial investments in technology across the entire company. With regard to Liquent, results are ahead of our expectations thus far, and integration activities have progressed according to plan.
Moving on to new business dynamics. Backlog of $4.6 billion at the end of the fourth quarter was up 4.9% year-over-year and up 2.3% sequentially. The impact from foreign exchange was nominal in the quarter.
The majority of our business wins continue to be from Strategic Partnerships, but we did achieve solid double-digit growth in gross new business awards from the small and emerging Biopharma company segment, compared with the fourth quarter of last year. We continue to be pleased with our win rate.
The level of our pending proposals at the end of the quarter was up compared to a year ago, indicating that there continues to be a good amount of opportunity in the marketplace. We also received a healthy flow of new requests for proposals during the quarter.
Cancellations came in at 4.6% of the beginning backlog within our expected range. For the fiscal year overall, the quarterly average cancellation rate was just under 5%, which was at the high end of the expected range. The main reason for cancellations continues to be drug failures.
The resulting net book-to-bill ratio for the quarter was 1.21 and was 1.17 for the full year. Our target book-to-bill for fiscal year 2014 remains at 1.2 for the full year, bearing in mind normal quarterly fluctuations.
On the Strategic Partnership front, the model has proven to be successful. As a data point in this regard, 85% of client and non-client pharmaceutical executives that where interviewed in a recent survey said that they believe strategic partnerships have a positive impact on the client-CRO relationship. They identified the major beneficial impact of the partnership to be a reduction in the level of required client oversight, keeping a higher percentage of their costs variable, access to capabilities and expertise not found internally, improved global reach and accelerate time-to-market. Furthermore, 65% said that they believed that outsourcing would increase beyond current levels in the coming years. Overall, we are confident about renewals. We have a value-creation mindset from day one of the partnership, and as we build value over the duration of the partnership, the idea of renewal is not a surprise for either party.
Turning now to a couple of additional highlights of the fiscal year. We achieved a sharp reduction in DSO year-over-year. We succeeded in attaining DSO of 42 days at the end of the June quarter, down from 49 days in the June quarter of 2012. I'd like to thank our finance and operational teams for their hard work in realizing this goal. Our new target is to achieve DSO in the mid-30s.
The decline in DSO contributed to strong operating cash flow of $185 million for the full year. Free cash flow was $104 million in the fiscal year 2013 and our cash balance at the end of June totaled $276 million.
In another development, we entered into a note purchase agreement in late June with a select group of institutional investors for a private placement financing. PAREXEL has received gross proceeds of $100 million from the sale of the notes with a 7-year bullet maturity and a 3.11% coupon. Funding took place in late July. Our net debt position at the end of the year was $172 million, up $166 million from $6 million in June 2012.
The company's also made significant progress by returning value to our shareholders through a successfully completed stock buyback program, totaling nearly $200 million. We continued to evaluate our financial strategy on a regular basis.
Shifting now to our thoughts about the industry overall. The newest edition of the PAREXEL Pharmaceutical R&D Statistical Sourcebook was recently issued. In reviewing some of the highlights in the edition, I came away feeling more positive about the industry and the prospect for our clients. For example, the biopharma industry submitted applications for 35 new molecular entities to the FDA in calendar 2012, the most since 1998. We also observed that biotechnology-related projects comprised a higher share of the R&D pipeline, which now equates to 36% compared to 32% in 2010. We believe that this bodes well for the health of some of our small and midsized clients.
As we enter into our new fiscal year, I believe that we are well positioned to continue to deliver solid growth in revenue and earnings per share. Revenue growth drivers include anticipated increases in outsourcing penetration, our differentiated product offerings, the ability to leverage our thought leadership position to take additional market share and potential acquisition activity.
Profit drivers include a more normalized operating environment, improved resource management, process refinement and the achievement of further synergies amongst our businesses. I'm excited about fiscal year 2014 and remain confident in our ability to reap further benefits for our shareholders.
So at this point, I'd like to turn the call over to Jim, who will provide more detail on our financial results.
James F. Winschel
Thanks, Joe, and good morning, everyone. I'd like to start by making some additional comments regarding our 3 reporting segments beginning with CRS.
During the fourth quarter, CRS service revenue increased by 17.6% compared with the prior year quarter, driven by strength in all operating units. On a sequential basis, revenue increased slightly. Excluding the $2.4 million negative impact of foreign exchange, revenue would have been up 18.4% on a year-over-year basis. For full fiscal year, CRS revenue was up 25.5% compared with fiscal year 2012.
With respect to the September quarter, we expect revenue in CRS to be down slightly as a result of normal seasonality. CRS gross margin was 28.1% during the fourth quarter, up 3.6 points compared with the fourth quarter 1 year ago and up 0.2 of a point sequentially. The year-over-year improvement was primarily the result of increased productivity, a reduction in contract staff, lower hiring costs and the impact of other improvement initiatives. We expect CRS margins to continue to improve in the September quarter despite the impact of normal revenue seasonality. For the full year, CRS gross margin of 26.6% was down slightly, compared with fiscal year 2012. However, we have been trending in the right direction over the past 6 months.
In PCMS, quarterly service revenue was up 9.2% compared with the June quarter 1 year ago and up 7.3% sequentially. On a same-store basis, excluding $2.2 million in revenue from the HERON acquisition, revenue increased 4.8% year-over-year.
You may remember that in the fourth quarter of the prior year, we had an unusually strong revenue level because work on a couple of large projects have been accelerated into fiscal year 2012 at the request of 2 clients. The same-store revenue increase in the current quarter was driven by the consulting side of the business. And for the full fiscal year, PCMS revenue grew 21.2%.
For the fourth quarter, PCMS gross margin was 40.3%, down 1.6 points versus a year ago and up 0.4 of a point sequentially. The year-over-year decline was driven by a less favorable revenue mix and the impact of investments being made to drive future revenue growth. Looking forward, we expect PCMS revenue and margins to remain stable in the September quarter. Full year PCMS gross margin of 40.3% was down 1.3 points from a year ago, as a result of growth-related investment activity, as previously mentioned.
Quarterly service revenue in Perceptive Informatics increased 28.7% year-over-year in the quarter, and increased 6.4% on a sequential basis. Excluding the $10.5 million impact of Liquent, Perceptive revenue was up 8% year-over-year. For the full year, Perceptive service revenue grew by 19.8%. And excluding the $20.2 million impact of Liquent, revenue grew by 9.1%.
Perceptive's gross margin in the quarter was 45.8%, up 6.4 points, compared with the prior year and up 2.1 points sequentially. The improvement resulted primarily from the better revenue mix, including the impact of Liquent and substantial strength in Medical Imaging.
For the full fiscal year, Perceptive's gross margin at 43% was up 3.2 points. And looking forward to the September quarter, we expect a slight sequential decrease in Perceptive's service revenue and gross margin as a result of normal seasonality.
On an overall company basis, gross margin for the quarter was 32%, up 3.3 points from 1 year ago and up 0.6 of a point sequentially for the reasons previously mentioned. For the full fiscal year, gross margin at 30.4% was flat compared with last year, and looking ahead to the first quarter of fiscal year 2014, we expect gross margin to increase from Q4's level.
SG&A spending in the fourth quarter was 18.9% of revenue, up from 17.9% in the fourth quarter 1 year ago and down 0.2 of a point, sequentially. SG&A increased 24.2% on a year-over-year basis, driven by the acquisitions of Liquent and HERON, increased fixed and variable compensation expense and higher levels of other expenditures to support strong business growth. For the full fiscal year, SG&A was 18.1% of service revenue compared with 18.8% for fiscal year 2012. During the first quarter of fiscal year 2014, we expect SG&A as a percentage of service revenue to increase as a result of normal seasonality.
For the quarter, depreciation expense equated to 3.7% of service revenue, up from 3.4%, 1 year ago. And for the full year, depreciation was 3.6% of service revenue compared with 4.1% in fiscal year 2012.
Amortization expense was 0.9 of 1% of service revenue in the fourth quarter, compared with 0.6 of 1%, 1 year ago. And for the full year, amortization expense as a percent of service revenue was 0.6 of 1%, unchanged from 1 year ago, despite having completed 2 acquisitions during the year.
Operating margin in the fourth quarter was 8.6%, up 180 basis points from 1 year ago and up 0.4 of a point sequentially. For the full year, operating margin was 8% compared with 6.8%, 1 year ago, up 120 basis points.
Looking ahead, we expect operating margin to be in the 8.7% to 8.8% range in the September quarter and to be in the 9% to 9.4% range for fiscal year 2014. Operating margin would be up another 120 basis points from fiscal year 2013, assuming we achieve the midpoint of the full year range.
Other income totaled $400,000 in the quarter and consisted of foreign exchange gains, partly offset by net interest expense. For the full year, other expense was $3.3 million, consisting primarily of net interest expense, partly offset by foreign exchange gains.
In the first quarter of fiscal year 2014, we expect other expense to be in the $3 million range.
The company's fourth quarter adjusted tax rate of 27.6% compared with 24.7% in the fourth quarter of 2012. The year-over-year tax rate increase was a result of a less favorable mix of pretax profitability. For the full year, the adjusted tax rate was 25.9% compared with 24.8% in fiscal year 2012.
At this time, we are projecting a GAAP and adjusted tax rate of around 29% to 30% for the September quarter and for fiscal year 2014. There are several areas where we may have the opportunity to generate a lower rate, but timing is somewhat uncertain.
Net income for the quarter of $29 million was up 40.2% compared with net income of $20.7 million in the fourth quarter of fiscal year 2012. For the full fiscal year, net income increased by 51.9%. In the fourth quarter, diluted earnings per share came in at $0.50 versus $0.34 in the same period 1 year ago, an increase of 47.1%. And for the full fiscal year, EPS grew 53.6%.
Moving on to the balance sheet. Net receivables stood at $297 million at the end of June. Taking into account gross revenue of $648.9 million for the quarter, DSO was 42 days, a decrease of 7 days from the June quarter 1 year ago, but an increase of 6 days from the March quarter. The sequential increase was caused in part by the last 2 days of the quarter being nonbusiness days and timing of certain milestones.
With regards to cash flow, we started the quarter with $288.4 million in cash and marketable securities. During the quarter, cash flow generated by operations totaled $32.9 million. Other cash inflows included $47.9 million related to additional borrowings, $8.2 million in proceeds from the company's stock option and employee stock purchase programs and $1.1 million from other sources. Cash outflows, including $45.1 million related to purchases of the company's stock under our open market share repurchase program, $31 million for capital expenditures and $22.4 million for the acquisition of HERON.
Netting the inflows and outflows resulted in an overall decrease in cash and marketable securities of $8.5 million from the end of March, leaving us with a balance of $279.9 million for the end of June. Free cash flow totaled $104 million in fiscal year 2013 and is currently estimated to be in the range of $120 million to $135 million for fiscal year 2014. We expect capital expenditures in fiscal year 2014 to be in the $90 million to $95 million range and to be used primarily for hardware, software and capital costs related to expansion of facilities.
I'd now like to highlight some elements of the financial strategy, which we successfully executed during fiscal year 2013. In this regard, we have been effectively managing our borrowings as a part of our efforts to better leverage our balance sheet and reduce the company's cost of capital. These actions helped to fund PAREXEL's stock buyback program, complete the acquisitions of Liquent and HERON and enable us to appropriately invest in capital expenditures. The reduction in DSO helped to support the company's growth-related working capital needs.
Finally, and given that I will soon be passing the CFO baton to Ingo Bank, I would like to reiterate how proud I am to have played a part in PAREXEL's success over the past 13 years. We have had tremendous growth in revenue, backlog and market capitalization. But most importantly, we continue to be a trusted partner to our clients. I have enjoyed working with all of you in the investor and analyst communities over the years and in that connection, I am looking forward to taking on my new role and continuing to interact with all of you at conferences and on roadshows during the period leading up to my retirement.
Operator, at this point we are ready to begin the question-and-answer period.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from line of Tim Evans from Wells Fargo Securities.
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Jim, congratulations on a nice swan song here. Can you talk a little bit about the investments you're making in PCMS? I know you're talking about positioning it for growth and you talked about the margin there being a little bit under pressure from those investments. Just curious, kind of what you see going forward.
James F. Winschel
Yes, sure, Tim, and thanks. We've been doing things like adding some additional experts in various areas. And when they first come on, they're not necessarily generating the same level of revenue they will after they've been here for a short time. And in addition to that, we are working on expanding our market presence in a number of parts of the world and I think Turkey was one of the areas that we had highlighted recently. But we've also done a lot of that kind of work over in the Asia Pacific region.
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Okay, great. And maybe just a quick update on Phase I, as well as the logistics business.
Josef H. Von Rickenbach
Yes. Tim, this is Joe. So in Phase I, well first of all, I'd like to just make a general comment about Phase I, and that is as it relates to the company overall. Generally, we haven't had a lot of growth in recent times in Phase I. And with the overall growth of the company being so high, relatively speaking, the impact of Phase I, obviously, on Early Phase had shrunk further. And so it's a relatively small part of the overall mix of revenue at the current time. Having said that, it looks like the market has started to improve somewhat. We believe that Q2, the improved funding environment, especially for the small and emerging clients, there is a little bit more demand now from that segment and that's probably just enough to give us a little bit of hope for a better demand environment for both our [indiscernible]unit work and for inpatient work. And our proposal [ph] has actually been pretty strong, relatively speaking, always bearing in mind sort of the overall context and compared to prior quarters. As far as the logistics business is concerned, we are basically pleased with the performance of that business overall in the last year. Again, it's relatively small compared to everything else. But it's a promising kind of investment area for us right now, although nicely profitable and ensuring relatively high growth rates overall.
Operator
And our next question comes from the line of Douglas Tsao from Barclays.
Douglas D. Tsao - Barclays Capital, Research Division
Joe, just in terms of the uptick in demand that you just cited in the Phase I business in terms of proposals. Just curious, what type of clients are you seeing that? Is this from small biotechs? Is it from larger companies? Just curious, in terms of some of those underlying dynamics.
Josef H. Von Rickenbach
Okay, well, if we're focusing on that, I'd say there are basically 2 sources. One is that we have actually entered into partnerships in that area as well. So clearly, that is helping us. These partnerships can be with large pharma companies but also with smaller ones. But then, the small and emerging Biopharma client segment, what we call the SEBPCO segment, clearly has started to pick up a little bit. For a while after the financial crisis, funding for these companies was tough. And right now, I think we are starting to see a little bit of a result of the improved funding environment that has prevailed now over the last -- especially over the last year within all the number of IPOs that have happened and other funding that has flowed into the sector, that is starting to show up in Early Phase. A number of these clients, bear in mind, have pipelines that are relatively directed towards the early phases. And so it's really not a surprise that we see that.
Douglas D. Tsao - Barclays Capital, Research Division
Okay. And then in terms of the partnerships you just cited for the Phase I, are those generally part of your broader sort of enterprise clinical research Strategic Partnerships? And then also, in terms of the book-to-bill, it finished a little below your sort of long-term target of 1.2. Obviously, that's down from the level we saw in fiscal year 2012. Is it just a point of where your business is today and your mix for Strategic Partnerships there, that really, we should expect things not to sort of rebound back to the levels that we'd previously seen? And obviously, sort of understanding that like 1.8 from 2012 is an exception, but we've been seeing incomparably strong comps, sort of 1.3, being pretty consistent.
Josef H. Von Rickenbach
Okay, so just to finish out Early Phase, we have partnerships, corporate partnerships that include Early Phase, but we also have partnerships with clients that focus on Early Phase, not just to explain that. When it comes to the book-to-bill, I thought we had a pretty decent book-to-bill for the quarter, basically meeting our targets. Slightly below for the year but pretty much where we would expect the book-to-bill to be, long-term. Remember, we have been guiding to this now for a long time, many quarters. And partly, because our revenue level and the whole company is much larger. And so some of the new business successes that we have enjoyed, relatively speaking, meaning, relative to the revenue levels that we had 2 or 3 years ago, are probably not going to repeat. And so as the market and our performance normalizes, 1.2 is probably a more realistic expectation in terms of a net book-to-bill.
Operator
And our next question comes from the line of Robert Jones from Goldman Sachs.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Just a couple of -- and, Jim, just a couple of model questions actually. You talked about things and leverage on the gross profit line next year, with less hiring being one of the drivers. But as we look to the SG&A guidance for fiscal '14, it looks like it's calling for a good increase year-over-year, relative to what we saw in '13. I was just wondering if you could maybe elaborate on what's driving that.
James F. Winschel
Well, of course, we've gone through even a lot of changes during fiscal year '13. And if you remember in the first half of fiscal year 2013, we were actually seeing sequential declines in the gross margin within the CRS segment. And over the last 2 quarters, we started -- we've seen those numbers come back in the other direction. We're to a point where, with all of the huge number of employees that we had added, those people are becoming much more productive. We have plans to get the number of contractors, for example, in the organization, down to the targeted level by the end of December 2013. We have a number of systems that are going to come online, one in particular that's focused on helping us to better manage our resources. And you also have to remember that in calendar year 2012, with the Pfizer opportunity, not only were we winning new work from Pfizer to start from scratch, but we took in well over 100 projects that were transferred to us in midstream, which I think added to the degree of difficulty during that period. But these projects are now fully embedded into our company and things just tend to smooth out on that basis.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Okay, got it. So just a lot of moving pieces then, if we look at that 100-basis-point projected increase in SG&A as a percent of sales in '14 over '13 aside, it's not one major area that you'd point to?
James F. Winschel
No, not one major area.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
And then the other one, just, Jim, if I could. Below the line, obviously there's some pretty big swing factors there, but can you maybe just help us think about how we should be modeling other income as we move forward? Quite a bit different, relative to our model, at least this quarter. And I guess along the same lines, you touched on this a bit in your prepared comments, but the tax rate guidance seems to be several hundred basis points above kind of where you'd been trending for '14. Just wondering if there's any specific drivers that you're focused on that you think will drive that tax rate up into fiscal '14?
James F. Winschel
All right. Well, let's talk first about the other income expense line. The first thing that we know is we sort of start off each quarter with a little over $2 million of interest expense. And what we've seen over the last 2 or 3 quarters have been that foreign exchange gains have offset that interest expense, and so we've seen a better number. In my model, I'm actually modeling probably $1 million of foreign exchange losses right now. And I think we have a great hedging program in place and it's working, but I'm being somewhat conservative in that regard. With respect to the tax rate, over the last several years, we were able to take advantage of the fact that we had valuation reserves on the books related to net operating losses, for example. And over that last 3-year period where our tax rates have been very low, you remember, we were down in the mid-teens at one point and then had got back into the mid-20s right now. And also, in that process, we're using large amounts of foreign tax credit that was available to us. As we go forward though, we're going to see some shifts there. And I think we have an ability to maybe have a sustainable tax rate that's somewhere in the 25% to 30% range. But there are certain changes that we're going to need to make now to the organization, as we've come to sort of the end of some of the valuation reserve reversal opportunities that we had. And for me, the timing of when will those things will get in place and when they'll take effect is uncertain. And I did, at the investor day, I was forecasting a tax rate of about 30%. I hedged it down to 29.5% in the go-forward, for fiscal year 2014. And that, on a whole-year basis, is worth about $0.01 per share.
Operator
And our next question comes from the line of Dave Windley from Jefferies.
David H. Windley - Jefferies LLC, Research Division
Joe, on the strategic deal landscape and outlook. For a couple of years, the company signed and was able to announce a really impressive list of strategic deals in fairly rapid succession. And I think you've talked about maybe half of the opportunities have been captured and still half of the opportunities are out there. I wondered if you could comment on the nature and pace of conversations that are ongoing with potential clients that haven't entered into strategic types of relationships. And is there -- should we expect the pace to be slower now because maybe the folks who are really amenable to that type of deal have already done it and the folks that remain are a little more cautious about entering into that type of relationship? Maybe you could give us some color on that.
Josef H. Von Rickenbach
Sure, Dave. Yes, so basically, you stated sort of our position well, and we are basically still observing that. So we have seen, if you want, the cohort of early adopters that have come into this model. And by the way, they tend to be more located in the U.S. and so pretty much that pace, if you want, is probably over. There have been some decisions this year also, and we're continuing to do well with that now. There is probably another -- fair number of companies that are looking at this model and are sort of thinking about it. But I think they also want to start to see some evidence from the early adopters that this actually works and that they are successful. And you may remember it in my comments, I actually quoted a survey that we conducted that basically went to the core of this question with clients. Is this working? Do they see the benefits? Are they happy with their decisions? And broadly speaking, I think the result of the survey endorsed our view that this is a mutually rewarding and probably better model going forward. And so I am fairly confident that eventually, this will show in the results of these companies also. Meaning, when we say strategic, it's not only strategic to us, it's also strategic to the client. And as a result, they will start to see benefits that are tangible as well in their productivity, in their costs. And I think, as that starts to become more evident, some of the folks who are currently on the sidelines but certainly interested and currently discussing the opportunities, will start to jump in as well.
David H. Windley - Jefferies LLC, Research Division
That's very helpful. So then, maybe slightly switching gears. Jim, on staffing, you mentioned to an earlier question reducing contractors might help out a little bit. I didn't hear if you said a number. I wondered if you provided a number, if you could. And then perhaps, I know that you're not -- I believe you're not including contractors in the full-time employee numbers that you put in the press release. And maybe you could help us to understand kind of the net change, how many new hires you had but how many of those replaced contractors in the quarter?
James F. Winschel
Well, we haven't actually quantified the number of contractors. What we did say today, however, is that we expect that by the end of December, that the contractor level would be at target. So the -- from that perspective, that's the best I can do for you right now. And in terms of overall headcount, I think it's important to remember that while our headcount, overall headcount went up about 400 people, net people this quarter, 140 of those came from the acquisition of HERON. And so we're sort of at a more normalized growth rate there. And I think we'll continue to see progress on the contractor front as we go forward as well. But those, then, will become full-time employees. So some portion of the 290-or-so, or 280 people that we added during the last quarter, were also replacing contractors.
David H. Windley - Jefferies LLC, Research Division
Okay. And is it possible, then, to quantify, if not quantify the number of contractors that you are reducing or has targeting to get to, is it possible to quantify, say, the basis points of impact to margin that getting to that target by the end of the year will deliver?
James F. Winschel
Well, so if you think about the guidance that we have provided today, we indicated that our operating margin was going to be in the 9% to 9.4% range. You take the midpoint there of 9.2% and look at where we finished fiscal year 2013 at 8%, that we've consistently been talking about it, 120-basis-point improvement in operating margins, and that's where we would expect to be. And a good chunk of that will come from gross margin improvement, including in the Clinical Research Services business.
Josef H. Von Rickenbach
But David, I just want to add to that. Don't forget, there is a whole list of initiatives in addition to the contracts that we are pursuing. And it's really important to bear in mind that we have diligence and a focus on them as well. And so, yes, we are talking about the contractors and obviously, Jim gave you some detail there. But these other initiatives are also very important and maybe long term, even more important, because they are really fundamentally taking and improving the business for the long run. Such as for instance, certain process refinements, which I mentioned, and other initiatives that we have going on.
Operator
Our next question comes from the line of Evan Stover from Robert W. Baird.
Evan A. Stover - Robert W. Baird & Co. Incorporated, Research Division
I wanted to parse out some of the changes in guidance from the investor day a couple of months ago. You obviously moved up the range a little bit. As I look at it, revenue up a little bit more from where you were, but not really materially so. So I look at it a little bit upside in tax rate, and maybe $0.01 or $0.02. So I'm just trying to get a better idea. Is it the productivity and contractor staffing utilization is kind of a little bit ahead of schedule and so maybe the guidance raise is half tax rate, half a little bit more confident in getting to the upper end of your up margin assumptions? If you could just provide a little bit more color there, that would be helpful.
James F. Winschel
Right. So, yes, we did take the revenue up $5 million at each end of the range, and so that accounts for some of the improvement here for sure. But in addition to that, I want to make sure that people heard what I said. We're indicating that the margin, for example, in the CRS segment, is going to, we believe, increase from the fourth quarter level to the first quarter level. And in the 13 years that I've been here, that's a sort of an unusual event. Usually, we have a seasonal decline there. So I think that's another great indication of the kind of improvements that we're making, and we're doing things operationally that are driving better productivity. And this is, other than the $0.01 on the tax rate line, is driving the increase, which, by the way, I mean, we were only a 1.5 months ago or 5 weeks ago or so that we had the investor day. So the signals, I think, are pretty good that we're giving here with respect to the improvement in margins in the CRS business.
Evan A. Stover - Robert W. Baird & Co. Incorporated, Research Division
All right, that's helpful. And kind of a small one. If I look at revenue from your largest client in the quarter, it looks like it ticked down about $12 million sequentially. I'm just trying to get a better handle if there was something in 3Q that was maybe driving that number to be a little bit higher. And we should think of it growing from the 4Q level? Or if there was just something seasonal in this quarter with that client. Any help there?
Josef H. Von Rickenbach
Yes, Evan, this is Joe. You're right, it did tick down a little bit from the prior quarter, and it probably is not going to come back up again. And I would expect that this may have to do with the transfer of studies that Jim mentioned before that are now working through the system. And we are now, basically moving into the next phase there, where -- which will behave more normally in the sense that new awards will start at the beginning, if you want, and are not come -- the instream studies that we had and that had a very rapid increase in revenue, are basically moving towards the maturity, as far as project completion is concerned.
Evan A. Stover - Robert W. Baird & Co. Incorporated, Research Division
All right. One final question. Capital deployment strategy. You're done with the share repurchase program. The $120 million to $130 million free cash flow guidance. I mean, I know there's potential for M&A, but if I look at what you've done recently, that won't account for all of it. What's the balance? Is it a mix? Is there more room for share repurchase potentially delevering a little bit? What are your thoughts there?
James F. Winschel
Well, we go through more or less, an ongoing review of our financial strategies, and you're correct that we should see a bit more, we think, a continuing trend to do more in the way of acquisitions. But there have been no other decisions made, for example, with respect to stock buyback at this time. And everybody on the phone will be the first to know when, if we change any of those decisions or make any new decisions.
Operator
And our next question comes from the line of Todd Van Fleet from First Analysis.
Todd Van Fleet - First Analysis Securities Corporation, Research Division
Wanted to dig into Perceptive a little bit to the extent you'll allow us. The -- where are we at about margin for that business these days? And how far are we from where you think the margin could get to?
Josef H. Von Rickenbach
Todd, this is Joe. Yes, so if we look at the performance of the Perceptive business in this past fiscal year that we've seen, again, in the course of the year, overall compared to the prior year, a fairly significant improvement in its operating margin performance. And we still expect that to continue into the new fiscal year. And of course, that will show itself also in the gross margin. And so generally, as a trend, we would expect a continuing upward trend in the gross margin. Maybe not every quarter, it may tick up and down a little bit, seasonality maybe a factor and so on. But the broad trend and outlook continue to be up for a variety of reasons, not the least of which is just scale, which has probably been an important reason why we have not been actually more profitable in the past. But we are clearly now entering the stage where we will be at scale, are at scale. And so that alone will drive better operating margin performance.
Todd Van Fleet - First Analysis Securities Corporation, Research Division
So Joe, are we 1,000 or are we 1,500 basis points away from ultimately where you think that business should be operating kind of year-over-year marginalized?
James F. Winschel
Yes, Todd, this is Jim. Our targets at this time, are to get that business up into the low 50s, as far as the gross margin is concerned. But it will be a steady march rather than -- we might have an occasional quarter where there's a nicer jump and maybe even -- it won't always be a, I guess, a straight line to the top. But as Joe said, the general trend will be for that business to improve its profitability.
Todd Van Fleet - First Analysis Securities Corporation, Research Division
Yes, and in addition to the gross margin improvement then, Jim, it will -- we'll presumably see, or you'll see leverage below the gross margin line as the business continues to scale?
James F. Winschel
Yes. And so I think that's the point that Joe made with regard to the scale of the business.
Operator
And our next question comes from the line of John Kreger from William Blair.
Roberto Fatta
This is Robbie Fatta in for John today. You guys mentioned earlier that the transactional bookings were pretty good this quarter. And at least according to our data, biotech funding was pretty strong this quarter. And you had mentioned that your small clients were doing pretty well. Historically, what is the tale on bookings trends after a couple of good quarters of biotech funding?
Josef H. Von Rickenbach
Robin (sic) [Robbie], you can't really look at it that way. I think it's driven more by fundamentals versus just kind of a chart being kind of a situation. So as of right now, I think, by the way, not surprisingly, we indicated, I think, 2 or 3 quarters ago that generally, the market feels a little better. People have a little bit more of a bounce in their step overall and feel better about investing in the sector. Don't forget, we have had a record number of approvals last year. But we also, and in addition, had a record number of new submissions. And obviously, many investors in the biopharma space into small companies, have had a long period where there has been little payback, tangible payback. But I think given that we have started to see this more now, I would expect that we might see a period, and that period could be relatively long, of improved fund flow. And by the way, you're right, we have observed the same thing, that fund flow in the sector was up again compared to the prior quarter. And year-to-date, it is also up from the prior year.
Roberto Fatta
Great, that's helpful. And then secondly, just on your M&A comments, what are your expectations for the areas to enter? Are there specific holes in your portfolio that you're looking to fill at this point?
Josef H. Von Rickenbach
Yes, so first of all, I'd say to that, that we're very pleased with the acquisitions that we have made. And are, so far in the most recent era of M&A at PAREXEL, both companies are doing well and are meeting our expectations in terms of integration and overall performance. I'd also say that generally the M&A environment is relatively good for a company like ours. And we have specific areas and conditions that we feel the companies need to meet in order to be attractive to us. Most importantly, they have to fit into our strategy. Once again, generally, we are targeting companies that are kind of more attractive from a strategic point of view, versus from a mass point of view. But having said that, we're also, to some extent, opportunistic. And if a great deal came our way, obviously, we'll look at it.
And so specifics could be in the technology area where, as you know, we've just made an acquisition with Liquent. There is more opportunity there. Specific expertise, very similar, let's say, to HERON. It could be another target. Jim mentioned geography before, that could be potentially a target. Although we feel our footprint is strong and pretty much covers the areas where we want to be, but there are still, also, a few opportunities. So that's just a little bit of an overview of where we're looking. But generally, deal flow is pretty good and high quality.
Operator
And our next question comes from the line of Greg Bolan from Sterne Agee.
Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division
So, Jim, getting to the questions around kind of utilization within CRS of bill left to ease, where do you think you guys are at, at this point? Are you somewhere around 80% to 85%? Or maybe give us a little bit of color on where you think you are in terms of scale in the CRS business.
James F. Winschel
Well, if you sort of look at historically, where that business has been and where we're at right now, I think we believe we still have quite a bit of opportunity to get to improvements. And in our view, eventually, to get to back to the historical levels.
Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division
Okay, that's helpful. And then one just clarification on Early Phase questions earlier. Is it fair to assume that Early Phase is around 3% of revenues at this point, Jim?
James F. Winschel
Well, we haven't -- have never broken out either the Phase I business or the Phase IV business within the organization. But what is pretty clear, it should be clear to everybody, of course, is that Phase III trials are the big trials, the multiple-year trials and everything. And so, a large amount of the work that we're doing there is certainly Phase II III work. But we have nicely sized and nicely growing Phase I and Phase IV businesses.
Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division
Okay. And then just the last question. The swing in FX this quarter, just getting back to the questions around SG&A. What was the FX impact this quarter? Was it a headwind or tailwind to operating margin?
James F. Winschel
We had a tailwind with respect to operating income that was north of $3 million and more heavily located in the Asia Pacific region.
Operator
And that concludes our question-and-answer session today. I'd like to turn the conference back over to Mr. Von Rickenbach for concluding remarks.
Josef H. Von Rickenbach
Okay, thanks, Connie. And I'd like to thank everyone for your questions and your interest in PAREXEL. And we are looking forward to updating you on our next phone call. Bye-bye.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.
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