FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a - 16 under
the Securities Exchange Act of 1934
For the quarterly period ended February 28, 2005
ICON plc
(Registrant's name)
0-29714
(Commission file number)
South County Business Park, Leopardstown, Dublin 18, Ireland.
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Yes___X___ No_______
Indicate by check mark whether the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1):
Yes______ No___X___
Indicate by check mark whether the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7):
Yes______ No___X___
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes_______ No___X___
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):82 N/A
ICON plc
Quarterly Period Ended February 28, 2005
CONTENTS Page
General.............................................................. 1
Condensed Consolidated Balance Sheets as at
February 28, 2005 and May 31, 2004................................... 2
Condensed Consolidated Statements of Operations for the
three and nine months ended February 28, 2005 and
February 29, 2004.................................................... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended February 28, 2005 and February 29, 2004............ 4
Condensed Consolidated Statements of Shareholders' Equity
and Comprehensive Income............................................. 5
Notes to the Condensed Consolidated Financial
Statements........................................................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 12
Signature Page....................................................... 20
ICON plc
GENERAL
As used herein, "ICON", the "Company" and "we" refer to ICON plc and its
consolidated subsidiaries, unless the context requires otherwise.
Business
We are a contract research organization, or CRO, providing clinical research and
development services on a global basis to the pharmaceutical, biotechnology and
medical device industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase I - IV
clinical trials management, study design, laboratory services and drug
development support. We believe that we are one of a select group of CROs with
the capability and expertise to conduct clinical trials in most major
therapeutic areas on a global basis. We have approximately 2,650 employees
worldwide, with operations in 37 locations in 23 countries, including the United
States and major markets in Europe and Rest of World and have managed clinical
trials in over 55 countries. For the nine months ended February 28, 2005, we
derived approximately 58.3%, 36.1%, and 5.6% of our net revenue in the United
States, Europe and Rest of World, respectively.
Headquartered in Dublin, Ireland, we began operations in 1990 and have expanded
our business through internal growth and strategic acquisitions.
On July 1, 2004 we acquired 70% of the common stock of Beacon Biosciences, Inc.,
a leading specialist CRO, which provides a range of medical imaging services to
the pharmaceutical, biotechnology and medical device industries.
On December 1, 2004, we acquired the workforce of Biomines Research Solutions
Private Limited, ("Biomines"), based in Chennai, India. Biomines are engaged in
the business of clinical trial data management and statistical analysis
services.
1
ICON plc
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT FEBRUARY 28, 2005 AND MAY 31, 2004
(Unaudited) (Audited)
February 28, 2005 May 31, 2004
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $41,897 $55,678
Short term investments - available for sale .................................... 29,045 23,085
Accounts receivable............................................................. 81,816 74,079
Unbilled revenue................................................................ 82,720 59,861
Other receivables............................................................... 6,451 4,306
Deferred tax asset.............................................................. 2,409 1,684
Prepayments and other current assets............................................ 9,086 9,468
------------- -------------
Total current assets............................................................ 253,424 228,161
Other Assets:
Property, plant and equipment, net.............................................. 44,838 42,936
Goodwill........................................................................ 67,440 64,226
Intangible asset................................................................ 219 -
------------- -------------
Total Assets.......................................................................... $365,921 $335,323
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $6,472 $12,801
Payments on account............................................................. 81,266 61,960
Other liabilities............................................................... 34,578 35,091
Income taxes payable............................................................ 7,362 4,496
------------- -------------
Total current liabilities...................................................... 129,678 114,348
Other Liabilities:
Long term government grants..................................................... 1,385 1,411
Long term finance leases........................................................ 370 167
Non-current deferred tax liability.............................................. 2,637 2,637
Minority interest............................................................... 800 -
Shareholders' Equity:
Ordinary Shares, par value 6 euro cents per share; 20,000,000 shares
authorized, 13,878,426 shares issued and outstanding at February 28, 2005
and 13,838,476 shares issued and outstanding at May 31, 2004 ................... 983 980
Additional paid-in capital...................................................... 113,773 112,936
Accumulated other comprehensive income.......................................... 15,839 9,984
Merger reserve.................................................................. 47 47
Retained earnings............................................................... 100,409 92,813
------------- -------------
Total Shareholders' Equity............................................................ 231,051 216,760
------------- -------------
Total Liabilities and Shareholders' Equity............................................ $365,921 $335,323
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
(UNAUDITED)
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands except share and per share data)
Revenue:
Gross revenue........................................ $113,341 $112,831 $347,604 $332,181
Subcontractor costs.................................. (30,486) (35,969) (106,915) (113,177)
-------------- --------------- -------------- ------------
Net revenue.......................................... 82,855 76,862 240,689 219,004
Costs and expenses:
Direct costs......................................... 46,008 42,502 132,132 120,271
Selling, general and administrative expense.......... 27,385 22,708 76,244 65,774
Depreciation and amortization ....................... 3,424 2,894 9,782 8,215
Other charges ....................................... 11,275 - 11,275 -
-------------- --------------- -------------- ------------
Total costs and expenses............................. 88,092 68,104 229,433 194,260
-------------- --------------- -------------- ------------
Income from operations.................................. (5,237) 8,758 11,256 24,744
Interest income......................................... 309 163 776 333
Interest expense........................................ (54) (88) (178) (136)
-------------- --------------- -------------- ------------
Income before provision for income taxes................ (4,982) 8,833 11,854 24,941
Provision for income taxes.............................. (521) (2,182) (4,153) (6,421)
Minority interest....................................... (25) - (105) -
-------------- --------------- -------------- ------------
Net income.............................................. ($5,528) $6,651 $7,596 $18,520
============== =============== ============== ============
Net income per Ordinary Share:
Basic................................................ ($0.40) $0.49 $0.55 $1.45
============== =============== ============== ============
Diluted............................................. ($0.39) $0.47 $0.54 $1.39
============== =============== ============== ============
Weighted average number of Ordinary Shares outstanding:
Basic.............................................. 13,866,236 13,622,514 13,847,197 12,797,089
============== =============== ============== =============
Diluted............................................ 14,077,910 14,070,194 14,101,975 13,288,688
============== =============== ============== =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
(UNAUDITED)
Nine months Ended
February 28 February 29
2005 2004
(in thousands)
Cash flows from operating activities:
Net income................................................ $7,596 $18,520
Adjustments to reconcile net income to net cash provided
by operating activities:.................................
Loss on disposal of fixed assets....................... 121 -
Depreciation and amortization.......................... 9,782 8,215
Amortization of grants................................. (150) (26)
Minority interest.................................... 105 -
Other charges........................................ 11,275 -
Changes in assets and liabilities:
(Increase)/decrease in accounts receivable............. (4,786) 4,710
Increase in unbilled revenue........................... (22,758) (11,803)
Decrease in other receivables.......................... 4,924 2,184
Increase in prepayments and other current assets....... (837) (743)
Increase in payments on account........................ 19,230 12,236
Decrease in other liabilities.......................... (8,781) (3,710)
Increase in income taxes payable....................... 1,517 5,673
Decrease in accounts payable.......................... (6,631) (4,445)
----------------- ---------------
Net cash provided by operating activities................. 10,607 30,811
Cash flows from investing activities:
Purchase of property, plant and equipment.............. (10,284) (9,697)
Purchase of short term investments..................... (5,960) -
Purchase of intangible asset........................... (250) -
Purchase of subsidiary undertakings and
acquisition costs...................................... (10,052) (11,180)
Net cash acquired with subsidiary undertakings......... 1,658 891
Payments in respect of prior year acquisitions......... (1,134) (1,588)
----------------- ---------------
Net cash used in investing activities..................... (26,022) (21,574)
Cash flows from financing activities:
Repayment of bank overdraft............................... - (7,126)
Proceeds from issuance of share capital................... - 45,705
Proceeds from exercise of share options................... 899 3,696
Share issuance costs...................................... (59) (1,178)
Costs in relation to prior year share issuance............ (137) -
Repayment of other liabilities............................ (151) (162)
----------------- ---------------
Net cash provided by financing activities................. 552 40,935
Effect of exchange rate movements on cash................. 1,082 (1,369)
----------------- ---------------
Net (decrease)/increase in cash and cash equivalents...... (13,781) 48,803
Cash and cash equivalents at beginning of period.......... 55,678 18,311
----------------- ---------------
Cash and cash equivalents at end of period................ $41,897 $67,114
================= ===============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
Accumulated
Additional Other
Paid-in Comprehensive Retained Merger
Shares Amount Capital Income Earnings Reserve Total
(dollars in thousands, except share data)
Balance at May 31, 2004............ 13,838,476 $980 $112,936 $9,984 $92,813 $47 $216,760
Comprehensive Income:
Net income....................... - - - - 7,596 - 7,596
Currency translation adjustment.. - - - 5,855 - - 5,855
--------
Total comprehensive income....... 13,451
Exercise of Share Options........ 39,950 3 896 - - - 899
Share Issuance Costs............. - - (59) - - - (59)
---------- ----- --------- ------- -------- ---- --------
Balance at February 28, 2005 13,878,426 $983 $113,773 $15,839 $100,409 $47 $231,051
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ICON plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
FEBRUARY 28, 2005
1. Basis of Presentation
These condensed consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting principles ("US
GAAP"), have not been audited. The condensed consolidated financial statements
reflect all adjustments, which are, in the opinion of management, necessary to
present a fair statement of the operating results and financial position for the
periods presented. The preparation of the condensed consolidated financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect reported amounts and disclosures in the condensed
consolidated financial statements. Actual results could differ from those
estimates. There has been no significant change in ICON plc's accounting
policies from those outlined in ICON's annual report on Form 20-F for the year
ended May 31, 2004, except as described below.
Certain information and footnote disclosure normally included in financial
statements prepared in accordance with the United States generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The condensed
consolidated financial statements should be read in conjunction with the
accounting policies and notes to the consolidated financial statements included
in ICON's 2004 annual report on Form 20-F. Operating results for the nine months
ended February 28, 2005 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 2005.
2. Acquisitions
Acquisition of Beacon
On July 1, 2004, the Company acquired 70% of the common stock of Beacon
Biosciences, Inc. ("Beacon"), based in Pennsylvania, USA, for an initial cash
consideration of U.S.$9.9 million, excluding costs of acquisition.
The acquisition of Beacon has been accounted for as a purchase in accordance
with SFAS No. 141, "Business Combinations". The following table summarises the
fair values of the assets acquired and the liabilities assumed at the date of
acquisition.
At July 1,
2004
(in thousands)
Property, Plant and Equipment $792
Goodwill 8,463
Cash 1,658
Other Current Assets 935
Current liabilities (926)
Long term liability (352)
----------------
10,570
Minority Interest (695)
---------------------------------------------- ----------------
Purchase Price $9,875
---------------------------------------------- ----------------
The results of Beacon have been included in the consolidated financial
statements from July 1, 2004.
6
Prior Period Acquisitions
On January 24, 2003, the Company acquired 100% of the outstanding shares of
Medeval Group Limited ("Medeval"), a company based in Manchester, England, for
an initial cash consideration of Stg(pound)9.5 million (U.S.$15.5 million),
excluding costs of acquisition. Earn-out provisions were built into the
acquisition contract requiring the potential payment of additional deferred
consideration up to a maximum of Stg(pound)4.3 million (U.S.$6.9 million)
depending on the performance of Medeval over the period to May 31, 2004. Such
additional consideration is accounted for as goodwill.
On September 30, 2004, cash consideration of Stg(pound)0.54 million (U.S.$0.97
million) was paid to a number of the former shareholders of Medeval plus
guaranteed loan notes with a value of Stg(pound)1.08million (U.S.$1.93 million)
were issued to the remaining selling shareholders. At May 31, 2004,
Stg(pound)1.37 million (U.S.$2.5 million) of this amount had been provided,
therefore an additional Stg(pound)0.253 million (U.S.$0.452 million) has been
accounted for under goodwill in the current year. These guaranteed loan notes
have a repayment date of 3 years from the date of issue but are exercisable nine
months from the date of issue.
On September 9, 2003, the Company acquired 100% of the outstanding shares of
Globomax LLC ("Globomax"), based in Maryland, USA, for an initial cash
consideration of U.S.$10.9 million, excluding costs of acquisition. Earn-out
provisions were been built into the acquisition contract requiring the potential
payment of additional deferred consideration up to a maximum of U.S.$4.0 million
depending on the performance of Globomax over the period from date of
acquisition to May 31, 2006. Such additional consideration will be accounted for
as goodwill.
The pro forma effect of the Globomax and Beacon acquisitions if completed on
June 1, 2003 would have resulted in net revenue, net income and earnings per
share for the three and nine months ended February 28, 2005 and 2004 as follows:
Three months ended Nine months ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Net Revenue $82,855 $78,017 $241,071 $225,506
Net Income ($5,528) $6,641 $7,549 $18,927
Basic Earnings per Share ($0.40) $0.49 $0.55 $1.48
Diluted Earnings Per Share ($0.39) $0.47 $0.54 $1.42
An effective tax rate of 35.0% was imputed on the profits before tax of Globomax
for the periods prior to acquisition.
3. Goodwill
Nine months ended Year ended
February 28 May 31
2005 2004
(in thousands) (in thousands)
Opening balance $64,226 $45,029
Arising during the year 8,463 13,134
Arising on earn-out
(prior year acquisitions) 452 3,215
Goodwill impairment (7,017) -
Foreign exchange movement 1,316 2,848
--------------------------------------------------- -------------------
Closing balance $67,440 $64,226
=================================================== ===================
7
The distribution of goodwill by business segment was as follows:
Nine months ended Year ended
February 28 May 31
2005 2004
(in thousands) (in thousands)
Central laboratory $- $7,017
Clinical research 67,440 57,209
--------------------------------------------------- --------------------
Total $67,440 $64,226
--------------------------------------------------- --------------------
4. Intangible assets
On December 1, 2004, the Company acquired the workforce of Biomines Research
Solutions Private Limited, ("Biomines"), based in Chennai, India, for a cash
consideration of U.S.$250,000.
The acquisition of the workforce of Biomines has been accounted for in
accordance with SFAS No. 141, "Business Combinations".
At December 1,
2004
(in thousands)
Acquired workforce - intangible asset $250
---------------------------------------------- ------------------
Purchase Price $250
---------------------------------------------- ------------------
The cost of the acquired workforce is being amortized over the 24 months in line
with the life of the non-compete service contracts of the acquired employees.
$31,000 has been amortized in the period since the date of acquisition.
At February 28,
2005
(in thousands)
Cost $250
Amortization in the period (31)
-------------------------------------------- ------------------
Net book value $219
-------------------------------------------- ------------------
5. Net income per Ordinary Share
Basic net income per Ordinary Share has been computed by dividing net income
available to ordinary shareholders by the weighted average number of Ordinary
Shares outstanding during the period. Diluted net income per Ordinary Share is
computed by adjusting the weighted average number of Ordinary Shares outstanding
during the period for all potentially dilutive Ordinary Shares outstanding
during the period and adjusting net income for any changes in income or loss
that would result from the conversion of such potential Ordinary Shares.
8
There is no difference in net income used for basic and diluted net income per
Ordinary Share. The reconciliation of the number of shares used in the
computation of basic and diluted net income per Ordinary Share is as follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
Weighted average number of Ordinary Shares
outstanding for basic net income per Ordinary Share 13,866,236 13,622,514 13,847,197 12,797,089
Effect of dilutive share options outstanding 211,674 447,680 254,778 491,599
--------------- --------------- ---------------- ----------------
Weighted average number of Ordinary Shares for
diluted net income per Ordinary Share 14,077,910 14,070,194 14,101,975 13,288,688
=============== =============== ================ ================
6. Business Segment Information
The Company's areas of operation outside of Ireland principally include the
United Kingdom, United States, Germany, Australia, Argentina, France, Japan,
Israel, Singapore, Canada, Sweden, The Netherlands, Latvia, Russia, Taiwan, Hong
Kong, South Africa, Spain, Hungary, India, Mexico and Brazil. Segment
information for the three and nine month periods ended February 28, 2005 and
February 29, 2004 are as follows:
a) The distribution of net revenue by geographical area was as follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Ireland* $10,402 $9,366 $29,903 $27,523
Rest of Europe 19,631 18,171 57,091 45,633
U.S. 48,399 46,660 140,278 138,232
Rest of the World 4,423 2,665 13,417 7,616
---------------------------------------- ---------------- --------------- --------------
Total $82,855 $76,862 $240,689 $219,004
---------------------------------------- ---------------- --------------- --------------
* All sales shown for Ireland are export sales.
b) The distribution of net revenue by business segment was as follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Central laboratory $6,371 $7,212 $19,376 $19,549
Clinical research 76,484 69,650 221,313 199,455
-------------------------------------------- ---------------- --------------- --------------
Total $82,855 $76,862 $240,689 $219,004
-------------------------------------------- ---------------- --------------- --------------
9
c) The distribution of income from operations by geographical area was as
follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Ireland $584 $3,454 $7,004 $8,390
Rest of Europe 2,380 2,150 5,689 3,886
U.S. (8,592) 2,572 (3,978) 11,299
Rest of the World 391 582 2,541 1,169
-------------------------------------------- ---------------- ----------- ------------------
Total $(5,237) $8,758 $11,256 $24,744
-------------------------------------------- ---------------- ----------- ------------------
d) The distribution of income from operations by business segment was as
follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Central laboratory $(10,533) $(483) $(13,287) $(2,796)
Clinical research 5,296 9,241 24,543 27,540
--------------------------------------------- ---------------- --------------- --------------
Total $(5,237) $8,758 $11,256 $24,744
--------------------------------------------- ---------------- --------------- --------------
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
February 28, May 31,
2005 2004
(in thousands)
Ireland $20,026 $18,799
Rest of Europe 9,238 7,202
U.S. 13,901 15,935
Rest of the World 1,673 1,000
----------------------------------------------------- ------------------
Total $44,838 $42,936
----------------------------------------------------- ------------------
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
February 28, May 31,
2005 2004
(in thousands)
Central laboratory $2,788 $3,989
Clinical research 42,050 38,947
-------------------------------------------------- ------------------
Total $44,838 $42,936
-------------------------------------------------- ------------------
10
g) The distribution of depreciation and amortization by geographical area
was as follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 28
2005 2004 2005 2004
(in thousands) (in thousands)
Ireland $1,378 $965 $3,787 $2,691
Rest of Europe 544 476 353 1,320
U.S. 1,382 1,367 5,338 3,948
Rest of the World 120 86 304 256
------------------------------------------ ---------------- ----------- ------------------
Total $3,424 $2,894 $9,782 $8,215
------------------------------------------ ---------------- ----------- ------------------
h) The distribution of depreciation and amortization by business segment
was as follows:
Three Months Ended Nine months Ended
February 28 February 29 February 28 February 29
2005 2004 2005 2004
(in thousands) (in thousands)
Central laboratory $255 $239 $735 $766
Clinical research 3,169 2,655 9,047 7,449
-------------------------------------------------- ---------------- ----------- ------------------
Total $3,424 $2,894 $9,782 $8,215
-------------------------------------------------- ---------------- ----------- ------------------
i) The distribution of total assets by geographical area was as follows:
February 28, May 31,
2005 2004
(in thousands)
Ireland $94,254 $76,165
Rest of Europe 105,350 115,056
U.S. 161,520 141,104
Rest of the World 4,797 2,998
--------------------------------------------------- ------------------
Total $365,921 $335,323
--------------------------------------------------- ------------------
j) The distribution of total assets by business segment was as follows:
February 28, May 31,
2005 2004
(in thousands)
Central laboratory $18,726 $20,343
Clinical research 347,195 314,980
--------------------------------------------------- ------------------
Total $365,921 $335,323
--------------------------------------------------- ------------------
11
ICON plc
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis should be read in conjunction with the
unaudited Consolidated Financial Statements and accompanying notes included
elsewhere herein and the Consolidated Financial Statements and related notes
thereto included in our Annual Report on Form 20-F for the fiscal year ended May
31, 2004. The Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Overview
We are a contract research organization, or CRO, providing clinical research and
development services on a global basis to the pharmaceutical, biotechnology and
medical device industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase I - IV
clinical trials management, study design, laboratory services and drug
development support. We believe that we are one of a select group of CROs with
the capability and expertise to conduct clinical trials in most major
therapeutic areas on a global basis. We have approximately 2,650 employees
worldwide, with operations in 37 locations in 23 countries including the United
States and major markets in Europe and Rest of World and have managed clinical
trials in over 55 countries. For the nine months ended February 28, 2005, we
derived approximately 58.3%, 36.1%, and 5.6% of our net revenue in the United
States, Europe and Rest of World, respectively.
We earn revenues by providing a number of different services to our clients.
These services include clinical trials management, biometric activities,
consulting and laboratory services. We recognize biometric, consulting and
laboratory revenues on a fee-for-service basis. Our laboratory service contracts
are multiple element arrangements, with laboratory kits and laboratory testing
representing the contractual elements. We determine the fair values for these
elements, each of which can be sold separately, based on objective and reliable
evidence of their respective fair values. Our laboratory contracts entitle us to
receive non-refundable set up fees and we allocate such fees as additional
consideration to the contractual elements based on the proportionate fair values
of the elements. We recognize revenues for the elements on the basis of the
number of deliverable units completed in a period.
We recognize clinical trials revenue on the basis of the relationship between
time incurred and the total estimated duration of the contract as this
represents the most accurate pattern over which our contractual obligations are
fulfilled. We invoice our customers upon achievement of specified contractual
milestones. This mechanism, which allows us to receive payment from our
customers throughout the duration of the contract, is not reflective of revenue
earned. We recognize revenues over the period from the awarding of the
customer's contract to study completion and acceptance. This requires us to
estimate total expected revenue, time inputs, contract costs, profitability and
expected duration of the clinical trial. These estimates are reviewed
periodically and, if any of these estimates change or actual results differ from
expected results, then an adjustment is recorded in the period in which they
become readily estimable.
As is customary in the CRO industry, we subcontract with third party
investigators in connection with clinical trials. All subcontractor costs, and
certain other costs where reimbursed by clients, are, in accordance with
industry practice, deducted from gross revenue to arrive at net revenue. As no
profit is earned on these costs, which vary from contract to contract, we view
net revenue as our primary measure of revenue growth.
Direct costs consist primarily of compensation and associated fringe benefits
for project-related employees and other direct project driven costs. Selling,
general and administrative expenses consist of compensation and related fringe
benefits for selling and administrative employees, professional services,
advertising costs and all costs related to facilities and information systems.
As the nature of our business involves the management of projects having a
typical duration of one to three years, the commencement, completion,
curtailment or early termination of projects in a fiscal year can have a
material impact on revenues earned with the relevant clients in such years. In
addition, as we typically work with some, but not all, divisions of a client,
fluctuations in the number and status of available projects within such
divisions can also have a material impact on revenues earned from such clients
from year to year.
Although domiciled in Ireland, we report our results in U.S. dollars. As a
consequence, the results of our non-United States based operations, when
translated into U.S. dollars, could be materially affected by fluctuations in
exchange rates between the U.S. dollar and the currency of those operations.
12
In addition to translation exposures, we are also subject to transaction
exposures because the currency in which contracts are priced can be different
from the currencies in which costs relating to those contracts are incurred. We
have thirteen operations operating in U.S. dollars, five trading in Euros, three
in pounds Sterling, and one each in Australian dollars, Indian Rupee, Singapore
dollars, Yen, Israeli New Shekels, Latvian Lats, Swedish Krona, Argentine Peso,
South African Rand, Russian Rouble, Canadian dollar, Hungarian Forint, Taiwan
dollar, Hong Kong dollar, Mexican Peso and Brazilian Real. Our operations in the
United States are not materially exposed to such currency differences as the
majority of our revenues and costs are in U.S. dollars. However, outside the
United States the multinational nature of our activities means that contracts
are usually priced in a single currency, most often pounds Sterling, U.S.
dollars or Euros, while costs arise in a number of currencies, depending, among
other things, on which of our offices provide staff for the contract, and the
location of investigator sites. Although many such contracts benefit from some
degree of natural hedging due to the matching of contract revenues and costs in
the same currency, where costs are incurred in currencies other than those in
which contracts are priced, fluctuations in the relative value of those
currencies could have a material effect on our results of operations. We
regularly review our currency exposures and hedge a portion of these, using
forward exchange contracts, where natural hedges do not cover them.
We have received capital and revenue grants from Enterprise Ireland, an Irish
government agency. We record capital grants as deferred income, which are
credited to income on a basis consistent with the depreciation of the relevant
asset. Grants relating to operating expenditures are credited to income in the
period in which the related expenditure is charged. The capital grant agreements
provide that in certain circumstances the grants received may be refundable in
full. These circumstances include sale of the related asset, liquidation of the
Company or failing to comply in other respects with the grant agreements. The
operating expenditure grant agreements provide for repayment in the event of
downsizing of the Company calculated by reference to any reduction in employee
numbers. We have not recognized any loss contingency having assessed as remote
the likelihood of these events arising. Up to February 28, 2005, we have
received $2,709,006 and $2,013,516 under the capital grants and operating
grants, respectively. Pursuant to the terms of the grant agreements we are
restricted from distributing some of these amounts by way of dividend or
otherwise.
As we conduct operations on a global basis, our effective tax rate has depended
and will depend on the geographic distribution of our revenue and earnings among
locations with varying tax rates. Our results of operations therefore may be
affected by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of our results of operations among various tax
jurisdictions changes, our effective tax rate may vary significantly from period
to period.
Due to the recent performance and current outlook in our central laboratory, an
impairment review of the goodwill for the laboratory segment commenced in the
third quarter of fiscal 2005.
Results of Operations
Three Months Ended February 28, 2005 Compared with Three Months Ended February
29, 2004
The following table sets forth for the periods indicated certain financial data
as a percentage of net revenue and the percentage change in these items compared
to the prior comparable period. The trends illustrated in the following table
may not be indicative of future results.
Three Months Ended
February 28, February 29, 2004
2005 2004 to 2005
Percentage
Percentage of Net Revenue Increase/(decrease)
Net revenue............................ 100.0% 100.0% 7.8%
Costs and expenses:
Direct costs........................... 55.5% 55.3% 8.2%
Selling, general and administrative.... 33.1% 29.5% 20.6%
Depreciation and amortization.......... 4.1% 3.8% 18.3%
Other charges.......................... 13.6% - 100.0%
Income from operations................. (6.3%) 11.4% (159.8)%
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Net revenue increased by $6.0 million or 7.8%, from $76.9 million to $82.9
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisitions
not included in the comparative period. The additional revenues from
acquisitions (Beacon) amounted to $1.7 million for the three months ended
February 28, 2005. Including the impact of acquisitions, revenues in the United
States increased by 3.7%, while Europe and the Rest of World grew by 14.1%. For
the three months ended February 28, 2005, net revenue for our central laboratory
business fell by 11.7%, from $7.2 million to $6.4 million while our clinical
research segment grew by 9.8% from $69.7 million to $76.5 million over the
comparable period. The growth in net revenue in our clinical research segment is
due to the expansion of our services to both existing and new clients, increased
use of outsourcing by the pharmaceutical, biotechnology and medical device
industries, an underlying increase in research and development spending and
consolidation in the CRO industry. The reduction in net revenue in our central
laboratory segment is due primarily to lower testing volumes.
Direct costs increased by $3.5 million, or 8.2%, from $42.5 million to $46.0
million, primarily due to increased staff numbers needed to support increased
project related activity in the clinical research business and increased direct
costs arising from the acquisitions amounting to $0.8 million. Direct costs, as
a percentage of net revenue increased from 55.3% in the three months to February
29, 2004 to 55.5% for the quarter ended February 28, 2005.
Selling, general and administrative expense increased by $4.7 million, or 20.6%,
from $22.7 million to $27.4 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of $0.7 million not included in the
comparative period. As a percentage of net revenue, selling, general and
administrative expenses, increased from 29.5% in the three months ended February
29, 2004, to 33.1% for the quarter ended February 28, 2005.
Depreciation and amortization increased by $0.5 million, or 18.3%, from $2.9
million to $3.4 million. This increase is due to the continued investment in
facilities and information technology to support the growth in activity. As a
percentage of net revenue, depreciation and amortization increased from 3.8% of
net revenues in the three months to February 29, 2004, to 4.1% for the three
months ended February 28, 2005.
Other operating charges of $11.3 million were realized in the three months ended
February 28, 2005. These charges related to the recognition of an impairment in
the carrying value of our investment in the central laboratory, a write-down of
certain fixed assets and the lease termination and exit costs associated with
the consolidation of some of our office facilities in the US.
Income from operations decreased by $14.0 million, or 159.8%, from $8.8 million
to $(5.2) million. Excluding the impact of the other charges, operating income
for the quarter ended February 28, 2005, was $6.0 million, a 31.1% decrease on
the same quarter last year. This decrease is due principally to reduced levels
of activity in our central laboratory business in the quarter and lower usage of
billable resources in our clinical research segment. As a percentage of net
revenue, including the effect of acquisitions, income from operations decreased
from 11.4% in the three months to February 29, 2004, to (6.3)% for the quarter
ended February 28, 2005, or 7.3% excluding the other charges. For the quarter,
income from operations, as a percentage of net revenue, for the central
laboratory and excluding the impact of the other charges was (27.7%), a
dis-improvement from the reported (6.7%) in the same quarter in fiscal 2004. The
central laboratory constitutes approximately 8% of our business. Operating
margins for our clinical research segment, excluding the impact of the other
charges decreased from 13.3% in the three months ended February 29, 2004, to
10.2% for the three months ended February 28, 2005.
Net interest income for the three months ended February 28, 2005, was $0.26
million compared to $0.08 million for the equivalent period last year. Higher
average level of funds invested and higher interest rates in the third quarter
of this year over last year contributed to the increased interest income.
Our effective tax rate for the three months ended February 28, 2005 was (10.5)%,
or 19.8% when the impact of the other charges and tax deduction associated with
this is excluded, compared to 24.7% for the comparable period last year. The
decrease in the effective rate was due to a change in the geographic
distribution of pre-tax earnings.
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Nine months ended February 28, 2005 compared with Nine months Ended February 29,
2004
The following table sets forth for the periods indicated certain financial data
as a percentage of net revenue and the percentage change in these items compared
to the prior comparable period. The trends illustrated in the following table
may not be indicative of future results.
Nine months Ended
February 28, February 29, 2004 to
2005 2004 2005
Percentage
Percentage of Net Revenue Increase
Net revenue............................ 100.0% 100.0% 9.9%
Costs and expenses:
Direct costs........................... 54.9% 54.9% 9.9%
Selling, general and administrative.... 31.7% 30.0% 15.9%
Depreciation and amortization.......... 4.0% 3.8% 19.1%
Other charges.......................... 4.7% - 100%
Income from operations................. 4.7% 11.3% (54.5%)
Net revenue increased by $21.7 million or 9.9%, from $219.0 million to $240.7
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisitions
not included in the comparative period. The additional revenues from these
acquisitions (Globomax and Beacon) amounted to $6.9 million for the nine months
ended February 28, 2005. Including the impact of acquisitions, revenues in the
United States, and Europe and the Rest of World grew by 1.5% and 24.3%
respectively. For the nine months ended February 28, 2005, net revenue for our
central laboratory business fell by 0.9%, from $19.5 million to $19.4 million
while our clinical research segment grew by 11.0%, from $199.5 million to $221.3
million over the comparable period. The growth in net revenue in our clinical
research segment is due to the expansion of our services to both existing and
new clients, increased use of outsourcing by the pharmaceutical, biotechnology
and medical device industries, an underlying increase in research and
development spending and consolidation in the CRO industry.
Direct costs increased by $11.8 million, or 9.9%, from $120.3 million to $132.1
million, primarily due to increased staff numbers needed to support increased
project related activity and increased direct costs arising from the
acquisitions amounting to $3.4 million. Direct costs, as a percentage of net
revenue remained constant at 54.9% from the nine months to February 29, 2004 to
the nine months ended February 28, 2005.
Selling, general and administrative expense increased by $10.5 million, or
15.9%, from $65.7 million to $76.2 million. The increase in costs is due to the
continued expansion of our operations and additional selling, general and
administrative costs from acquisitions of $2.4 million not included in the
comparative period. As a percentage of net revenue, selling, general and
administrative expenses, increased from 30.0% in the nine months ended February
29, 2004, to 31.7% for the nine months ended February 28, 2005.
Depreciation and amortization increased by $1.6 million, or 19.1%, from $8.2
million to $9.8 million. This increase is due to the continued investment in
facilities and information technology to support the growth in activity. As a
percentage of net revenue, depreciation and amortization increased from 3.8% of
net revenues in the nine months to February 29, 2004, to 4.0% for the nine
months ended February 28, 2005.
Other operating charges of $11.3 million were realized in the nine months ended
February 28, 2005. These charges related to the recognition of an impairment in
the carrying value of our investment in the central laboratory, a write-down of
certain fixed assets and the lease termination and exit costs associated with
the consolidation of some of our office facilities in the US.
Income from operations decreased by $13.5 million, or 54.5%, from $24.8 million
to $11.3 million, including acquisitions. Excluding the impact of the other
charges, operating income for the nine months ended February 28, 2005, was $22.5
million, a 8.9% decrease on the same period last year. As a percentage of net
revenue, including the effect of acquisitions, income from operations decreased
from 11.3% in the nine months to February 29, 2004, to 4.7% for the nine months
ended February 28, 2005, or 9.4% excluding the other charges. As a percentage of
net revenue, income from operations for the central laboratory and excluding the
impact of the other
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charges was (23.3%), a dis-improvement from the (14.3%) reported in the same
period in fiscal 2004. The central laboratory constitutes approximately 8% of
our business. Operating margins for our clinical research segment excluding the
impact of the other charges decreased from 13.8% in the nine months ended
February 29, 2004, to 13.6% for the nine months ended February 28, 2005.
Net interest income for the nine months ended February 28, 2005, was $0.6
million compared to $0.2 million for the equivalent period last year. Higher
average level of funds invested and higher interest rates in the first nine
months of this year over last year contributed to the increased interest income.
Our effective tax rate for the nine months ended February 28, 2005 was 35.0% or
21.1% when the impact of the other charges and tax deduction associated with
this is excluded, compared to 25.7% for the comparable period last year. The
decrease in the effective rate was due to a change in the geographic
distribution of pre-tax earnings.
Liquidity and Capital Resources
The CRO industry generally is not capital intensive. Since our inception, we
have financed our operations and growth primarily with cash flows from
operations, net proceeds of $49.1 million raised in our initial public offering
in May 1998 and net proceeds of $44.3 million, raised in our secondary offering
in August 2003. Our principal cash needs are payment of salaries, office rents,
travel expenditures and payments to subcontractors. The aggregate amount of
employee compensation, excluding stock compensation expense, paid in the nine
months ended February 29, 2004 and February 28, 2005 amounted to $128.7 million
and $143.5 million, respectively. Investing activities primarily reflect capital
expenditures for facilities and for information systems enhancements, the sale
and purchase of short-term investments and acquisitions.
Our clinical research and development contracts are generally fixed price with
some variable components and range in duration from a few months to several
years. Revenue from contracts is generally recognized as income on a percentage
of completion basis as the work is performed. The cash flow from contracts
typically consists of a down payment of between 10% and 20% paid at the time the
contract is entered into, with the balance paid in instalments over the
contract's duration, in some cases on the achievement of certain milestones.
Accordingly, cash receipts do not necessarily correspond to costs incurred and
revenue recognized on contracts.
As of February 28, 2005, our working capital amounted to $123.7 million,
compared to $113.8 million at May 31, 2004. The other significant influence on
our operating cash flow is revenue outstanding, which comprises accounts
receivable and unbilled revenue, less payments on account. The dollar values of
these amounts and the related days revenue outstanding can vary due to the
achievement of contractual milestones, including contract signing, and the
timing of cash receipts. The number of days revenue outstanding was 67 days at
February 28, 2005, compared to 69 days at November 30, 2004, and 60 days at May
31, 2004.
Net cash provided by operating activities was $10.6 million in the nine months
ended February 28, 2005, compared to $30.8 million in the nine months ended
February 29, 2004.
Net cash used in investing activities was $26.0 million in the nine months ended
February 28, 2005, compared to $21.6 million in the nine months ended February
29, 2004.
Net cash provided by financing activities was $0.6 million in the nine months
ended February 28, 2005, compared to $40.9 million in the nine months ended
February 29, 2004. This decrease is primarily due to the receipt of $44.3
million, following the sale of 1,500,000 American Depositary Shares in August
2003 by the Company.
As a result of these cash flows, cash and cash equivalents decreased by $13.8
million in the nine months ended February 28, 2005, compared to an increase of
$48.8 million in the nine months ended February 29, 2004.
On December 1, 2004, the Company acquired the workforce of Biomines Research
Solutions Private Limited, ("Biomines"), based in Chennai, India, for a cash
consideration of U.S.$250,000.
On July 1, 2004, ICON acquired 70% of the common stock of Beacon Biosciences,
Inc., for an initial cash consideration of $9.9 million.
On July 3, 2003, ICON entered into a facility agreement (the "Facility
Agreement") for the provision of a term loan facility of U.S.$40 million,
multi-currency overdraft facility of $5 million, and revolving credit facility
of $15 million (the "Facilities") with
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The Governor and Company of the Bank of Ireland and Ulster Bank Ireland Limited
(the "Banks"). Our obligations under the Facilities are secured by certain
composite guarantees and indemnities and pledges in favour of each of the banks.
This facility bears interest at an annual rate equal to the Banks Prime Rate
plus three quarters of one percent. ICON plc and its subsidiaries are entitled
to make borrowings under a term loan facility of $40 million and a multi
currency overdraft facility of $5 million. As at February 28, 2005, the full
amount of these facilities were available to be drawn down. ICON Clinical
Research, Inc. (a subsidiary of ICON plc) is entitled to make borrowings under a
revolving credit facility of $15 million. As at February 28, 2005, the full
amount of this facility was available to be drawn down.
The Company entered into an overdraft agreement with Allied Irish Banks plc
("AIB") whereby the company guarantees any overdraft of the subsidiary ICON
Clinical Research GmbH up to an amount (euro)120,000 (U.S.$158,448). As of
February 28, 2005, the full facility was available to be drawn down.
Inflation
We believe the effects of inflation generally do not have a material adverse
impact on our operations or financial conditions.
New Accounting Pronouncements not yet adopted
In December 2004, the FASB issued Statement No. 123R, "Share-Based Payment - An
Amendment of FASB Statements No. 123 and 95 ("SFAS No.123R"), which is effective
for public companies in periods beginning after June 15, 2005. We will implement
the proposed standard no later than the quarter that begins September 1, 2005.
The cumulative effect of adoption, if any, applied on a modified prospective
basis, would be measured and recognized on July 1, 2005. SFAS No. 123R addresses
the accounting for transactions in which an enterprise receives goods and
services in exchange for: (a) equity instruments of the enterprise; or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R eliminates the ability to account for share-based compensation
transactions using APB 25, and generally would require instead that such
transactions be accounted for using a fair-value based method. Equity classified
awards are measured at grant date at fair value and are not subsequently
re-measured. Liability classified awards are re-measured at fair value at each
balance sheet date until the awards are settled. We are currently evaluating
option valuation methodologies and assumptions in light of SFAS No. 123R related
to employee stock options. Current estimates of option values using the
Black-Scholes method (as reported) may not be indicative of results from
valuation methodologies ultimately adopted in the final rules.
In November 2004, the FASB issued statement No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), which is effective for
public companies prospectively for inventory costs incurred in periods beginning
after June 15, 2005. This Statement amends the guidance in ARB No. 43, Chapter 4
"Inventory Pricing", to clarify that accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage) should
be recognized as a current period change and to require the allocation of fixed
production overhead to the costs of conversion based on normal capacity of the
production facilities. We do not expect that the adoption of SFAS No. 151 will
have a material impact on our financial position or results of operations.
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary
assets - an amendment of APB Opinion No. 29" ("SFAS No. 153"), which is
effective for public companies in periods beginning after June 15, 2005. The
guidance in APB opinion No. 29, Accounting for Nonmonetary Transactions, is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of the assets exchanged. The guidance in that Opinion,
however, included certain exceptions to that principle. This statement amends
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. We do not expect that the
adoption of SFAS No. 153 will have a material impact on our financial position
or results of operations.
In November 2003 and March 2004, the Emerging Issues Task Force (EITF) reached
partial consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment
and its Application to Certain Investments," ("EITF 03-1"). EITF 03-1 addresses
the meaning of other then temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" and
investments accounted for under the cost method. The EITF agreed on certain
quantitative and qualitative disclosures about unrealised losses pertaining to
securities classified as
17
available-for-sale or held-to-maturity. In addition, EITF 03-1requires certain
disclosures about cost method investments. The recognition and measurement
provisions of EITF 03-1 have been deferred until additional guidance is issued.
18
Legal Proceedings
We are not party to any litigation or other legal proceedings that we believe
could reasonably be expected to have a material adverse effect on our business,
results of operations and financial condition.
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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.
ICON plc
March 22, 2005 /s/ Sean Leech
---------------------------------- ----------------------------
Date Sean Leech
Chief Financial Officer
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