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 August 31, 2004
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 August 31, 2004
CONTENTS Page
General................................................................. 1
Condensed Consolidated Balance Sheets as at
August 31, 2004 and May 31, 2004........................................ 2
Condensed Consolidated Statements of Operations for the
three months ended August 31, 2004 and 2003............................. 3
Condensed Consolidated Statements of Cash Flows for the
three months ended August 31, 2004 and 2003............................. 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.......................................................... 18
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 2,550 employees
worldwide, with operations in 35 locations in 21 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 three months ended August 31, 2004, we
derived approximately 58.4%, 35.6%, and 6.0% 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.
1
ICON plc
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 2004 AND MAY 31, 2004
(Unaudited) (Audited)
August 31, 2004 May 31, 2004
--------------- ------------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $49,492 $55,678
Short term investments - available for sale .................................... 23,081 23,085
Accounts receivable............................................................. 70,125 74,079
Unbilled revenue................................................................ 66,984 59,861
Other receivables............................................................... 3,901 4,306
Deferred tax asset.............................................................. 1,684 1,684
Prepayments and other current assets............................................ 8,740 9,468
------------- -------------
Total current assets............................................................ 224,007 228,161
Other Assets:
Property, plant and equipment, net.............................................. 44,732 42,936
Goodwill........................................................................ 72,277 64,226
------------- -------------
Total Assets.......................................................................... $341,016 $335,323
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $7,325 $12,801
Payments on account............................................................. 61,376 61,960
Other liabilities............................................................... 31,486 35,091
Income taxes payable............................................................ 6,409 4,496
Bank creditlines and loan facilities............................................ 7,000 -
------------- -------------
Total current liabilities...................................................... 113,596 114,348
Other Liabilities:
Long term government grants..................................................... 1,337 1,411
Long term finance leases........................................................ 402 167
Non-current deferred tax liability.............................................. 2,637 2,637
Minority interest............................................................... 590 -
Shareholders' Equity:
Ordinary Shares, par value 6 euro cents per share; 20,000,000 shares
authorized, 13,842,536 shares issued and outstanding at August 31, 2004
and
13,838,476 shares issued and outstanding at May 31, 2004 980 980
Additional paid-in capital...................................................... 113,011 112,936
Accumulated other comprehensive income.......................................... 8,298 9,984
Merger reserve.................................................................. 47 47
Retained earnings............................................................... 100,118 92,813
------------- -------------
Total Shareholders' Equity............................................................ 222,454 216,760
------------- -------------
Total Liabilities and Shareholders' Equity............................................ $341,016 $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 MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
Three Months Ended
August 31,
----------
2004 2003
---- ----
(in thousands except
share and per share data)
Revenue:
Gross revenue................................. $117,195 $106,177
Subcontractor Costs........................... (38,856) (37,242)
---------- ----------
Net revenue................................... 78,339 68,935
Costs and expenses:
Direct costs.................................. 42,453 37,699
Selling, general and administrative expenses.. 23,339 21,025
Depreciation ................................. 3,062 2,589
---------- ----------
Total costs and expenses...................... 68,854 61,313
Income from operations.............................. 9,485 7,622
Interest income..................................... 197 73
Interest expense.................................... (33) (26)
---------- ----------
Income before provision for income taxes............ 9,649 7,669
Provision for income taxes.......................... (2,322) (2,065)
Minority Interest................................... (22) -
---------- ----------
Net income.......................................... $7,305 $5,604
========== ==========
Net income per Ordinary Share:
Basic ........................................ $0.53 $0.46
========== ==========
Diluted....................................... $0.52 $0.44
========== ==========
Weighted average number of Ordinary Shares outstanding:
Basic.........................................13,837,986 12,153,772
========== ==========
Diluted.......................................14,105,288 12,606,971
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ICON plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 2004 AND 2003
(UNAUDITED)
Three Months Ended
August 31 August 31
--------- ---------
2004 2003
---- ----
(in thousands)
Cash flows from operating activities:
Net income................................................ $7,305 $5,604
Adjustments to reconcile net income to net cash
(used in)/provided by
operating activities:..................................
Depreciation........................................... 3,062 2,589
Amortization of grants................................. (48) (9)
Minority interest.................................... 22 -
Changes in assets and liabilities:
Decrease in accounts receivable........................ 4,340 4,055
Increase in unbilled revenue........................... (6,837) (8,090)
Increase in other receivables.......................... (555) (3,466)
Decrease/(increase) in prepayments and other
current assets ........................................ 669 (1,976)
(Decrease)/increase in payments on account............. (548) 1,736
(Decrease)/increase in other liabilities............... (3,559) 2,823
Increase in income taxes payable....................... 1,785 2,138
Decrease in accounts payable.......................... (5,625) (5,612)
--------------- ---------------
Net cash provided by/(used in) operating activities....... 11 (208)
Cash flows from investing activities:
Purchase of property, plant and equipment.............. (4,546) (3,428)
Purchase of subsidiary undertakings and acquisition
costs.................................................. (9,913) -
Net cash acquired with subsidiary undertakings......... 1,658 -
Deferred payments in respect of prior year acquisitions (6) (102)
--------------- ---------------
Net cash used in investing activities..................... (12,807) (3,530)
Cash flows from financing activities:
Proceeds from / (repayment of) bank overdraft............. 7,000 (1,080)
Proceeds from issuance of share capital................... - 45,705
Proceeds from exercise of share options................... 75 1,819
Share issuance costs...................................... - (402)
Costs in relation to prior year share issuance............ (104) -
Repayment of other liabilities............................ (117) (3)
--------------- ---------------
Net cash provided by financing activities................. 6,854 46,039
Effect of exchange rate movements on cash................. (244) (3,197)
--------------- ---------------
Net (decrease)/increase in cash and cash equivalents...... (6,186) 39,104
Cash and cash equivalents at beginning of period.......... 55,678 18,311
--------------- ---------------
Cash and cash equivalents at end of period................ $49,492 $57,415
=============== ===============
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....................... - - - - 7,305 - 7,305
Currency translation adjustment.. - - - (1,686) - - (1,686)
----------
Total comprehensive income....... 5,619
Exercise of Share Options........ 4,060 - 75 - - - 75
---------- ------- ---------- --------- --------- -------- ----------
Balance at August 31, 2004 13,842,536 $980 $113,011 $8,298 $100,118 $47 $222,454
========== ======= ========== ========= ========= ======== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ICON plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AUGUST 31, 2004
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 three
months ended August 31, 2004 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 8,760
Cash 1,658
Other Current Assets 935
Current liabilities (1,350)
Long term liability (352)
----------------
10,443
Minority Interest (568)
---------------------------------------------------------------------
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 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 have 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.
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 months ended August 31, 2003 and 2004 as follows:
Three months ended
August 31
---------
2004 2003
---- ----
(in thousands)
Net Revenue $78,721 $72,785
Net Income $7,258 $5,750
Basic Earnings per Share $0.52 $0.47
Diluted Earnings Per Share $0.51 $0.46
An effective tax rate of 35.0% was imputed on the profits before tax of Globomax
for the periods prior to acquisition.
7
3. Goodwill
Three months ended Year ended
August 31 May 31
2004 2004
(in thousands) (in thousands)
Opening Balance $64,226 $45,029
Arising during the year 8,760 13,134
Arising on earn-out (current and prior year - 3,215
acquisitions)
Foreign exchange movement (709) 2,848
--------------------------------------------------------------------------------------
Closing Balance $72,277 $64,226
======================================================================================
The distribution of goodwill by business segment was as follows:
Three months ended Year ended
August 31 May 31
2004 2004
(in thousands) (in thousands)
-------------- --------------
Central laboratory $7,017 $7,017
Clinical research 65,260 57,209
------------------------------------------------------------------------
Total $72,277 $64,226
------------------------------------------------------------------------
4. 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.
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
August 31,
----------
2004 2003
---- ----
Weighted average number of Ordinary Shares
outstanding for basic net income per
Ordinary Share 13,837,986 12,153,772
Effect of dilutive share options outstanding 267,302 453,199
------------- --------------
Weighted average number of Ordinary Shares
for diluted net income per Ordinary Share 14,105,288 12,606,971
============= ==============
8
5. 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 and India. Segment information for the three
month periods ended August 31, 2004 and 2003 are as follows:
a) The distribution of net revenue by geographical area was as follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Ireland* $10,638 $9,884
Rest of Europe 17,214 12,459
U.S. 45,784 44,464
Rest of the World 4,703 2,128
---------------------------------------------------------- -------------
Total $78,339 $68,935
---------------------------------------------------------- -------------
* All sales shown for Ireland are export sales.
b) The distribution of net revenue by business segment was as follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Central laboratory $6,550 $5,723
Clinical research 71,789 63,212
--------------------------------------------------------------------
Total $78,339 $68,935
--------------------------------------------------------------------
c) The distribution of income from operations by geographical area was as
follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Ireland $2,811 $2,056
Rest of Europe 2,338 639
U.S. 2,699 4,835
Rest of the World 1,637 92
--------------------------------------------------------------------
Total $9,485 $7,622
--------------------------------------------------------------------
9
d) The distribution of income from operations by business segment was as
follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Central laboratory $(861) $(1,231)
Clinical research 10,346 8,853
-----------------------------------------------------------------
Total $9,485 $7,622
-----------------------------------------------------------------
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
August 31, May 31,
2004 2004
---- ----
(in thousands)
Ireland $19,447 $18,799
Rest of Europe 7,053 7,202
U.S. 17,245 15,935
Rest of the World 987 1,000
----------------------------------------------------------------------
Total $44,732 $42,936
----------------------------------------------------------------------
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
August 31, May 31,
2004 2004
---- ----
(in thousands)
Central laboratory $3,766 $3,989
Clinical research 40,966 38,947
-------------------------------------------------------------------
Total $44,732 $42,936
--------------------------------------------------------------------
g) The distribution of depreciation by geographical area was as follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Ireland $1,119 $834
Rest of Europe 493 418
U.S. 1,361 1,249
Rest of the World 89 88
--------------------------------------------------------------------
Total $3,062 $2,589
--------------------------------------------------------------------
10
h) The distribution of depreciation by business segment was as follows:
Three months ended
August 31,
----------
2004 2003
---- ----
(in thousands)
Central laboratory $236 $285
Clinical research 2,826 2,304
----------------------------------------------------------- -------------
Total $3,062 $2,589
----------------------------------------------------------- -------------
i) The distribution of total assets by geographical area was as follows:
August 31, May 31,
2004 2004
---- ----
(in thousands)
Ireland $73,144 $76,165
Rest of Europe 103,749 115,056
U.S. 160,998 141,104
Rest of the World 3,125 2,998
---------------------------------------------------------------------
Total $341,016 $335,323
---------------------------------------------------------------------
j) The distribution of total assets by business segment was as follows:
August 31, May 31,
2004 2004
---- ----
(in thousands)
Central laboratory $19,317 $20,343
Clinical research 321,699 314,980
------------------------------------------------------ -------------
Total $341,016 $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 2,550 employees
worldwide, with operations in 35 locations in 21 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 three months ended August 31, 2004, we
derived approximately 58.4%, 35.6%, and 6.0% 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 fourteen 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 and Hong Kong dollar. 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 August 31, 2004, we have received
$2,464,243 and $1,831,592 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.
Results of Operations
Three Months Ended August 31, 2004 Compared with Three Months Ended August 31,
2003
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
------------------
August 31, August 31, 2003
---------- ---------- ----
2004 2003 to 2004
---- ---- -------
Percentage
----------
Percentage of Net Revenue Increase
------------------------- --------
Net revenue............................ 100.0% 100.0% 13.6%
Costs and expenses:
Direct costs........................... 54.2% 54.7% 12.6%
Selling, general and administrative.... 29.8% 30.4% 11.0%
Depreciation and amortization.......... 3.9% 3.8% 18.3%
Income from operations................. 12.1% 11.1% 24.4%
Net revenue increased by $9.4 million or 13.6%, from $68.9 million to $78.3
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 & Beacon) amounted to $3.6 million for the three months
ended August 31, 2004. Including the impact of acquisitions, revenues in the
United States, and Europe and the Rest of World grew by 3.0% and 33.0%
respectively. For the three months ended August 31, 2004, net revenue for our
central laboratory business
13
grew by 14.5% from $5.7 million to $6.6 million while our clinical research
segment grew by 13.6% from $63.2 million to $71.8 million over the comparable
period. The growth in net revenue in our clinical research segment and central
laboratory 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 $4.8 million, or 12.6%, from $37.7 million to $42.5
million, primarily due to increased staff numbers needed to support increased
project related activity and increased direct costs arising from the
acquisitions amounting to $1.5 million. Direct costs, as a percentage of net
revenue decreased from 54.7% in the three months to August 31, 2003 to 54.2% for
the quarter ended August 31, 2004.
Selling, general and administrative expense increased by $2.3 million, or 11.0%,
from $21.0 million to $23.3 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, decreased from 30.4% in the three months ended August
31, 2003, to 29.8% for the quarter ended August 31, 2004.
Depreciation increased by $0.5 million, or 18.3%, from $2.6 million to $3.1
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 increased from 3.8% of net revenues in the three months to
August 31, 2003, to 3.9% for the three months ended August 31, 2004.
Income from operations increased by $1.9 million, or 24.4%, from $7.6 million to
$9.5 million, including acquisitions. This improvement is due to increased
levels of activity carried out across the Company together with the acquisition
of Globomax and Beacon. As a percentage of net revenue, including the effect of
acquisitions, income from operations increased from 11.1% in the three months to
August 31, 2003, to 12.1% for the quarter ended August 31, 2004. For the
quarter, income from operations, as a percentage of net revenue, for the central
laboratory was (13.1%), an improvement from the reported (21.5%) in the same
quarter in fiscal 2004. The central laboratory constitutes approximately 8% of
our business. Operating margins for our clinical research segment increased from
14.0% in the three months ended August 31, 2003, to 14.4% for the three months
ended August 31, 2004.
Net interest income for the three months ended August 31, 2004, was $0.16
million compared to $.01 million for the equivalent period last year. Higher
average level of funds invested in the first quarter this year over last year
contributed to the increased interest income.
Our effective tax rate for the three months ended August 31, 2004 was 24.1%
compared to 26.9% 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.
14
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 by us and our
subsidiaries in the three months ended August 31, 2003 and August 31, 2004
amounted to $40.3 million and $46.5 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 August 31, 2004, our working capital amounted to $110.4 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, decreased from 60 days at May
31, 2004 to 59 days at August 31, 2004.
Net cash provided by operating activities was less then $0.1 million in the
three months ended August 31, 2004, compared to net cash used in operating
activities of $0.2 million in the three months ended August 31, 2003.
Net cash used in investing activities was $12.8 million in the three months
ended August 31, 2004, compared to $3.5 million in the three months ended August
31, 2003. This increase is due primarily to the $9.9 million paid in respect of
the acquisition of 70% of the common stock of Beacon during the quarter ended
August 31, 2003.
Net cash provided by financing activities was $6.9 million in the three months
ended August 31, 2004, compared with $46.0 million in the three months ended
August 31, 2003.
As a result of these cash flows, cash and cash equivalents decreased by $6.2
million in the three months ended August 31, 2004, compared to an increase of
$39.1 million in the three months ended August 31, 2003.
Our U.S. subsidiary, ICON Clinical Research, Inc. (the "Borrower"), had a $12
million secured line of credit (the "PNC Facility") with PNC Bank N.A. ("PNC").
The PNC Facility bore interest at an annual rate equal to PNC's Prime Rate less
three-quarters of one percent. The full sum of the unpaid principal and interest
was payable on demand. The PNC Facility was secured by a first priority security
interest in certain assets of the Borrower. This facility was terminated on July
3, 2003.
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 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 August 31, 2004, 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
August 31, 2004, US$8 million of this facility was available to be drawn down.
On July 1, 2004, ICON acquired 70% of the common stock of Beacon Biosciences,
Inc., for an initial cash consideration of $9.9 million.
15
On September 9, 2003, ICON completed the acquisition of Globomax LLC, for an
initial cash consideration of $10.9 million. Earn-out provisions have 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.
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.$144,132). As of
August 31, 2004, the full facility was available to be drawn down.
The Company also entered into an overdraft agreement with AIB, whereby the
company guaranteed any overdraft of the subsidiary ICON Clinical Research Israel
Ltd. up to an amount of U.S.$250,000. This facility was terminated on April 20,
2004.
On November 17, 1998, we entered into an overdraft facility (the "AIB facility")
for (euro)2,539,000 ($3,049,593) with AIB. This facility bore an annual interest
rate equal to AIB Bank's Prime Rate plus one-quarter of one percent. The full
sum of the unpaid principal and interest was repayable on demand. This facility
was terminated on July 3, 2003.
On July 29, 2002, we entered into an additional AIB facility for
STG(pound)50,000 ($89,442) This facility bore interest at an annual rate equal
to AIB Bank's Prime Rate plus two percent. The full sum of the unpaid principal
and interest was repayable on demand. This facility was terminated on July 3,
2003.
Inflation
We believe the effects of inflation generally do not have a material adverse
impact on our operations or financial conditions.
New Accounting Pronouncements
In December 2003, the FASB issued Interpretation No. 46, revised--Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46R"). FIN
46R addresses the consolidation of variable interest entities ("VIEs"), which
include entities that have one or more of the following characteristics: (1) The
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated financial support; (2) The equity
investors lack essential characteristics of a controlling financial interest (as
defined by FIN 46R); and (3) The equity investors have voting rights that are
not proportionate to their economic interests, and the activities of the entity
involve or are conducted on behalf of an investor with a disproportionally small
voting interest. In addition, FIN 46R provides for certain scope exceptions to
its application. Adoption of this Interpretation is required in financial
statements that have interests in VIEs or potential VIEs, commonly referred to
as special-purpose entities, for periods ending after 15 December 2003.
Application for all other types of entities is required in financial statements
for periods ending after 15 March 2004. The adoption of FIN 46R has not had a
material impact on the Company's Consolidated Financial Statements.
On April 30, 2003, the FASB issued FASB Statement No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, which amends
FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, to address (1) decisions reached by the Derivatives Implementation
Group, (2) developments in other Board projects that address financial
instruments, and (3) implementation issues related to the definition of a
derivative. Statement 149 has multiple effective date provisions depending on
the nature of the amendment to Statement 133. Under SFAS No. 133, the Company's
foreign exchange contracts do not qualify for hedge accounting treatment. The
impact of adopting Statement 149 did not have a significant impact on our
financial statements.
On May 15, 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This Statement is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for certain mandatorily redeemable
financial instruments. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial
16
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not
permitted. The adoption of SFAS No.150 did not have a significant impact on our
financial statements.
The Emerging Issues Task Force (EITF) has reached a final consensus on EITF
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. This Issue
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities, specifically how
to determine whether an arrangement involving multiple deliverables contains
more than one unit of accounting. The Issue also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The guidance in this Issue is effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003, with a possible alternative means of adoption by applying the new rules to
existing contracts and recording the effect of adoption as a cumulative effect
of a change in accounting principle. Early adoption is permitted. We adopted
EITF Issue No. 00-21 on June 1, 2003. The adoptions of EITF Issue No. 00-21did
not have a significant impact on our financial statements.
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.
17
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
September 24, 2004 /s/ Sean Leech
- --------------------------------- ---------------------------------
Date Sean Leech
Chief Financial Officer
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