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, 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 August 31, 2005
CONTENTS Page
General.................................................................. 1
Condensed Consolidated Balance Sheets as at
August 31, 2005 and May 31, 2005......................................... 2
Condensed Consolidated Statements of Operations for the
three months ended August 31, 2005 and August 31, 2004................... 3
Condensed Consolidated Statements of Cash Flows for
the three months ended August 31, 2005 and August 31,
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...................................... 11
Signature Page........................................................... 16
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 2,800 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 three months ended August 31, 2005, we
derived approximately 55.4%, 37.6%, and 7.0% 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 27, 2005 the Board of Directors of the Company approved a change of the
Company's fiscal year end from a twelve-month period ending on May 31 to a
twelve-month period ending on December 31. The Company is making this change in
order to align its fiscal year end with the majority of other contract research
organizations. As a requirement of this change, the Company will report results
for the seven-month period from June 1, 2005 to December 31, 2005 as a separate
transition period in a Transition Report filed on Form 20-F. Going forward, the
Company's fiscal quarters will end on the last day of March, June, September and
December of each year.
1
ICON plc
CONDENSED CONSOLIDATED BALANCE SHEETS
AS AT AUGUST 31, 2005 AND MAY 31, 2005
(Unaudited) (Audited)
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $58,321 $56,341
Short term investments - available for sale .................................... 17,030 22,034
Accounts receivable............................................................. 68,224 80,486
Unbilled revenue................................................................ 71,584 56,762
Other receivables............................................................... 5,739 5,662
Deferred tax asset.............................................................. 2,637 2,637
Prepayments and other current assets............................................ 11,374 10,717
------------- -------------
Total current assets............................................................ 234,909 234,639
Other Assets:
Property, plant and equipment, net.............................................. 44,501 45,286
Goodwill........................................................................ 67,033 67,440
Intangible assets............................................................... 157 188
------------- -------------
Total Assets.......................................................................... $346,600 $347,553
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................ $7,324 $10,379
Payments on account............................................................. 51,707 52,583
Other liabilities............................................................... 35,571 39,890
Deferred tax liability.......................................................... 310 310
Income taxes payable............................................................ 7,977 6,189
------------- -------------
Total current liabilities...................................................... 102,889 109,351
Other Liabilities:
Long term government grants..................................................... 1,175 1,257
Long term finance leases........................................................ 204 248
Non-current deferred tax liability.............................................. 2,747 2,747
Minority interest............................................................... 824 884
Shareholders' Equity:
Ordinary shares, par value 6 euro cents per share; 20,000,000 shares
authorized, 13,991,209 shares issued and outstanding at August 31, 2005
and
13,899,096 shares issued and outstanding at May 31, 2005 991 985
Additional paid-in capital...................................................... 115,658 114,447
Accumulated other comprehensive income.......................................... 9,324 11,229
Merger reserve.................................................................. 47 47
Retained earnings............................................................... 112,741 106,358
------------- -------------
Total Shareholders' Equity............................................................ 238,761 233,066
------------- -------------
Total Liabilities and Shareholders' Equity............................................ $346,600 $347,553
============= =============
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, 2005 AND AUGUST 31, 2004
(UNAUDITED)
Three Months Ended
August 31,
2005 2004
(in thousands except share
and per share data)
Revenue:
Gross revenue.................................................................. $115,352 $117,195
Subcontractor costs............................................................ (29,431) (38,856)
-------------- ---------------
Net revenue.................................................................... 85,921 78,339
Costs and expenses:
Direct costs................................................................... 47,310 42,453
Selling, general and administrative ........................................... 26,809 23,339
Depreciation and amortization.................................................. 3,434 3,062
-------------- ---------------
Total costs and expenses....................................................... 77,553 68,854
-------------- ---------------
Income from operations........................................................... 8,368 9,485
Interest income.................................................................. 427 197
Interest expense................................................................. (12) (33)
-------------- ---------------
Income before provision for income taxes......................................... 8,783 9,649
Provision for income taxes....................................................... (2,459) (2,322)
Minority interest................................................................ 59 (22)
-------------- ---------------
Net income....................................................................... $6,383 $7,305
============== ===============
Net income per ordinary share:
Basic ......................................................................... $0.46 $0.53
============== ===============
Diluted........................................................................ $0.45 $0.52
============== ===============
Weighted average number of ordinary shares outstanding:
Basic.......................................................................... 13,919,606 13,837,986
============== ===============
Diluted........................................................................ 14,150,212 14,105,288
============== ===============
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, 2005 AND AUGUST 31, 2004
(UNAUDITED)
Three Months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Cash flows from operating activities:
Net income................................................ $6,383 $7,305
Adjustments to reconcile net income to net cash (used in)/provided by
operating activities:..................................
Loss on disposal of property, plant and equipment...... (1) -
Depreciation and amortization.......................... 3,434 3,062
Amortization of grants................................. (48) (48)
Minority interest.................................... (59) 22
Changes in assets and liabilities:
Decrease in accounts receivable........................ 11,737 4,340
Increase in unbilled revenue........................... (14,965) (6,837)
Increase in other receivables.......................... (1,548) (555)
(Increase)/decrease in prepayments and other current assets (764) 669
Decrease in payments on account........................ (780) (548)
Increase/(decrease) in other liabilities............... 571 (2,179)
Increase in income taxes payable....................... 1,850 1,785
Decrease in accounts payable.......................... (2,984) (5,625)
--------------- ---------------
Net cash provided by operating activities................. 2,826 1,391
Cash flows from investing activities:
Purchase of property, plant and equipment.............. (3,214) (4,546)
Purchase of subsidiary undertakings and acquisition costs.. - (9,913)
Sale of short term investments......................... 5,004 -
Cash acquired with subsidiary undertakings............. - 1,658
Deferred payments in respect of prior year acquisitions (3,374) (1,386)
--------------- ---------------
Net cash used in investing activities..................... (1,584) (14,187)
Cash flows from financing activities:
Proceeds from bank overdraft.............................. - 7,000
Proceeds from exercise of share options................... 1,217 75
Costs in relation to prior year share issuance............ - (104)
Repayment of other liabilities............................ (44) (117)
--------------- ---------------
Net cash provided by financing activities................. 1,173 6,854
Effect of exchange rate movements on cash................. (435) (244)
--------------- ---------------
Net increase/(decrease) in cash and cash equivalents...... 1,980 (6,186)
Cash and cash equivalents at beginning of period.......... 56,341 55,678
--------------- ---------------
Cash and cash equivalents at end of period................ $58,321 $49,492
=============== ===============
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, 2005........ 13,899,096 $985 $114,447 $11,229 $106,358 $47 $233,066
Comprehensive Income:
Net income....................... - - - 6,383 - 6,383
Currency translation adjustment.. - - (1,905) - - (1,905)
-----------
Total comprehensive income....... 4,478
Exercise of share options........ 92,113 6 1,211 - - - 1,217
_________ ____ ______ _______ ______ ______ ______
Balance at August 31, 2005 13,991,209 $991 $115,658 $9,324 $112,741 $47 $238,761
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, 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, 2005.
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 2005 annual report on Form 20-F. Operating results for the three
months ended August 31, 2005 are not necessarily indicative of the results that
may be expected for the fiscal period ending December 31, 2005.
2. Acquisitions
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 which amounted to U.S.$1.0 million. Earn-out
provisions have been 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 and
guaranteed loan notes with a value of Stg(pound)1.08 million (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) was
provided in fiscal 2005. These guaranteed loan notes had a repayment date of
three years from the date of issue but were exercisable nine months from the
date of issue. The guaranteed loan note holders issued redemption notices to the
Company, which required the Company to redeem all the guaranteed loan notes on
June 30, 2005, in consideration of a cash payment of Stg(pound)1.08 million
(U.S.$1.93 million), the total amount of which was accrued for at May 31, 2005.
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. Such potential additional consideration will be
accounted for as goodwill. The total amount of goodwill is expected to be tax
deductible.
On May 31, 2005, an amount of U.S.$1.4 million was accrued as the first earn-out
target in the acquisition contract was reached on this date. This amount of
U.S.$1.4 million was paid to the former shareholders GloboMax on August 31,
2005.
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.
6
The pro forma effect of the Beacon acquisition if completed on June 1, 2004
would have resulted in net revenue, net income and earnings per share for the
three months ended August 31, 2005 and 2004 as follows:
Three months ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Net revenue $85,921 $78,721
Net income $6,383 $7,258
Basic earnings per share $0.46 $0.52
Diluted earnings per share $0.45 $0.51
3. Goodwill
Three months ended Year ended
------------------ ----------
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands) (in thousands)
Opening balance $67,440 $64,226
Arising during the year - 8,463
Arising on earn-out (prior
year acquisitions) - 1,856
Goodwill impairment - (7,017)
Foreign exchange movement (407) (88)
----------------------------------------------------- ------------------
Closing balance $67,033 $67,440
===================================================== ==================
The goodwill balance relates completely to the clinical research segment.
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, August 31,
---------- ----------
2005 2004
---- ----
Weighted average number of ordinary shares outstanding for basic
net income per ordinary share 13,919,606 13,837,986
Effect of dilutive share options outstanding 230,606 267,302
---------------- ----------------
Weighted average number of ordinary shares for diluted net income
per ordinary share 14,150,212 14,105,288
================ ================
7
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, India, Mexico and Brazil. Segment
information for the three month periods ended August 31, 2005 and August 31,
2004 are as follows:
a) The distribution of net revenue by geographical area was as follows:
Three months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Ireland* $10,753 $10,638
Rest of Europe 21,510 17,214
U.S. 47,625 45,784
Rest of the World 6,033 4,703
------------------------------------------------------ --------------
Total $85,921 $78,339
------------------------------------------------------ --------------
* 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 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Central laboratory $7,235 $6,550
Clinical research 78,686 71,789
---------------------------------------------------- --------------
Total $85,921 $78,339
---------------------------------------------------- --------------
c) The distribution of income from operations by geographical area was as
follows:
Three Months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Ireland $462 $2,811
Rest of Europe 4,623 2,338
U.S. 1,640 2,699
Rest of the World 1,643 1,637
------------------------------------------------ ------------------
Total $8,368 $9,485
------------------------------------------------ ------------------
8
d) The distribution of income from operations by business segment was as
follows:
Three Months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Central laboratory $(1,615) $(861)
Clinical research 9,983 10,346
------------------------------------------------------- --------------
Total $8,368 $9,485
------------------------------------------------------- --------------
e) The distribution of property, plant and equipment, net, by geographical
area was as follows:
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands)
Ireland $19,778 $20,471
Rest of Europe 7,119 7,273
U.S. 16,055 15,927
Rest of the World 1,549 1,615
----------------------------------------------------- ------------------
Total $44,501 $45,286
----------------------------------------------------- ------------------
f) The distribution of property, plant and equipment, net, by business
segment was as follows:
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands)
Central laboratory $3,363 $2,940
Clinical research 41,138 42,346
----------------------------------------------------- ------------------
Total $44,501 $45,286
----------------------------------------------------- ------------------
g) The distribution of depreciation and amortization by geographical area
was as follows:
Three Months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Ireland $1,353 $1,119
Rest of Europe 521 493
U.S. 1,409 1,361
Rest of the World 151 89
--------------------------------------------------------- --------------
Total $3,434 $3,062
--------------------------------------------------------- --------------
9
h) The distribution of depreciation and amortization by business segment
was as follows:
Three Months Ended
------------------
August 31 August 31
--------- ---------
2005 2004
---- ----
(in thousands)
Central laboratory $286 $236
Clinical research 3,148 2,826
--------------------------------------------------------- --------------
Total $3,434 $3,062
--------------------------------------------------------- --------------
i) The distribution of total assets by geographical area was as follows:
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands)
Ireland $105,869 $109,596
Rest of Europe 80,950 79,878
U.S. 154,557 153,577
Rest of the World 5,224 4,502
------------------------------------------------ ------------------
Total $346,600 $347,553
-------------------------------------------------------------------
j) The distribution of total assets by business segment was as follows:
August 31, May 31,
---------- -------
2005 2005
---- ----
(in thousands)
Central laboratory $18,921 $18,083
Clinical research 327,679 329,470
---------------------------------------------------- ------------------
Total $346,600 $347,553
---------------------------------------------------- ------------------
10
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 Condensed 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, 2005. 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 2,800 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 three months ended August 31, 2005, we
derived approximately 55.4%, 37.6%, and 7.0% 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.
11
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 August 31, 2005, we have received
$2,520,459 and $1,873,375 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, 2005 Compared with Three Months Ended August 31,
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
------------------
August 31, August 31, 2004
---------- ---------- ----
2005 2004 to 2005
---- ---- -------
Percentage
----------
Percentage of Net Revenue Increase/(decrease)
------------------------- -------------------
Net revenue............................ 100.0% 100.0% 9.7%
Costs and expenses:
Direct costs........................... 55.1% 54.2% 11.4%
Selling, general and administrative.... 31.2% 29.8% 14.9%
Depreciation and amortization.......... 4.0% 3.9% 12.1%
Income from operations................. 9.7% 12.1% (11.8%)
Net revenue increased by $7.6 million, or 9.7%, from $78.3 million to $85.9
million. This improvement arose through a combination of increased business from
existing clients, business won from new clients and revenues from acquisition
not included in the comparative period. The additional revenues relating to the
Beacon acquisition amounted to $0.6 million for the three months ended August
31,
12
2005. Revenues in the United States, Europe and the Rest of World grew by 4.0%,
15.8% and 28.3% respectively. In the three months ended August 31, 2005, net
revenue from our central laboratory business increased by 10.5% from $6.6
million to $7.2 million, while our clinical research segment grew by 9.6% from
$71.8 million to $78.7 million over the comparable period. The increase in net
revenue in our central laboratory segment is primarily due to higher testing
volumes in the first quarter of fiscal 2006. 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 $4.8 million, or 11.4%, from $42.5 million to $47.3
million, primarily due to increased staff numbers needed to support increased
project related activity and increased costs arising from the Beacon acquisition
amounting to $0.3 million. Direct costs as a percentage of net revenue increased
from 54.2% in the three months to August 31, 2004 to 55.1% in the three months
to August 31, 2005.
Selling, general and administrative expenses increased by $3.5 million, or
14.9%, from $23.3 million to $26.8 million. This increase is due to the
continued expansion of our operations and additional selling, general and
administrative costs of $0.2 million from the Beacon acquisition not included in
the comparative period. As a percentage of net revenue, selling, general and
administrative expenses, increased from 29.8% in the three months ended August
31, 2004 to 31.2% in the three months ended August 31, 2005.
Depreciation and amortization expense increased by $0.3 million, or 12.1%, from
$3.1 million to $3.4 million. This increase is due to the continued investment
in facilities and information technology to support the growth in activity and
in providing for future capacity. As a percentage of net revenue, depreciation
and amortization increased from 3.9% in the three months ended August 31, 2004
to 4.0% in the three months ended August 31, 2005.
Income from operations decreased by $1.1 million, or 11.8%, from $9.5 million to
$8.4 million, including acquisitions. As a percentage of net revenue, income
from operations decreased from 12.1% for the three months to August 31, 2004 to
9.7% of net revenues for the three months ended August 31, 2005. For first three
months of fiscal 2006, losses from operations, as a percentage of net revenue
for the central laboratory, increased from 13.1% for the first three months of
fiscal 2004 to 22.3% for the comparable period in 2005 due to the expansion of
infrastructure in the laboratory. The central laboratory constitutes
approximately 8% of our business revenues. Operating margins for our clinical
research segment decreased from 14.4% in the three months ended August 31, 2004
to 12.7% for the three months ended August 31, 2005.
Net interest income for the three months ended August 31, 2005 was $0.4 million,
an increase of $0.2 million over the amount of net interest income for the three
months ended August 31, 2004. Higher average level of funds invested and higher
interest rates over fiscal 2005 contributed to the increased interest income.
ICON's effective tax rate for the three months ended August 31, 2005 was 28.0%
compared with 24.1% for the comparable period last year. The increase in the
effective rate was primarily due to a change in the geographic distribution of
pre-tax earnings.
13
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 public 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 paid in the three months ended August 31, 2004 and August
31, 2005 amounted to $46.5 million and $51.6 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 the basis of
the relationship between time incurred and the total estimated contract duration
or on a fee-for-service basis. 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, 2005, our working capital amounted to $132.0 million, compared
to $125.3 million at May 31, 2005. 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 70 days at August 31, 2005,
compared to 63 days at May 31, 2005.
Net cash provided by operating activities was $2.8 million in the three months
ended August 31, 2005, compared to $1.4 million in the three months ended August
31, 2004.
Net cash used in investing activities was $1.6 million in the three months ended
August 31, 2005, compared to $14.2 million in the three months ended August 31,
2004. The decrease in cash used in investing activities is due principally to
the acquisition of Beacon in July 2004.
Net cash provided by financing activities was $1.2 million in the three months
ended August 31, 2005, compared to $6.9 million in the three months ended August
31, 2004. This decrease is principally due to the funds drawdown from a bank
overdraft in the first quarter of fiscal 2005.
As a result of these cash flows, cash and cash equivalents increased by $2.0
million in the three months ended August 31, 2005, compared to a decrease of
$6.2 million in the three months ended August 31, 2004.
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, 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
August 31, 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 its subsidiary ICON
Clinical Research GmbH up to an amount (euro)120,000 (U.S.$147.420). As of
August 31, 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.
14
New Accounting Pronouncements not yet adopted
In March 2005, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 47. In accordance with FASB Interpretation 47 companies must
recognise a liability for the fair value of a legal obligation to perform
asset-retirement activities that are conditional on a future event if the amount
can be reasonably estimated. The Interpretation provides guidance on whether the
fair value is reasonably estimable. The premise underlying the Interpretation is
a need for more uniform application of Statement 143 "Accounting for Asset
Retirement Obligations". Companies must adopt the Interpretation no later than
the end of the fiscal year ending after December 15, 2005. The company does not
expect the impacts of adopting FASB Interpretation No 47 to be material.
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 year that begins January 1, 2006. The
cumulative effect of adoption, if any, applied on a modified prospective basis,
would be measured and recognized on March 31, 2006. 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 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 available-for-sale or held-to-maturity. In addition,
EITF 03-1 requires certain disclosures about cost method investments. The
recognition and measurement provisions of EITF 03-1 have been deferred until
additional guidance is issued.
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.
15
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
October 14, 2005 /s/ Sean Leech
- ------------------------------- --------------------------------
Date Sean Leech
Executive Vice President -
Commercial and Organizational
Development
(Principal Financial Officer)*
* Sean Leech, Executive Vice President - Commercial and Organizational
Development, was replaced by Ciaran Murray as the Chief Financial Officer of the
Registrant on October 3, 2005. Sean Leech is the person performing the functions
of the Principal Financial Officer of the Registrant on an interim basis as of
the date hereof.
16
