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 September 30, 2007
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 September 30, 2007
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ICON
plc
This
report on Form 6-K is hereby incorporated by reference in the registration
statement on Form F-3 (Registration No. 333-133371) of ICON plc and in the
prospectus contained therein, and this report on Form 6-K shall be deemed
a part
of such registration statement from the date on which this report is filed,
to
the extent not superseded by documents or reports subsequently filed or
furnished by ICON plc under the Securities Act of 1933 or the Securities
Exchange Act of 1934.
1
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. As of September 30, 2007, we had
approximately 5,400 employees worldwide, with operations in 65 locations
in 33
countries, including the United States and major markets in Europe and Rest
of
World. For the nine months ended September 30, 2007, we derived approximately
52.8%, 41.2%, and 6% of our net revenue in the United States, Europe and
Rest of
World, respectively.
Headquartered
in Dublin, Ireland, we began operations in 1990 and have expanded our business
through internal growth and strategic acquisitions.
Recent
Developments
On
July
12, 2007, the Company acquired 100% of the common stock of DOCS International,
a
European based clinical research staffing organization, for a cash consideration
of approximately $40.6 million (€29.5 million). DOCS International operates in
eight European countries and focuses on the training and supply of contract
and
permanent clinical research personnel to the pharmaceutical and biotech
industry.
On
July 9,
2007, ICON plc entered into a facility agreement for the provision of a
multi-currency revolving credit facility of €35 million ($49.5 million) with The
Governor and Company of the Bank of Ireland. Our obligations under
the facility are secured by certain composite guarantees and indemnities
and
pledges in favour of the bank. The facility bears interest at an annual rate
equal to the interbank rate plus 0.6 percent. On July 10, 2007 the Company
drew
down €29.5 million ($40.6 million) of the facility to fund the acquisition of
DOCS International.
2
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
|
(Unaudited)
September
30,
2007
|
(Audited)
December
31,
2006
|
|||||||
|
ASSETS
|
(in
thousands)
|
|||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ |
69,499
|
$ |
63,039
|
||||
|
Short
term investments - available for sale
|
28,707
|
39,822
|
||||||
|
Accounts
receivable
|
136,696
|
108,216
|
||||||
|
Unbilled
revenue
|
123,823
|
89,977
|
||||||
|
Other
receivables
|
11,553
|
7,468
|
||||||
|
Deferred
tax asset
|
4,373
|
6,028
|
||||||
|
Prepayments
and other current assets
|
16,642
|
14,335
|
||||||
|
Income
taxes receivable
|
583
|
-
|
||||||
|
Total
current assets
|
391,876
|
328,885
|
||||||
|
Other
Assets:
|
||||||||
|
Property,
plant and equipment, net
|
109,952
|
68,208
|
||||||
|
Goodwill
|
124,353
|
78,717
|
||||||
|
Non-current
deferred tax asset
|
5,599
|
531
|
||||||
|
Total
Assets
|
$ |
631,780
|
$ |
476,341
|
||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ |
13,560
|
$ |
9,691
|
||||
|
Payments
on account
|
94,028
|
90,394
|
||||||
|
Other
liabilities
|
66,591
|
51,956
|
||||||
|
Deferred
tax liability
|
433
|
538
|
||||||
|
Bank
credit lines and loan facilities
|
70,487
|
5,000
|
||||||
|
Income
taxes payable
|
18,832
|
10,985
|
||||||
|
Total
current liabilities
|
263,931
|
168,564
|
||||||
|
Other
Liabilities:
|
||||||||
|
Long
term government grants
|
1,177
|
1,170
|
||||||
|
Long
term finance leases
|
70
|
163
|
||||||
|
Non-current
deferred tax liability
|
5,388
|
2,586
|
||||||
|
Minority
interest
|
1,228
|
1,120
|
||||||
|
Total
Liabilities
|
271,794
|
173,603
|
||||||
|
Shareholders'
Equity:
|
||||||||
|
Ordinary
shares, par value 6
euro cents per share; 40,000,000 shares authorized,
|
||||||||
|
28,783,048
shares issued and
outstanding at September 30, 2007 and
|
||||||||
|
28,517,852
shares issued and
outstanding at December 31, 2006
|
2,118
|
2,100
|
||||||
|
Additional
paid-in
capital
|
143,059
|
133,996
|
||||||
|
Accumulated
other comprehensive
income
|
22,600
|
14,515
|
||||||
|
Retained
earnings
|
192,209
|
152,127
|
||||||
|
Total
Shareholders' Equity
|
359,986
|
302,738
|
||||||
|
Total
Liabilities and Shareholders' Equity
|
$ |
631,780
|
$ |
476,341
|
||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30,
2006
(UNAUDITED)
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
2007
|
September
30,
2006
|
September
30,
2007
|
September
30,
2006
|
|||||||||||||
|
(in
thousands except share and per share data)
|
||||||||||||||||
|
Revenue:
|
||||||||||||||||
|
Gross
revenue
|
$ |
231,819
|
$ |
171,109
|
$ |
625,942
|
$ |
465,497
|
||||||||
|
Subcontractor
costs
|
(64,903 | ) | (50,395 | ) | (175,890 | ) | (138,852 | ) | ||||||||
|
Net
revenue
|
166,916
|
120,714
|
450,052
|
326,645
|
||||||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Direct
costs
|
91,675
|
68,428
|
254,107
|
183,146
|
||||||||||||
|
Selling,
general and
administrative expense
|
51,518
|
35,800
|
132,864
|
98,477
|
||||||||||||
|
Depreciation
and
amortization
|
5,020
|
3,875
|
13,626
|
11,009
|
||||||||||||
|
Total
costs and
expenses
|
148,213
|
108,103
|
400,597
|
292,632
|
||||||||||||
|
Income
from operations
|
18,703
|
12,611
|
49,455
|
34,013
|
||||||||||||
|
Interest
income
|
927
|
995
|
3,027
|
2,646
|
||||||||||||
|
Interest
expense
|
(911 | ) | (44 | ) | (948 | ) | (110 | ) | ||||||||
|
Income
before provision for income taxes
|
18,719
|
13,562
|
51,534
|
36,549
|
||||||||||||
|
Provision
for income taxes
|
(4,158 | ) | (3,423 | ) | (11,344 | ) | (9,496 | ) | ||||||||
|
Minority
interest
|
(60 | ) | (45 | ) | (108 | ) | (121 | ) | ||||||||
|
Net
income
|
$ |
14,501
|
$ |
10,094
|
$ |
40,082
|
$ |
26,932
|
||||||||
|
Net
income per Ordinary Share:
|
||||||||||||||||
|
Basic
|
$ |
0.50
|
$ |
0.36
|
$ |
1.40
|
$ |
0.95
|
||||||||
|
Diluted
|
$ |
0.49
|
$ |
0.35
|
$ |
1.35
|
$ |
0.94
|
||||||||
|
Weighted
average number of Ordinary Shares outstanding:
|
||||||||||||||||
|
Basic
|
28,760,726
|
28,351,525
|
28,669,798
|
28,333,823
|
||||||||||||
|
Diluted
|
29,826,457
|
29,085,080
|
29,714,585
|
28,709,932
|
||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER 30,
2006
(UNAUDITED)
|
Nine
Months Ended
|
||||||||
|
September
30,
2007
|
September
30,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ |
40,082
|
$ |
26,932
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Loss
on disposal of property,
plant and equipment
|
417
|
197
|
||||||
|
Depreciation
and
amortization
|
13,626
|
11,012
|
||||||
|
Amortization
of
grants
|
(87 | ) | (85 | ) | ||||
|
Share
compensation expense
|
3,940
|
2,993
|
||||||
|
Deferred
taxes
|
(278 | ) | (310 | ) | ||||
|
Minority
interest
|
108
|
121
|
||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Increase
in accounts
receivable
|
(19,532 | ) | (26,546 | ) | ||||
|
Increase
in unbilled
revenue
|
(32,089 | ) | (11,340 | ) | ||||
|
Decrease
in other
receivables
|
1,760
|
1,864
|
||||||
|
Increase
in prepayments and
other current assets
|
(815 | ) | (2,617 | ) | ||||
|
Increase
in payments on
account
|
1,805
|
16,530
|
||||||
|
Increase
in other
liabilities
|
2,199
|
13,082
|
||||||
|
Increase
in income taxes
payable
|
6,295
|
703
|
||||||
|
Increase/(decrease)
in accounts payable
|
2,487
|
(498 | ) | |||||
|
Net
cash provided by operating activities
|
19,918
|
32,038
|
||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of property, plant and equipment
|
(49,660 | ) | (19,260 | ) | ||||
|
Purchase
of subsidiary undertakings and acquisition costs
|
(40,568 | ) | (6,837 | ) | ||||
|
Purchase
of short term investments
|
-
|
(20,021 | ) | |||||
|
Sale
of short term investments
|
11,116
|
3,008
|
||||||
|
Overdraft
assumed/cash received on acquisition
|
(2,424 | ) |
341
|
|||||
|
Deferred
payments in respect of prior year acquisitions
|
-
|
(96 | ) | |||||
|
Net
cash used in investing activities
|
(81,536 | ) | (42,865 | ) | ||||
|
Cash
flows from financing activities:
|
||||||||
|
Drawdown/(repayment)
of bank credit lines and loan facilities
|
65,487
|
(888 | ) | |||||
|
Proceeds
from exercise of share options
|
4,188
|
6,015
|
||||||
|
Share
issuance costs
|
(117 | ) | (28 | ) | ||||
|
Tax
benefit from the exercise of share options
|
1,070
|
955
|
||||||
|
Repayment
of other liabilities
|
(87 | ) | (84 | ) | ||||
|
Net
cash provided by financing activities
|
70,541
|
5,970
|
||||||
|
Effect
of exchange rate movements on cash
|
(2,463 | ) |
236
|
|||||
|
Net
increase/(decrease) in cash and cash equivalents
|
6,460
|
(4,621 | ) | |||||
|
Cash
and cash equivalents at beginning of period
|
63,039
|
59,509
|
||||||
|
Cash
and cash equivalents at end of period
|
$ |
69,499
|
$ |
54,888
|
||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(UNAUDITED)
|
Shares
|
Amount
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Income
|
Retained
Earnings
|
Total
|
|||||||||||||||||||
|
(dollars
in thousands, except share data)
|
||||||||||||||||||||||||
|
Balance
at December 31, 2006
|
28,517,852
|
$ |
2,100
|
$ |
133,996
|
$ |
14,515
|
$ |
152,127
|
$ |
302,738
|
|||||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
income
|
40,082
|
40,082
|
||||||||||||||||||||||
|
Currency
translation adjustment
|
8,085
|
8,085
|
||||||||||||||||||||||
|
Total
comprehensive income
|
350,905
|
|||||||||||||||||||||||
|
Share
issuance costs
|
(117 | ) | (117 | ) | ||||||||||||||||||||
|
Exercise
of share options
|
265,196
|
18
|
4,170
|
4,188
|
||||||||||||||||||||
|
Non-cash
stock compensation expense
|
3,940
|
3,940
|
||||||||||||||||||||||
|
Tax
benefit on exercise of share options
|
1,070
|
1,070
|
||||||||||||||||||||||
|
Balance
at September 30, 2007
|
28,783,048
|
$ |
2,118
|
$ |
143,059
|
$ |
22,600
|
$ |
192,209
|
$ |
359,986
|
|||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER
30, 2007
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.
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 Form 20-F for the year ended December 31, 2006. Operating
results for the nine months ended September 30, 2007 are not necessarily
indicative of the results that may be expected for the fiscal period ending
December 31, 2007.
2.
Goodwill
|
September
30,
|
December
31,
|
|||||||
|
2007
|
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Opening
balance
|
$ |
78,717
|
$ |
65,731
|
||||
|
Payments
made in respect of current period acquisitions
|
43,351
|
9,005
|
||||||
|
Payments
made in respect of prior period acquisitions
|
-
|
96
|
||||||
|
Foreign
exchange movement
|
2,285
|
3,885
|
||||||
|
Closing
balance
|
$ |
124,353
|
$ |
78,717
|
||||
The
goodwill balance relates entirely to the clinical research segment.
Acquisition
of Docs International
On
July
12, 2007 the Company acquired 100% of the common stock of DOCS International
(“DOCS”), a European based clinical research staffing organization, for a cash
consideration of approximately $40.6 million (€29.5 million), excluding costs of
acquisition.
The
acquisition of DOCS 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 12,
|
||||
|
2007
|
||||
|
(in
thousands)
|
||||
|
Property,
plant and equipment
|
$ |
984
|
||
|
Goodwill
|
43,351
|
|||
|
Cash
|
(2,355 | ) | ||
|
Other
current assets
|
7,362
|
|||
|
Current
liabilities
|
(8,198 | ) | ||
|
Purchase
price
|
$ |
41,144
|
||
7
Prior
Period Acquisitions
On
July
10, 2006, the Company acquired 100% of the common stock of Ovation Healthcare
Research 2 Inc. (“Ovation”), based in Illinois, USA, for an initial cash
consideration of U.S.$6.6 million, excluding costs of acquisition. Working
capital provisions had been built into the acquisition contract requiring
the
potential payment of additional deferred consideration up to a maximum of
U.S.$1.4 million. On October 27, 2006, $0.18 million was paid to the former
shareholders of Ovation in full and final settlement of the working capital
provisions.
The
acquisition of Ovation 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 10,
|
||||
|
2006
|
||||
|
(in
thousands)
|
||||
|
Property,
plant and equipment
|
$ |
384
|
||
|
Goodwill
|
9,005
|
|||
|
Cash
|
341
|
|||
|
Other
current assets
|
4,381
|
|||
|
Current
liabilities
|
(6,952 | ) | ||
|
Long
term liabilities
|
(124 | ) | ||
|
Purchase
price
|
$ |
7,035
|
||
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 $10.9 million, excluding costs of acquisition. Earn out
provisions were built into the acquisition contract requiring the potential
payment of additional deferred consideration up to a maximum of US$4 million
depending on the performance of GloboMax over the period from date of
acquisition to May 31, 2006. On August 26, 2005, cash consideration of US$1.4
million was paid to the former shareholders of GloboMax in respect of the
first
earn out target which was reached on May 31, 2005. On May 31, 2006 a final
payment of $96,131 was made to the former shareholders of GloboMax. No further
payments are anticipated.
3.
Adoption of the provisions of FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes
In
June
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes –
an Interpretation of FASB Statement No. 109, Accounting for Income Taxes.
The Interpretation addresses the determination of whether tax benefits claimed
or expected to be claimed on a tax return should be recorded in the financial
statements.
Under
FIN
48, the Company may recognize the tax benefits from an uncertain tax position
only if it is more likely than not that the tax position will be sustained
on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
a
position should be measured based on the largest benefit that has a greater
than
50% likelihood of being recognized upon ultimate settlement.
FIN
48
also provides guidance on derecognition, classification, interest and penalties
on income taxes, accounting in interim periods and requires increased
disclosures.
The
Company adopted the provisions of FIN 48 effective January 1, 2007. As a
result
of the implementation of FIN 48, the Company maintains a $11.2 million liability
for unrecognized tax benefit, which is comprised of $10.2 million related
to
items generating unrecognized tax benefits and $1.0 million for interest
and
related penalties to such items. The Company recognizes interest accrued
on
unrecognized tax benefits as an additional income tax expense.
Any
recognition of an unrecognized tax liability would impact the Company’s
effective tax rate in that period. We do not anticipate that the total
unrecognized tax benefits or our effective tax rate will significantly change
due to the settlement of audits and the expiration of statutes of limitations
within the next 12 months.
8
The
Company has analyzed filing positions in all of the significant federal,
state
and foreign jurisdictions where it is required to file income tax returns,
as
well as open tax years in these jurisdictions. The only periods subject to
examination by the major tax jurisdictions where the Company does business
are
2003 through 2006 tax years. The Company does not believe that the outcome
of
any examination will have a material impact on its financial
statements.
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
|
Nine
Months Ended
|
|||||||||||||||
|
Sept
30,
|
Sept
30,
|
Sept
30,
|
Sept
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
Weighted
average number of ordinary shares outstanding for
basic
net income per ordinary share
|
28,760,726
|
28,351,525
|
28,669,798
|
28,333,823
|
||||||||||||
|
Effect
of dilutive share options outstanding
|
1,065,731
|
733,555
|
1,044,787
|
376,109
|
||||||||||||
|
Weighted
average number of ordinary shares for diluted net
income
per ordinary share
|
29,826,457
|
29,085,080
|
29,714,585
|
28,709,932
|
||||||||||||
5.
Stock Options
On
January
17, 2003, the Company adopted the Share Option Plan 2003 (the “2003 Plan”)
pursuant to which the Compensation Committee of the Company’s Board of Directors
may grant options to officers and other employees of the Company or its
subsidiaries for the purchase of ordinary shares. Each option will be an
employee stock option, or NSO, as described in Section 422 or 423 of the
Code.
Each grant of an option under the 2003 Plan will be evidenced by a Stock
Option
Agreement between the optionee and the Company. The exercise price will be
specified in each Stock Option Agreement, however option prices will not
be less
than 100% of the fair market value of an ordinary share on the date the option
is granted.
An
aggregate of 3.0 million ordinary shares have been reserved under the 2003
Plan;
in no event will the number of ordinary shares that may be issued pursuant
to
options awarded under the 2003 Plan exceed 10% of the outstanding shares,
as
defined in the 2003 Plan, at the time of the grant. Further, the maximum
number
of ordinary shares with respect to which options may be granted under the
2003
Plan during any calendar year to any employee shall be 200,000 ordinary
shares.
No
options
can be granted after January 17, 2013.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Accounting Standards (“SFAS”) 123 (revised 2004), Share Based
Payment (“SFAS 123R”) which replaced SFAS 123 Accounting for
Stock-Based Compensation and supersedes Accounting Principles Board (“APB”)
Opinion No. 25 Accounting for Stock Issued to
Employees. SFAS 123R requires, with effect from accounting
periods beginning after June 15, 2005 that all share based payments to
employees, including stock options granted, be recognized in the financial
statements based on their grant date fair values.
The
Company has adopted SFAS 123R with effect from January 1, 2006 with the
Black-Scholes method of valuation being used to calculate the fair value
of
options granted. The Company adopted SFAS 123R using the
modified-prospective transition method. Under that transition method
compensation cost recognized in the three months ended September 30, 2007
includes; (a) compensation cost for all share-based payments granted prior
to,
but not yet vested as of, January 1, 2006 based on grant date fair value
estimated in accordance with the original provisions of SFAS 123 and (b)
compensation cost for all share based payments granted subsequent to January
1,
2006 based on grant date fair values estimated in accordance with the provisions
of SFAS 123R. Results for prior periods have not been
restated.
9
The
following table summarizes option activity for the nine months ended September
30, 2007:
|
Options
Outstanding
Number
of Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Fair
Value
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||||||||
|
Outstanding
at December 31, 2006
|
2,321,852
|
$ |
18.61
|
$ |
8.45
|
|||||||||||
|
Granted
|
625,415
|
42.51
|
18.23
|
|||||||||||||
|
Exercised
|
(265,276 | ) |
16.54
|
7.73
|
||||||||||||
|
Forfeited
|
(121,143 | ) |
24.14
|
10.66
|
||||||||||||
|
Outstanding
at September 30, 2007
|
2,560,848
|
$ |
24.36
|
$ |
10.81
|
5.64
|
||||||||||
|
Exercisable
at September 30, 2007
|
720,670
|
$ |
18.92
|
$ |
8.65
|
4.55
|
||||||||||
Share
option awards are generally granted with an exercise price equal to the market
price of the Company’s shares at date of grant. Share options
typically vest over a period of five years from date of grant and expire
eight
years from date of grant. The maximum contractual term of options
outstanding at September 30, 2007 is eight years.
The
weighted average fair value of stock options granted during the nine months
ended September 30, 2007 calculated using the Black-Scholes option pricing
model, was $18.23 based on the following assumptions; dividend yield - 0%,
risk
free interest rate – 4.7%, expected volatility - 40% and weighted average
expected life – 5.11 years.
Expected
volatility is based on historical volatility of our common stock over a period
equal to the expected term of the options; the expected life represents the
weighted average period of time that options granted are expected to be
outstanding given consideration to vesting schedules, and our historical
experience of past vesting and termination patterns. The risk-free rate is
based
on the U.S. gilts zero-coupon yield curve in effect at time of grant for
periods
corresponding with the expected life of the option.
Income
from operations for the nine months ended September 30, 2007 is stated after
charging $3.9 million in respect of non-cash stock compensation
expense. Basic and diluted earnings per share for the nine months
ended September 30, 2007 had SFAS 123R not been introduced would have been
$1.54
and $1.47 respectively. Non-cash stock compensation expense for the
nine months ended September 30, 2007 has been allocated to direct costs and
selling, general and administrative expenses as follows:
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
Sept
30,
|
Sept
30,
|
Sept
30,
|
Sept
30,
|
|||||||||||||
|
2007
|
|
2006
|
2007
|
2006
|
||||||||||||
|
(In
thousands)
|
(In
thousands)
|
|||||||||||||||
|
Direct
costs
|
$ |
760
|
565
|
$ |
2,167
|
1,649
|
||||||||||
|
Selling,
general and administrative
|
620
|
460
|
1,773
|
1,344
|
||||||||||||
| $ |
1,380
|
1,025
|
$ |
3,940
|
2,993
|
|||||||||||
10
Non
vested
shares outstanding as at September 30, 2007 are as follows:
|
Options
Outstanding
Number
of Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Fair
Value
|
||||||||||
|
Non
vested outstanding at December 31, 2006
|
1,788,308
|
$ |
19.32
|
$ |
8.69
|
|||||||
|
Granted
|
625,415
|
42.51
|
18.23
|
|||||||||
|
Vested
|
(452,402 | ) |
20.69
|
9.30
|
||||||||
|
Forfeited
|
(121,143 | ) |
24.14
|
10.66
|
||||||||
|
Non
vested outstanding at September 30, 2007
|
1,840,178
|
$ |
26.49
|
$ |
11.68
|
|||||||
As
at
September 30, 2007, total unrecognized compensation cost related to unvested
options, which the Company expects to recognize over a weighted average period
of 2.18 years, amounted to $14.28 million. The Company has granted
options with fair values ranging from $5.22 to $23.33 per option or a weighted
average fair value of $9.69 per option. The Company issues new
ordinary shares for all options exercised. The total amount of
fully vested share options which remained outstanding at September 30, 2007
was
720,670. The fully vested options have an average remaining
contractual term of 4.55 years and average exercise price of
$18.92. The total intrinsic value of options exercised during the
period was $10.29 million (three months ended September 30, 2006 was $.38
million).
6.
Business Segment Information
The
Company's areas of operation outside of Ireland principally include the United
Kingdom, United States, Germany, Australia, New Zealand, Argentina, Chile,
France, Italy, Japan, Israel, Singapore, Canada, Sweden, Denmark, Finland,
The
Netherlands, Latvia, Russia, Lithuania, Poland, Taiwan, Hong Kong, South
Africa,
Spain, Hungary, India, Mexico, Brazil, South Korea, China, Thailand and Peru.
Segment information for the three and nine month periods ended September
30,
2007 and September 30, 2006 are as follows:
| a) The distribution of net revenue by geographical area was as follows: | ||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Ireland*
|
$ |
20,047
|
$ |
11,889
|
$ |
70,435
|
$ |
31,199
|
||||||||
|
Rest
of Europe
|
47,598
|
28,322
|
115,147
|
74,447
|
||||||||||||
|
U.S.
|
88,552
|
72,471
|
237,545
|
198,331
|
||||||||||||
|
Rest
of the World
|
10,719
|
8,032
|
26,925
|
22,668
|
||||||||||||
|
Total
|
$ |
166,916
|
$ |
120,714
|
$ |
450,052
|
$ |
326,645
|
||||||||
|
*
All sales shown for Ireland are export sales.
|
11
| b) The distribution of net revenue by business segment was as follows: | ||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Central
laboratory
|
$ |
13,845
|
$ |
12,888
|
$ |
39,802
|
$ |
33,693
|
||||||||
|
Clinical
research
|
153,071
|
107,826
|
410,250
|
292,952
|
||||||||||||
|
Total
|
$ |
166,916
|
$ |
120,714
|
$ |
450,052
|
$ |
326,645
|
||||||||
| c) The distribution of income from operations by geographical area was as follows: | ||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September 30,
|
September
30,
|
September 30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Ireland
|
$ |
3,342
|
$ |
2,331
|
$ |
23,279
|
$ |
6,263
|
||||||||
|
Rest
of Europe
|
3,585
|
3,676
|
6,660
|
10,047
|
||||||||||||
|
U.S.
|
10,221
|
5,612
|
17,918
|
14,517
|
||||||||||||
|
Rest
of the World
|
1,555
|
992
|
1,598
|
3,186
|
||||||||||||
|
Total
|
$ |
18,703
|
$ |
12,611
|
$ |
49,455
|
$ |
34,013
|
||||||||
|
d) The
distribution of income from operations by business segment was
as
follows:
|
||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Central
laboratory
|
$ |
966
|
$ |
639
|
$ |
2,759
|
$ |
305
|
||||||||
|
Clinical
research
|
17,737
|
11,972
|
46,696
|
33,708
|
||||||||||||
|
Total
|
$ |
18,703
|
$ |
12,611
|
$ |
49,455
|
$ |
34,013
|
||||||||
| e) The distribution of property, plant and equipment, net, by geographical area was as follows: | ||||||||
|
September
30,
2007
|
December
31,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Ireland
|
$ |
67,344
|
$ |
33,999
|
||||
|
Rest
of Europe
|
12,496
|
9,213
|
||||||
|
U.S.
|
24,195
|
21,421
|
||||||
|
Rest
of the World
|
5,917
|
3,575
|
||||||
|
Total
|
$ |
109,952
|
$ |
68,208
|
||||
12
| f) The distribution of property, plant and equipment, net, by business segment was as follows: | ||||||||
|
September
30,
2007
|
December
31,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Central
laboratory
|
$ |
5,611
|
$ |
5,050
|
||||
|
Clinical
research
|
104,341
|
63,158
|
||||||
|
Total
|
$ |
109,952
|
$ |
68,208
|
||||
| g) The distribution of depreciation and amortization by geographical area was as follows: | ||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Ireland
|
$ |
1,731
|
$ |
1,318
|
$ |
4,493
|
$ |
3,844
|
||||||||
|
Rest
of Europe
|
906
|
637
|
2,358
|
1,806
|
||||||||||||
|
U.S.
|
1,982
|
1,690
|
5,703
|
4,771
|
||||||||||||
|
Rest
of the World
|
401
|
230
|
1,072
|
588
|
||||||||||||
|
Total
|
$ |
5,020
|
$ |
3,875
|
$ |
13,626
|
$ |
11,009
|
||||||||
| h) The distribution of depreciation and amortization by business segment was as follows: | ||||||||||||||||
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
|
September
30,
|
September
30,
|
September
30,
|
September
30,
|
|||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
|
Central
laboratory
|
$ |
515
|
$ |
360
|
$ |
1,358
|
$ |
982
|
||||||||
|
Clinical
research
|
4,505
|
3,515
|
12,268
|
10,027
|
||||||||||||
|
Total
|
$ |
5,020
|
$ |
3,875
|
$ |
13,626
|
$ |
11,009
|
||||||||
| i) The distribution of total assets by geographical area was as follows: | ||||||||
|
September
30,
2007
|
December
31,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Ireland
|
$ |
177,630
|
$ |
115,802
|
||||
|
Rest
of Europe
|
154,603
|
100,212
|
||||||
|
U.S.
|
271,246
|
245,381
|
||||||
|
Rest
of the World
|
28,301
|
14,946
|
||||||
|
Total
|
$ |
631,780
|
$ |
476,341
|
||||
13
| j) The distribution of total assets by business segment was as follows: | ||||||||
|
September
30,
2007
|
December
31,
2006
|
|||||||
|
(in
thousands)
|
||||||||
|
Central
laboratory
|
$ |
54,801
|
$ |
28,272
|
||||
|
Clinical
research
|
576,979
|
448,069
|
||||||
|
Total
|
$ |
631,780
|
$ |
476,341
|
||||
14
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 year ended
December 31, 2006. 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. As of September 30, 2007 we had
approximately 5,400 employees worldwide, with operations in 65 locations
in 33
countries including the United States and major markets in Europe and Rest
of
World. For the nine months ended September 30, 2007 we derived
approximately 52.8%, 41.2%, 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, 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.
15
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
19
operations operating in U.S. dollars, 11 trading in Euros, 5 in pounds Sterling,
2 each in Indian Rupee, Russian Rouble, Japanese Yen, Swedish Krona and Polish
Zloty, and 1 each in Australian dollars, Singapore dollars, Israeli New Shekels,
Latvian Lats, Argentine Peso, South African Rand, Canadian dollar, Hungarian
Forint, Danish Krone, Hong Kong dollar, Taiwan dollar, Mexican Peso, Brazilian
Real, Chilean Peso, South Korean Won, Thai Baht, Chinese Yuan Renminbi,
Lithuanian Litas, Peruvian Neuvo Sol & New Zealand dollars. 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 September 30, 2007, we have received
$2.9 million and $2.2 million 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 September 30, 2007 compared with Three Months Ended September
30,
2006
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
|
||||||||||||
|
September
30,
2007
|
September
30,
2006
|
2006
to
2007
|
||||||||||
|
Percentage
|
||||||||||||
|
Percentage
of Net Revenue
|
Increase/(decrease)
|
|||||||||||
|
Net
revenue
|
100.0 | % | 100.0 | % | 38.3 | % | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Direct
costs
|
54.9 | % | 56.7 | % | 34.0 | % | ||||||
|
Selling,
general and administrative
|
30.9 | % | 29.7 | % | 44.0 | % | ||||||
|
Depreciation
and amortization
|
3.0 | % | 3.2 | % | 29.5 | % | ||||||
|
Income
from operations
|
11.2 | % | 10.4 | % | 48.3 | % | ||||||
Net
revenue increased by $46.2 million, or 38.3%, from $120.7 million for the
three
months ended September 30, 2006, to $166.9 million for the three months ended
September 30, 2007. In the three months ended September 30, 2007, net
revenue from our central laboratory business increased by 7.4%, from $12.9
million, to $13.8 million, while our clinical research segment grew by 42%,
from
$107.8 million, to $153.1 million, in each case over the period ended September
30, 2006. The increase in net revenue in our central laboratory segment is
primarily due to higher testing volumes over the comparative period. The
improvement in net revenue in the clinical research segment arose through
a
combination of increased business from existing clients, and business won
from
new clients due to 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.
16
Direct
costs increased by $23.2 million, or 34.0%, from $68.4 million for the three
months ended September 30, 2006 to $91.7 million for the three months ended
September 30, 2007, primarily due to increased staff numbers needed to support
increased project related activity. Direct costs as a percentage of net revenue
decreased from 56.7% for the three months ended September 30, 2006, to 54.9%
for
the three months ended September 30, 2007.
Selling,
general and administrative expenses increased by $15.7 million, or 44.0%,
from
$35.8 million for the three months ended September 30, 2006, to $51.5 million
for the three months ended September 30, 2007. This increase is due to the
continued expansion of our operations. As a percentage of net revenue, selling,
general and administrative expenses, increased from 29.7% in the three months
ended September 30, 2006, to 30.9% in the three months ended September 30,
2007.
Depreciation
and amortization expense increased by $1.1 million, or 29.5%, from $3.9 million
for the three months ended September 30, 2006, to $5.0 million for the three
months ended September 30, 2007. 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 decreased from 3.2% in the three months ended
September 30, 2006, to 3.0% in the three months ended September 30,
2007.
Income
from operations increased by $6.1 million, or 48.3%, from $12.6 million for
the
three months ended September 30, 2006, to $18.7 million for the three months
ended September 30, 2007. The operating income for the quarter is derived
after
the recognition of the non cash stock compensation charge of $1.4 million
(September 30, 2006; $1.0 million). As a percentage of net revenue, income
from
operations increased from 10.4% for the three months ended September 30,
2006,
to 11.2% of net revenues for the three months ended September 30,
2007.
The
three
months ended September 30, 2007, saw a continued improvement in the performance
of the central laboratory business, from an operating profit of 5.0% for
the
three months ended September 30, 2006, to an operating profit of 7.0% for
the
three months ended September 30, 2007. The central laboratory
constitutes approximately 8.3% of our business revenues for the three months
ended September 30, 2007 (September 30, 2006; 10.7%).
Net
interest income for the three months ended September 30, 2007 was $0.02 million,
a decrease of $0.9 million on the amount of interest income for the
three months ended September 30, 2006. The decrease in net interest income
earned in the period was due to a higher level of borrowings in the period
to
fund the acquisition of DOCS International in July 2007 and to meet the ongoing
funding requirements for the Company’s new headquarters building in Dublin,
Ireland.
ICON's
effective tax rate for the three months ended September 30, 2007 was 22.2%
compared with 25.2% for the three months ended September 30,
2006. The decrease is due mainly to the changes in the geographic
distribution of pre-tax earnings.
17
Nine
Months Ended September 30, 2007 compared with the Nine Months Ended September
30, 2006
The
following table sets forth for the periods indicated certain financial data
as a
percentage of net revenue and the percentage change in these items compared
to
the prior comparable period. The trends illustrated in the following table
may
not be indicative of future results.
|
Nine
Months Ended
|
||||||||||||
|
September
30,
2007
|
September
30,
2006
|
2006
to
2007
|
||||||||||
|
Percentage
|
||||||||||||
|
Percentage
of Net Revenue
|
Increase/(decrease)
|
|||||||||||
|
Net
revenue
|
100.0 | % | 100.0 | % | 37.8 | % | ||||||
|
Costs
and expenses:
|
||||||||||||
|
Direct
costs
|
56.5 | % | 56.1 | % | 38.7 | % | ||||||
|
Selling,
general and administrative
|
29.5 | % | 30.1 | % | 34.9 | % | ||||||
|
Depreciation
and amortization
|
3.0 | % | 3.4 | % | 23.8 | % | ||||||
|
Income
from operations
|
11.0 | % | 10.4 | % | 45.4 | % | ||||||
Net
revenue increased by $123.4 million, or 37.8%, from $326.6 million for the
nine
months ended September, 2006, to $450.1 million for the nine months ended
September 30, 2007. This improvement arose through a combination of increased
business from existing clients and business won from new clients. In the
nine
months ended September 30, 2007, net revenue from our central laboratory
business increased by 18.1%, from $33.7 million for the nine months ended
September 30, 2006, to $39.8 million for the nine months ended September
30,
2007, while our clinical research segment grew by 40%, from $292.9 million,
to
$410.3 million over the comparable period. The increase in net revenue in
our
central laboratory segment is primarily due to higher testing volumes in
2007.
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, revenue from
acquisitions and consolidation in the CRO industry.
Direct
costs increased by $71.0 million, or 38.7%, from $183.1 million for the nine
months ended September 30, 2006, to $254.1 million for the nine months ended
September 30, 2007, primarily due to increased staff numbers needed to support
increased project related activity. Direct costs as a percentage of net revenue
increased from 56.1% in the nine months ended September 30, 2006, to 56.5%
in
the nine months ended September 30, 2007.
Selling,
general and administrative expenses increased by $34.4 million, or 34.9%,
from
$98.5 million for the nine months ended September 30, 2006, to $132.9 million
for the nine months ended September 30, 2007. This increase is due to the
continued expansion of our operations. As a percentage of net revenue, selling,
general and administrative expenses, decreased from 30.1% in the nine months
ended September 30, 2006, to 29.5% in the nine months ended September 30,
2007.
Depreciation
and amortization expense increased by $2.6 million, or 23.8%, from $11.0
million
for the nine months ended September 30, 2006, to $13.6 million for the nine
months ended September 30, 2007. 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, decreased from 3.4% in the nine months ended
September 30, 2006, to 3.0% in the nine months ended September 30,
2007.
Income
from operations increased by $15.5 million, or 45.4%, from $34.0 million
for the
nine months ended September 30, 2006, to $49.5 million for the nine months
ended
September 30, 2007. As a percentage of net revenue, income from operations
increased from 10.4% for the nine months ended September 30, 2006, to 11.0%
of
net revenues for the nine months ended September 30, 2007. The
operating income for the nine months is derived after the recognition of
the non
cash stock compensation charge of $3.9 million (September 30, 2006; $3.0
million). As a percentage of net revenue, the central laboratory business
generated operating profits of 7% for the nine months ended September 30,
2007
compared to a profit from operations percentage of 1.0% for the nine months
ended September 30, 2006, due to the efficiencies gained in the higher testing
volumes in fiscal 2007. For the nine months ended September 30, 2007, the
central laboratory constituted approximately 8.8% of our business revenues
(September 30, 2006; 10.3%).
18
Net
interest income for the nine months ended September 30, 2007 was $2.1 million,
a
decrease of $0.4 million over the amount of net interest income for the nine
months ended September 30, 2006. The decrease in net interest income earned
in
the period was due to a higher level of borrowings in the period to fund
the
acquisition of DOCS International in July 2007 and to meet the ongoing funding
requirements for the Company’s new headquarters building in Dublin,
Ireland.
ICON's
effective tax rate for the nine months ended September 30, 2007 was 22.0%
compared with 26.0% for the nine months ended September 30, 2006. This decrease
is mainly due to the changes in the geographic distribution of pre tax
earnings.
Liquidity
and Capital Resources
The
CRO
industry generally is not capital intensive. Since our inception, we have
financed our operations and growth primarily with cash flows from operations,
net proceeds of $49.1 million raised in our initial public offering in May
1998
and net proceeds of $44.3 million raised in our 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 nine months ended September 30, 2007 amounted to
$272.2
million, compared to $196.0 million for the nine months ended September 30,
2006. 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 and
in
some cases upon the achievement of certain milestones. Accordingly, cash
receipts do not necessarily correspond to costs incurred and revenue recognized
on contracts.
As
of
September 30, 2007, our working capital amounted to $127.9 million, compared
to
$160.3 million at December 31, 2006. 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 65 days at September
30,
2007, compared to 53 days at December 31, 2006.
Net
cash
provided by operating activities was $19.9 million in the nine months ended
September 30, 2007, compared to $32.0 million in the nine months ended September
30, 2006.
Net
cash
used in investing activities was $81.5 million in the nine months ended
September 30, 2007, compared to $42.9 million in the nine months ended September
30, 2006. Net cash used in investing activities is primarily used in the
construction of the new facility head office building located in Dublin,
Republic of Ireland and the ongoing investment in information technology
to
support the Company’s current and future growth.
Net
cash
provided by financing activities was $70.5 million in the nine months ended
September 30, 2007, compared to $6.0 million in the nine months ended September
30, 2006.
As
a
result of these cash flows, cash and cash equivalents increased by $6.5 million
in the nine months ended September 30, 2007, compared to a decrease of $4.6
million in the nine months ended September 30, 2006.
On
April
24, 2007, the Company entered into a facility agreement for the provision
of an
overdraft facility of €14 million (U.S. $19.8 million) with AIB
Bank. The overdraft facility bears interest at an annual rate equal
to the bank’s prime rate and is repayable on demand if the Company defaults
under its obligations as specified in the loan agreement. On September 25,
2007
the amount available to be drawn down under this facility was increased to
€21
million ($29.7 million). As of September 30, 2007 €20.4 million ($28.9 million)
of the facility had been drawn down.
On
July
12, 2007 the Company acquired 100% of the common stock of DOCS International,
a
European based clinical research staffing organization, for a cash consideration
of approximately $40.6 million (€29.5 million). DOCS International operates in
eight European countries and focuses on the training and supply of contract
and
permanent clinical research personnel to the pharmaceutical and biotech
industry.
19
On
July 9,
2007 ICON plc entered into a facility agreement for the provision of a
multi-currency revolving credit facility of €35 million ($49.5 million) with The
Governor and Company of the Bank of Ireland. Our obligations under
the facility are secured by certain composite guarantees and indemnities
and
pledges in favour of the bank. The facility bears interest at an annual rate
equal to the interbank rate plus 0.6 percent. On July 10, 2007 the Company
drew
down €29.5 million ($40.6 million) of the facility to fund the acquisition of
DOCS International. The facility will become payable on demand if the Company
defaults under its obligations as specified in the loan agreement.
Inflation
We
believe
the effects of inflation generally do not have a material adverse impact
on our
operations or financial conditions.
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.
20
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 | |
| /s/ Ciaran Murray | |
| Date: October 23, 2007 | Ciaran Murray |
| Chief Financial Officer |
21