Prior
Period Acquisitions
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 FASB
Statement No. 141
Business
Combinations
(“SFAS 141”). 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
|
|
Intangible
asset
|
|
|
2,035
|
|
Goodwill
|
|
|
42,081
|
|
Bank
overdraft
|
|
|
(2,400
|
)
|
Other
current assets
|
|
|
7,960
|
|
Current
liabilities
|
|
|
(9,510
|
)
|
Purchase
price
|
|
$
|
41,150
|
|
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
(“FIN 48”). 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 at March
31, 2008, the Company maintains a $11.7 million liability for unrecognized tax
benefit, which is comprised of $10.0 million related to items generating
unrecognized tax benefits and $1.7 million for interest and related penalties to
such items. The Company recognizes interest accrued on unrecognized tax benefits
as an additional income tax expense.
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 2007 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
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Weighted
average number of ordinary shares outstanding for basic net income per
ordinary share
|
|
|
28,902,630
|
|
|
|
28,564,498
|
|
Effect
of dilutive share options outstanding
|
|
|
1,137,106
|
|
|
|
944,164
|
|
Weighted
average number of ordinary shares for diluted net income per ordinary
share
|
|
|
30,039,736
|
|
|
|
29,508,662
|
|
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 FASB issued FASB Statement No. 123R (revised 2004),
Share Based Payment
(“SFAS
123R”) which replaced FASB Statement No. 123
Accounting for Stock-Based
Compensation
(“SFAS 123”)
and supersedes
Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to
Employees
(APB No. 25). 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 March 31, 2008, and March
31, 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. The following table summarizes option activity for the three months
ended March 31, 2008:
|
|
Options
Outstanding
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Fair
Value
|
|
|
Weighted
Average
Remaining Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,488,063
|
|
|
$
|
24.53
|
|
|
$
|
10.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
623,483
|
|
|
$
|
70.66
|
|
|
$
|
25.84
|
|
|
|
|
Exercised
|
|
|
(151,074
|
)
|
|
$
|
21.63
|
|
|
$
|
9.54
|
|
|
|
|
Forfeited
|
|
|
(17,678
|
)
|
|
$
|
26.20
|
|
|
$
|
10.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
2,942,794
|
|
|
$
|
34.44
|
|
|
$
|
13.97
|
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2008
|
|
|
991,156
|
|
|
$
|
21.06
|
|
|
$
|
9.11
|
|
|
|
4.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2008, is eight years.
The
weighted average fair value of stock options granted during the three months
ended March 31, 2008, calculated using the Black-Scholes option pricing model,
was $25.84 based on the following assumptions; dividend yield - 0%, risk free
interest rate – 3.2%, expected volatility - 35% 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 life 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 three months ended March 31, 2008, is stated after
charging $1.3 million in respect of non-cash stock compensation
expense. Basic and diluted earnings per share for the three months
ended March 31, 2008, had SFAS 123R not been introduced would have been $0.63
and $0.60 respectively. Non-cash stock compensation expense for the
three months ended March 31, 2008, has been allocated to direct costs and
selling, general and administrative expenses as follows:
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
$
|
670
|
|
|
$
|
650
|
|
Selling,
general and administrative
|
|
|
584
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,254
|
|
|
$
|
1,180
|
|
Non vested shares
outstanding as at March 31, 2008, are as follows:
|
|
Options
Outstanding
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Non
vested outstanding at December 31, 2007
|
|
|
1,808,949
|
|
|
$
|
26.47
|
|
|
$
|
11.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
623,483
|
|
|
$
|
70.66
|
|
|
$
|
25.84
|
|
Vested
|
|
|
(467,244
|
)
|
|
$
|
23.77
|
|
|
$
|
10.53
|
|
Forfeited
|
|
|
(13,550
|
)
|
|
$
|
25.52
|
|
|
$
|
11.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
vested outstanding at March 31, 2008
|
|
|
1,951,638
|
|
|
$
|
41.24
|
|
|
$
|
16.43
|
|
As at
March 31, 2008, total unrecognized compensation cost related to unvested
options, which the Company expects to recognize over a weighted average period
of 2.74 years, amounted to $21.5 million. The Company has granted
options with fair values ranging from $6.34 to $25.84 per option or a weighted
average fair value of $11.53 per option. The Company issues new
ordinary shares for all options exercised. The total amount of
fully vested share options which remained outstanding at March 31, 2008, was
991,156. Fully vested share options at March 31, 2008, have an
average remaining contractual term of 4.53 years, an average exercise price of
$21.06 and a total intrinsic value of $43.4 million. The total intrinsic value
of options exercised during the three months ended March 31, 2008, was $6.5
million (March 31, 2007: $4.09 million).
6.
Business Segment Information
The
Company operates predominantly in the contract clinical research industry
providing a broad range of clinical research and integrated product development
services on a global basis for the pharmaceutical and biotechnology industries.
The Company also has a central laboratory segment primarily based in New York,
USA. This, together with laboratory services based in Dublin, form the central
laboratory segment information disclosed below.
The
Company's areas of operation outside of Ireland principally include the United
States, United Kingdom, France, Germany, Spain, Italy, The Netherlands, Denmark,
Sweden, Finland, Russia, Latvia, Lithuania, Ukraine, Poland, Romania, Czech
Republic, Hungary, Israel, Australia, New Zealand, Japan, South Korea, China,
Taiwan, Hong Kong, Thailand, Singapore, India, South Africa, Canada, Mexico,
Brazil, Peru, Argentina and Chile. Segment information for the three
months ended March 31, 2008, the three months ended March 31, 2007, and as at
March 31, 2008, and December 31, 2007, is as follows:
a) The
distribution of net revenue by geographical area was as follows:
|
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Ireland*
|
|
$
|
35,438
|
|
$
|
22,703
|
Rest
of Europe
|
|
|
57,706
|
|
|
32,096
|
U.S.
|
|
|
92,098
|
|
|
72,970
|
Rest
of the World
|
|
|
16,102
|
|
|
8,320
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,344
|
|
$
|
136,089
|
*
All sales shown for Ireland are export sales.
|
|
|
|
|
|
|
b) The
distribution of net revenue by business segment was as follows:
|
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Central
laboratory
|
|
$
|
16,408
|
|
$
|
13,077
|
Clinical
research
|
|
|
184,936
|
|
|
123,012
|
|
|
|
|
|
|
|
Total
|
|
$
|
201,344
|
|
$
|
136,089
|
c) The
distribution of income from operations by geographical area was as
follows:
|
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Ireland
|
|
$
|
11,905
|
|
$
|
10,832
|
Rest
of Europe
|
|
|
3,757
|
|
|
1,337
|
U.S.
|
|
|
5,504
|
|
|
2,429
|
Rest
of the World
|
|
|
346
|
|
|
94
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,512
|
|
$
|
14,692
|
d) The
distribution of income from operations by business segment was as
follows:
|
|
|
Three Months
Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Central
laboratory
|
|
$
|
1,230
|
|
$
|
948
|
Clinical
research
|
|
|
20,282
|
|
|
13,744
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,512
|
|
$
|
14,692
|
e) The
distribution of property, plant and equipment, net, by geographical area was as
follows:
|
|
|
March
31,
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
Ireland
|
|
$
|
94,642
|
|
|
$
|
82,127
|
|
Rest
of Europe
|
|
|
19,241
|
|
|
|
15,547
|
|
U.S.
|
|
|
32,739
|
|
|
|
29,072
|
|
Rest
of the World
|
|
|
7,086
|
|
|
|
6,680
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,708
|
|
|
$
|
133,426
|
|
f) The
distribution of property, plant and equipment, net, by business segment was as
follows:
|
|
|
March
31,
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
Central
laboratory
|
|
$
|
8,330
|
|
|
$
|
7,048
|
|
Clinical
research
|
|
|
145,378
|
|
|
|
126,378
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
153,708
|
|
|
$
|
133,426
|
|
g) The
distribution of depreciation and amortization by geographical area was as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Ireland
|
|
$
|
1,993
|
|
|
$
|
1,333
|
|
Rest
of Europe
|
|
|
1,349
|
|
|
|
705
|
|
U.S.
|
|
|
2,248
|
|
|
|
1,792
|
|
Rest
of the World
|
|
|
508
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,098
|
|
|
$
|
4,156
|
|
h) The
distribution of depreciation and amortization by business segment was as
follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(in
thousands)
|
Central
laboratory
|
|
$
|
508
|
|
|
$
|
429
|
|
Clinical
research
|
|
|
5,590
|
|
|
|
3,727
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,098
|
|
|
$
|
4,156
|
|
i) The
distribution of total assets by geographical area was as follows:
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
Ireland
|
|
$
|
260,409
|
|
|
$
|
202,293
|
|
Rest
of Europe
|
|
|
156,829
|
|
|
|
161,746
|
|
U.S.
|
|
|
352,053
|
|
|
|
301,183
|
|
Rest
of the World
|
|
|
28,589
|
|
|
|
27,916
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
797,880
|
|
|
$
|
693,138
|
|
j) The
distribution of total assets by business segment was as follows:
|
|
|
March
31,
|
|
|
|
December
31,
|
|
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
(in
thousands)
|
Central
laboratory
|
|
$
|
42,581
|
|
|
$
|
40,562
|
|
Clinical
research
|
|
|
755,299
|
|
|
|
652,576
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
797,880
|
|
|
$
|
693,138
|
|
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 Form 20-F for the year ended December
31, 2007. The Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States.
We are a
contract research organization (“CRO”), providing outsourced development
services on a global basis to the pharmaceutical, biotechnology and medical
device industries. We specialize in the strategic development, management and
analysis of programs that support Clinical Development - from compound selection
to Phase I-IV clinical studies. We have the operational flexibility to provide
development services on a stand-alone basis or as part of an integrated “full
service” solution. Our primary approach is to use dedicated teams to achieve
optimum results, but we can implement a range of resourcing models to suit
client requirements.
In a
highly fragmented industry, we are one of a small number of companies with the
capability and expertise to conduct clinical trials in all major therapeutic
areas on a global basis. Currently, we have approximately 6,150 employees, in 68
locations in 36 countries, providing Phase I - IV Clinical Trial Management,
Drug Development Support Services, Data Management and Biostatistics and Central
Laboratory and Imaging Services. For the three months ended March 31, 2008, we
derived approximately 45.7%, 46.3% and 8.0% of our net revenue in the United
States, Europe and Rest of World, respectively.
Revenue
consists primarily of fees earned under contracts with third-party clients. In
most cases, a portion of the contract fee is paid at the time the study or trial
is started, with the balance of the contract fee generally payable in
installments over the study or trial duration, based on the achievement of
certain performance targets or "milestones". Revenue for contracts is recognized
on the basis of the relationship between time incurred and the total estimated
duration of the trial or on a fee-for-service basis according to the particular
circumstances of the contract. 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 these costs vary from contract to contract, we view net
revenue as our primary measure of revenue growth.
Direct
costs consist primarily of compensation, associated fringe benefits and share
based compensation expense for project-related employees and other direct
project driven costs. Selling, general and administrative expenses consist of
compensation, related fringe benefits and share based compensation expense for
selling and administrative employees, professional services, advertising costs
and all costs related to facilities and information systems.
As the
nature of ICON's business involves the management of projects having a typical
duration of one to three years, the commencement or completion 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
we are domiciled in Ireland, we report our results in U.S. dollars. As a
consequence the results of our non-U.S. based operations, when translated into
U.S. dollars, could be materially affected by fluctuations in exchange rates
between the U.S. dollar and the currencies of those operations.
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, Czech Koruna, Ukraine Hryvnia,
Romanian New Leu, 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 U.S. dollars, Euros or
pounds Sterling, 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 ICON's results of operations. We
regularly review our currency exposures and hedge a portion of these, using
forward exchange contracts, where they are not covered by natural
hedges.
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. ICON's 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 March 31, 2008 compared with Three Months Ended March 31,
2007
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
|
|
|
|
March 31
,
|
|
March 31
,
|
|
2007
|
|
|
2008
|
|
2007
|
|
to
2008
|
|
|
|
|
|
|
Percentage
|
|
|
Percentage
of Net Revenue
|
Increase
|
|
Net
revenue
|
100.0
|
%
|
100.0
|
%
|
48
|
%
|
Costs
and expenses:
|
|
|
|
|
|
|
Direct
costs
|
56.2
|
%
|
57.7
|
%
|
44
|
%
|
Selling,
general and administrative
|
30.1
|
%
|
28.4
|
%
|
57
|
%
|
Depreciation
and amortization
|
3.0
|
%
|
3.1
|
%
|
47
|
%
|
Income
from operations
|
10.7
|
%
|
10.8
|
%
|
46
|
%
|
Net
revenue increased by $65.2 million, or 48.0%, from $136.1 million to $201.3
million. In the three months ended March 31, 2008, net revenue from our central
laboratory business increased by 25.5%, from $13.1 million, to $16.4 million,
while our clinical research segment improved by 50.3%, from $123.0 million to
$184.9 million, over the prior period. This increase in net revenue has resulted
from a combination of increased business from existing clients, business won
from new clients, increased use of outsourcing by the pharmaceutical,
biotechnology and medical device industries and an underlying increase in
research and development spending.
Direct
costs increased by $34.6 million, or 44.1%, from $78.6 million for the three
months ended March 31, 2007, to $113.2 million for the three months ended March
31, 2008, primarily due to increased personnel related costs of $32.8 million
resulting from the increase in project-related employees of over 1,400. The
remainder of the increase resulted primarily from increased laboratory and
consulting expenses. Direct costs as a percentage of net revenue
decreased from 57.7% for the three months ended March 31, 2007, to 56.2% for the
three months ended March 31, 2008.
Selling,
general and administrative expenses increased by $21.9 million, or 56.5%, from
$38.7 million for the three months ended March 31, 2007, to $60.5 million for
the three months ended March 31, 2008. The increase in SG&A costs is
primarily driven by increased personnel costs of $9.5 million resulting from
increased levels of selling and administrative employees to support the
continued expansion of the business. In addition to these personnel
costs there were additional rent and utility charges of $4.7 million arising
from further office openings since the three months ended March 31, 2007,
increased professional, legal and accounting costs of $1.3 million, increased
information technology costs of $1.2 million, an increase of $1.5 million in
relation to realized and unrealized foreign exchange loss and increased
temporary staff and recruitment costs of $1.5 million. As a percentage of net
revenue, selling, general and administrative expenses, increased from 28.4% in
the three months ended March 31, 2007, to 30.1% in the three months ended March
31, 2008.
The total
share based compensation expense recognized during the three months ended March
31, 2008 amounted to $1.3 million compared to $1.2 million during the three
months ended March 31, 2007.
Depreciation
and amortization expense increased by $1.9 million, or 46.7%, from $4.2 million
to $6.1 million. As a percentage of net revenue, depreciation and amortization
decreased from 3.1% of net revenues for the three months ended March 31, 2007,
to 3.0% for the three months ended March 31, 2008. The increase in
absolute terms arises primarily from construction of the Company’s new
headquarter building in Dublin, Republic of Ireland, and the ongoing investment
in global infrastructure and information technology to support the Company
’
s current and
future growth.
Income
from operations increased by $6.8 million, or 46.4%, from $14.7 million to $21.5
million. As a percentage of net revenue, income from operations decreased from
10.8% of net revenues for the three months ended March 31, 2007, to 10.7% for
the three months ended March 31, 2008. The three months ended March 31, 2008,
saw a continued improvement in the performance of the central laboratory
business, with results improving from an operating profit of 7.3% for the three
months ended March 31, 2007, to an operating profit of 7.5% for the three months
ended March 31, 2008. The central laboratory constitutes approximately 8.1% of
our business revenues for the three months ended March 31, 2008. Operating
margins for our clinical research segment decreased to 11.0% in the three months
ended March 31, 2008, from 11.2% for the three months ended March 31,
2007.
Net
interest expense for the three months ended March 31, 2008, was $0.04 million, a
decrease of $1.1 on net interest income of $1.0 million for the three months
ended March 31, 2007. The Company entered into a number of significant banking
facilities in the period since March 31, 2007, to fund the acquisition of DOCS
International in July 2007, ($40.6 million), the acquisition of Healthcare
Discoveries in February 2008, ($11.1 million), and the construction of the
Company’s new headquarter building in Dublin, Republic of Ireland.
Our
provision for income taxes increased from $3.4 million for the three months
ended March 31, 2007, to $4.2 million for the three months ended March 31,
2008. ICON plc’s effective tax rate for the three months ended March
31, 2008, was 19.8% compared with 21.8% for the three months ended March 31,
2007. The effective tax rate is principally a function of the distribution of
pre-tax profits in the territories in which the Group operates.
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,
net proceeds of $44.3 million raised in our public offering in August 2003 and
borrowings of $131.1 million used to finance the acquisitions of DOCS
International and Healthcare Discoveries, and expenditure on our head office
expansion. 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 March 31, 2008, amounted
to $125.5 million, compared to $83.2 million for the three months ended March
31, 2007. 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
March 31, 2008, our working capital amounted to $189.8 million, compared to
$193.3 million at December 31, 2007. The other significant influence on our
operating cash flow is revenue outstanding, which comprises accounts receivable
and unbilled revenue, less payments on account. The dollar values of these
amounts and the related days revenue outstanding can vary due to the achievement
of contractual milestones, including contract signing, and the timing of cash
receipts. The number of days revenue outstanding was 67 days at March 31, 2008,
compared to 66 days at December 31, 2007.
Net cash
used in operating activities was $12.3 million in the three months ended March
31, 2008, compared to $2.8 million in the three months ended March 31,
2007. The reduction in net cash from operating activities is primarily due to
the timing of cash receipts on billed revenue.
Net cash
used in investing activities was $15.6 million in the three months ended March
31, 2008, compared to $12.5 million in the three months ended March 31, 2007.
The increase in net cash used in investing activities is primarily due to the
acquisition of Healthcare Discoveries in February 2008 for $11.1 million, the
construction of the new head office building located in Dublin, Republic of
Ireland and the ongoing investment in global infrastructure and information
technology to support the Company’s current and future growth, offset by the
sale of short term investments.
Net cash
provided by financing activities was $31.3 million in the three months ended
March 31, 2008, compared to $1.9 million in the three months ended March 31,
2007. The increase in net cash provided by financing activities was
due to the drawdown of available facilities to fund the acquisition of
Healthcare Discoveries in February 2008, the construction of the new head office
building located in Dublin, Republic of Ireland and the ongoing investment in
global infrastructure and information technology to support the Company’s
current and future growth.
As a
result of these cash flows, cash and cash equivalents increased by $4.3 million
in the three months ended March 31, 2008, compared to a decrease of $13.4
million in the three months ended March 31, 2007.
On July 9,
2007, ICON plc entered into a five year committed multi-currency
facility agreement for €35 million ($55.3 million) with
The Governor and Company of the Bank of Ireland. The facility bears interest at
an annual rate equal to the reference rate of EURIBOR plus a margin. Our
obligations under the facility are secured by certain composite guarantees and
indemnities and pledges in favour of the bank. On July 10, 2007, the Company
drew down €29.5 million ($46.6 million) of the facility to fund the acquisition
of DOCS International. On October 15, 2007, the remaining
€5.5 million ($8.7 million) of the facility was drawn down to cover head office
expansion in Ireland.
On October
17, 2007, an uncommitted credit facility was negotiated with Allied Irish Banks
plc, for €30 million ($47.4 million). Interest is calculated at the EUR
Interbank rate plus a margin. The facility is secured by the same
composite guarantees and indemnities in place for the Bank of Ireland committed
facility. On December 31, 2007, this facility was fully
drawn. The funds were used to refinance overdraft facilities in place
to fund expenditure on the head office expansion. On January 8, 2008, the
facility with Allied Irish Banks plc was increased to €50 Million ($79.0
million). All terms of this facility remain the same. On March 31,
2008, €40.4 million ($63.8 million) of this facility was drawn. The facility is
due to be reviewed on October 31, 2010.
On
February 4, 2008, an uncommitted credit facility was negotiated with Citibank
N.A, for $30 million. Interest is calculated at the London Interbank
Market rate plus a margin. On March 31, 2008, $12.0 million of this facility was
drawn, primarily to fund the acquisition of Healthcare Discoveries.
The
average margin payable on the above mentioned facilities is 0.59 per
cent.
The
current available overdraft facility with Allied Irish Banks plc is €2 million
($3.2 million). The applicable interest rate when utilized is the bank’s prime
rate and is repayable on demand if the Company defaults under its obligations as
specified in the loan agreement. As of March 31, 2008, the facility was undrawn
and available.
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Ciaran Murray
|
Date
April 28, 2008
|
|
Ciaran
Murray
|
|
|
Chief
Financial Officer
|