ICON
plc
GENERAL
As
used
herein, “ICON”, the “Company” and “we” refer to ICON plc and its consolidated
subsidiaries, unless the context requires otherwise.
Business
We
are a
contract research organization, or CRO, providing clinical research and
development services on a global basis to the pharmaceutical, biotechnology
and
medical device industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase
I - IV
clinical trials management, study design, laboratory services and drug
development support. We believe that we are one of a select group of CROs
with
the capability and expertise to conduct clinical trials in most major
therapeutic areas on a global basis. We
have
approximately 3,600 employees
worldwide, with operations in 45 locations in 30 countries, including the
United
States and major markets in Europe and Rest of World. For the six months
ended
June 30, 2006, we derived approximately 61.1%,
31.8%, and 7.1% of
our net
revenue in the United States, Europe and Rest of World, respectively.
Headquartered
in Dublin, Ireland, we began operations in 1990 and have expanded our business
through internal growth and strategic acquisitions.
On
July
27, 2005 the Board of Directors of the Company approved a change of the
Company’s fiscal year-end from a twelve-month period ending on May 31 to a
twelve-month period ending on December 31. The Company made this change in
order
to align its fiscal year end with the majority of other contract research
organizations. As a requirement of this change, the Company reported results
for
the seven-month period from June 1, 2005 to December 31, 2005 as a separate
transition period in a Transition Report filed on Form 20-F. From January
1,
2006, the Company’s fiscal quarters will end on the last day of March, June,
September and December of each year. Information set out in this report is
for
the three and six months ending June 30, 2006. Comparative income statement
and
cash flow information, together with related notes, is for the three and
six
months ending May 31, 2005. Comparative balance sheet information and related
notes are stated as at December 31, 2005.
ICON
plc
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
AT JUNE 30, 2006 AND DECEMBER 31, 2005
|
|
(Unaudited) |
(Audited) |
|
|
June
30, 2006 |
December |
|
|
|
31,
2005 |
|
|
(in thousands)
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
|
$63,186
|
$59,509
|
Short
term investments - available for sale
|
|
37,827
|
22,809
|
Accounts
receivable
|
|
81,233
|
71,450
|
Unbilled
revenue
|
|
69,379
|
62,270
|
Other
receivables
|
|
5,092
|
6,435
|
Deferred
tax asset
|
|
1,526
|
1,554
|
Prepayments
and other current assets
|
|
13,480
|
11,089
|
Total current assets
|
|
271,723
|
235,116
|
Other
Assets:
|
|
|
|
Property,
plant and equipment, net
|
|
52,974
|
47,652
|
Goodwill
|
|
67,395
|
65,731
|
Non-current
deferred tax asset
|
|
422
|
452
|
Intangible
assets
|
|
52
|
116
|
|
|
|
|
Total
Assets
|
|
$392,566
|
$349,067
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
|
$9,262
|
$7,575
|
Payments
on account
|
|
65,436
|
50,211
|
Other
liabilities
|
|
35,911
|
33,184
|
Deferred
tax liability
|
|
593
|
682
|
Bank
credit lines and loan facilities
|
|
-
|
4,856
|
Income
taxes payable
|
|
7,260
|
6,296
|
Total current liabilities
|
|
118,462
|
102,804
|
Other
Liabilities:
|
|
|
|
Long
term government grants
|
|
1,179
|
1,160
|
Long
term finance leases
|
|
100
|
152
|
Non-current
deferred tax liability
|
|
2,526
|
2,499
|
Minority
interest
|
|
970
|
894
|
Total
Liabilities
|
|
123,237
|
107,509
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
Ordinary
shares, par value
6
euro cents
per
share; 20,000,000 shares authorized, 14,176,636
shares issued and outstanding at June 30, 2006 and 14,018,092
shares issued
and outstanding at December 31, 2005
|
|
|
|
|
|
1,005
|
993
|
Additional paid-in capital
|
|
129,443
|
123,333
|
Accumulated other comprehensive income
|
|
8,220
|
3,409
|
Merger reserve
|
|
47
|
47
|
Retained
earnings
|
|
130,614
|
113,776
|
Total
Shareholders' Equity
|
|
269,329
|
241,558
|
|
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
$392,566
|
$349,067
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ICON
plc
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND MAY 31,
2005
(UNAUDITED)
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
May
31,
|
|
June
30,
|
|
May
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
(in
thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross revenue
|
|
$
|
153,744
|
|
$
|
121,979
|
|
$
|
294,388
|
|
$
|
235,320
|
|
Subcontractor costs
|
|
|
(46,308
|
)
|
|
(36,010
|
)
|
|
(88,457
|
)
|
|
(66,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
|
107,436
|
|
|
85,969
|
|
|
205,931
|
|
|
168,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct costs
|
|
|
60,014
|
|
|
47,529
|
|
|
114,718
|
|
|
93,537
|
|
Selling, general and administrative expense
|
|
|
32,397
|
|
|
27,540
|
|
|
62,677
|
|
|
54,925
|
|
Depreciation and amortization
|
|
|
3,689
|
|
|
3,549
|
|
|
7,134
|
|
|
6,973
|
|
Other Charges
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
96,100
|
|
|
78,618
|
|
|
184,529
|
|
|
166,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
11,336
|
|
|
7,351
|
|
|
21,402
|
|
|
2,114
|
|
Interest
income
|
|
|
993
|
|
|
432
|
|
|
1,651
|
|
|
741
|
|
Interest
expense
|
|
|
(55
|
)
|
|
(51
|
)
|
|
(66
|
)
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income taxes
|
|
|
12,274
|
|
|
7,732
|
|
|
22,987
|
|
|
2,750
|
|
Provision
for income taxes
|
|
|
(2,943
|
)
|
|
(1,699
|
)
|
|
(6,073
|
)
|
|
(2,220
|
)
|
Minority
interest
|
|
|
(34
|
)
|
|
(84
|
)
|
|
(76
|
)
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
9,297
|
|
$
|
5,949
|
|
$
|
16,838
|
|
$
|
421
|
|
Net
income per Ordinary Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
$
|
0.43
|
|
$
|
1.19
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.65
|
|
$
|
0.42
|
|
$
|
1.18
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of Ordinary Shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
14,132,745
|
|
|
13,887,989
|
|
|
14,087,381
|
|
|
13,877,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
14,347,765
|
|
|
14,100,098
|
|
|
14,249,678
|
|
|
14,089,004
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
ICON
plc
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2006 AND MAY 31, 2005
(UNAUDITED)
|
|
Six
Months Ended
|
|
|
|
June
30, 2006
|
|
May
31, 2005
|
|
|
|
(in
thousands)
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
16,838
|
|
|
|
|
$
|
421
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of property, plant and equipment
|
|
|
95
|
|
|
|
|
|
20
|
|
Depreciation and amortization
|
|
|
7,134
|
|
|
|
|
|
6,973
|
|
Amortization of grants
|
|
|
(56
|
)
|
|
|
|
|
(102
|
)
|
Share compensation expense
|
|
|
1,968
|
|
|
|
|
|
-
|
|
Deferred taxes
|
|
|
24
|
|
|
|
|
|
(532
|
)
|
Minority interest
|
|
|
76
|
|
|
|
|
|
109
|
|
Other charges
|
|
|
-
|
|
|
|
|
|
11,275
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
(Increase)/decrease in accounts receivable
|
|
|
(8,575
|
)
|
|
|
|
|
9,211
|
|
(Increase)/decrease in unbilled revenue
|
|
|
(6,759
|
)
|
|
|
|
|
14,688
|
|
Decrease/(increase) in other receivables
|
|
|
2,132
|
|
|
|
|
|
(4,732
|
)
|
Increase in prepayments and other current assets
|
|
|
(2,072
|
)
|
|
|
|
|
(1,626
|
)
|
Increase/(decrease) in payments on account
|
|
|
15,146
|
|
|
|
|
|
(21,425
|
)
|
Increase in other liabilities
|
|
|
2,288
|
|
|
|
|
|
8,379
|
|
Increase/(decrease) in income taxes payable
|
|
|
680
|
|
|
|
|
|
(579
|
)
|
Increase in accounts payable
|
|
|
1,465
|
|
|
|
|
|
5,132
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
30,384
|
|
|
|
|
|
27,212
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property, plant and equipment
|
|
|
(10,827
|
)
|
|
|
|
|
(8,104
|
)
|
Purchase
of intangible asset
|
|
|
-
|
|
|
|
|
|
(250
|
)
|
Purchase
of subsidiary undertakings and acquisition costs
|
|
|
-
|
|
|
|
|
|
(42
|
)
|
Purchase
of short term investments
|
|
|
(15,018
|
)
|
|
|
|
|
(5,011
|
)
|
Sale
of short term investments
|
|
|
-
|
|
|
|
|
|
12,022
|
|
Deferred
payments in respect of prior year acquisitions
|
|
|
(96
|
)
|
|
|
|
|
(1,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used
in investing
activities
|
|
|
(25,941
|
)
|
|
|
|
|
(2,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Repayments
of bank
credit lines and loan facilities
|
|
|
(4,888
|
)
|
|
|
|
|
(10,000
|
)
|
Proceeds
from exercise of share options
|
|
|
4,179
|
|
|
|
|
|
919
|
|
Share
issuance costs
|
|
|
(25
|
)
|
|
|
|
|
(29
|
)
|
Repayment
of other liabilities
|
|
|
(53
|
)
|
|
|
|
|
(120
|
)
|
Net
cash used in financing activities
|
|
|
(787
|
)
|
|
|
|
|
(9,230
|
)
|
Effect
of exchange rate movements on cash
|
|
|
21
|
|
|
|
|
|
(689
|
)
|
Net
increase in cash and cash equivalents
|
|
|
3,677
|
|
|
|
|
|
14,366
|
|
Cash
and cash equivalents at beginning of period
|
|
|
59,509
|
|
|
|
|
|
41,975
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
63,186
|
|
|
|
|
$
|
56,341
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ICON
plc
CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
hensive
|
|
Retained
|
|
Merger
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Earnings
|
|
Reserve
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars
in thousands, except share date)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
14,018,092
|
|
$
|
993
|
|
$
|
123,333
|
|
$
|
3,409
|
|
$
|
113,776
|
|
$
|
47
|
|
$
|
241,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,838
|
|
|
-
|
|
|
16,838
|
|
Currency translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,811
|
|
|
-
|
|
|
-
|
|
|
4,811
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,649
|
|
Share issuance costs
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(25
|
)
|
Exercise of share options
|
|
|
158,544
|
|
|
12
|
|
|
4,167
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,179
|
|
Non-cash stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
-
|
|
|
-
|
|
|
1,968
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
|
14,176,636
|
|
$
|
1,005
|
|
$
|
129,443
|
|
$
|
8,220
|
|
$
|
130,614
|
|
$
|
47
|
|
$
|
269,329
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
ICON
plc
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE
30, 2006
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. As discussed in note 5, the Company adopted Statement of Accounting
Standard (“SFAS”) 123 (revised 2004) Share
Based Payment
(“SFAS
123R”) effective from January 1, 2006. There were no other significant change
in
ICON plc’s accounting policies from those outlined in ICON’s Transition Report
on Form 20-F for the seven month period ended December 31, 2005.
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 Transition Report on Form 20-F for the seven months ended
December 31, 2005. Operating results for the six months ended June 30, 2006
are
not necessarily indicative of the results that may be expected for the fiscal
period ending December 31, 2006.
2.
Acquisitions
Prior
Period Acquisitions
On
September 9, 2003, the Company acquired 100% of the outstanding shares of
Globomax LLC (“GloboMax”), based in Maryland, USA, for an initial cash
consideration of $10.9 million, excluding costs of acquisition.
On
May 31,
2006, an amount of $96,131 was paid to the former shareholders of Globomax.
This
$96,131 was withheld from an earn-out payment made on the August 31, 2005
due to
an outstanding customer debt arising prior to the acquisition of Globomax.
This
customer debt has subsequently been recovered and the $96,131 in turn became
due
to the former shareholders of Globomax. This payment has been accounted for
as
goodwill. No further payments are anticipated.
3.
Goodwill
|
June
30,
|
December
31,
|
|
2006
|
2005
|
|
(in
thousands)
|
Opening
balance
|
$65,731
|
$67,440
|
Payments
made in respect of prior year acquisitions
|
96
|
-
|
Foreign
exchange movement
|
1,568
|
(1,709)
|
|
|
|
Closing
balance
|
$67,395
|
$65,731
|
The
goodwill balance relates entirely to the clinical research segment.
4.
Net income per ordinary share
Basic
net
income per ordinary share has been computed by dividing net income available
to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted net income per ordinary share is computed
by adjusting the weighted average number of ordinary shares outstanding during
the period for all potentially dilutive ordinary shares outstanding during
the
period and adjusting net income for any changes in income or loss that would
result from the conversion of such potential ordinary shares.
There
is
no difference in net income used for basic and diluted net income per ordinary
share. The reconciliation of the number of shares used in the computation
of
basic and diluted net income per ordinary share is as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
Weighted
average number of ordinary shares outstanding for basic net income
per
ordinary share
|
14,132,745
|
13,887,989
|
14,087,381
|
13,877,113
|
Effect
of dilutive share options outstanding
|
215,020
|
212,109
|
162,297
|
211,891
|
Weighted
average number of ordinary shares for diluted net income per ordinary
share
|
14,347,765
|
14,100,098
|
14,249,678
|
14,089,004
|
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 either
an
incentive stock option, or ISO, as described in Section 422 of the Code or
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 for an ISO
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 1.5 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 100,000 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 six months ended June 30, 2006, 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 six months ended June
30,
2006:
|
Options
Outstanding
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average
Fair
Value
|
|
Weighted
Average Remaining Contractual Life
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
1,132,146
|
$31.50
|
$14.60
|
|
|
|
|
|
|
|
|
Granted
|
372,611
|
$43.91
|
$19.64
|
|
|
Exercised
|
(158,544)
|
$26.18
|
$13.73
|
|
|
Forfeited
|
(83,565)
|
$31.54
|
$14.95
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
1,262,648
|
$35.66
|
$16.29
|
|
6.1
|
|
|
|
|
|
|
Exercisable
at June 30, 2006
|
359,892
|
$31.79
|
$15.23
|
|
4.98
|
|
|
|
|
|
|
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 June 30,
2006
is eight years.
The
weighted average fair value of stock options granted during the six months
ended
June 30, 2006, calculated using the Black-Scholes option pricing model, was
$19.64 based on the following assumptions; dividend yield - 0%, risk free
interest rate - 4.6%, expected volatility - 45% and weighted average expected
life - 4.81 years.
On
January
17, 2006, 15,000 share options, with an exercise price of $41.68, were granted
to a key employee of the Company. These options will vest between 2009 and
2014,
subject to the Company’s diluted earnings achieving $4.20 per share. If the
Company does not achieve diluted earnings of $4.20 per share before January
16,
2014, the option grant expires.
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 part 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 six months ended June 30, 2006, is stated after charging
$2.0 million in respect of non-cash stock compensation expense. Basic and
diluted earnings per share for the six months ended June 30, 2006, had SFAS
123R
not been introduced would have been $1.33 and $1.30 respectively. Non-cash
stock
compensation expense for the six months ended June 30, 2006, has been allocated
to direct costs and selling, general and administrative expenses as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
|
|
|
|
Direct
costs
|
$572
|
$-
|
$1,084
|
$-
|
Selling,
general and administrative
|
466
|
-
|
884
|
-
|
|
|
|
|
|
|
$1,038
|
$-
|
$1,968
|
$-
|
Non
vested
shares outstanding as at June 30, 2006, are as follows:
|
Options
Outstanding
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Fair Value
|
|
|
|
|
Non
vested outstanding at December 31, 2005
|
803,389
|
$33.20
|
$15.22
|
|
|
|
|
Granted
|
372,611
|
$43.91
|
$19.64
|
Vested
|
(189,679)
|
$35.38
|
$16.13
|
Forfeited
|
(83,565)
|
$33.06
|
$14.95
|
|
|
|
|
Non
vested outstanding at June 30, 2006
|
902,756
|
$37.20
|
$16.72
|
|
|
|
|
As
at June
30, 2006, total unrecognized compensation cost related to unvested options,
which the Company expects to recognize over a weighted average period of
3.4
years, amounted to $11.2 million. The Company has granted options with fair
values ranging from $11.55 to $19.64 per option or a weighted average fair
value
of $15.86 per option. The Company issues new ordinary shares for all options
exercised. The total amount of fully vested share options which remained
outstanding at June 30, 2006 was 48,878. The options have an average remaining
contractual term of 2.1 years and average exercise price of $20.42. The total
intrinsic value of options exercised during the period was $3.60 million
(3
months ended June 30, 2006 was $2.58 million).
Prior
to
the adoption of SFAS 123R, the Company accounted for its share options in
accordance with the provisions of SFAS No. 123 which allowed entities to
continue to apply the provisions of APB 25 and provide pro forma net income
and
pro forma earnings per share disclosures for employee stock option grants
as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
impact
on net profit and earnings per share, had SFAS 123R been applied are as
follows:
|
|
Six
Months Ended
|
|
|
May
31, 2005
|
|
|
|
Net
profit as reported
|
|
$421
|
|
|
|
Deduct:
Total non-cash stock compensation expense determined under fair
value
based method for all awards, net of related tax effects
|
|
($1,565)
|
Pro
forma net loss
|
|
($1,144)
|
|
|
|
Earnings
per share (in $):
|
|
|
Basic
- as reported
|
|
0.03
|
Basic
- pro forma
|
|
(0.08)
|
Diluted
- as reported
|
|
0.03
|
Diluted
- proforma
|
|
(0.08)
|
The
weighted average fair value of stock options granted during the six months
ended
May 31, 2005, calculated using the Black-Scholes option pricing model, was
$15.07 based on the following assumptions; dividend yield - 0%, risk free
interest rate - 3.9/4.1%, expected volatility - 45% and weighted average
expected life - 4.81 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 exercise
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.
On
February 7, 2005, 120,000 share options, with an exercise price of $34.40,
were
granted to certain key employees of the Company. These options will vest
between
2008 and 2013 subject to the Company’s diluted earnings achieving $4.00 per
share. If the Company does not achieve diluted earnings of $4.00 per share
before February 6, 2013, the option grant expires.
6.
Business Segment Information
The
Company's areas of operation outside of Ireland principally include the
United
Kingdom, United States, Germany, Australia, Argentina, Chile, France, Italy,
Japan, Israel, Singapore, Canada, Sweden, The Netherlands, Latvia, Russia,
Lithuania, Poland, Taiwan, Hong Kong, South Africa, Spain, Hungary, India,
Mexico, Brazil, South Korea, China and Thailand. Segment
information for the three and six month periods ended June 30, 2006 and
May 31,
2005 are as follows:
a)
The
distribution of net revenue by geographical area was as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Ireland*
|
|
$11,423
|
|
$7,339
|
|
$19,310
|
|
$17,741
|
|
Rest
of Europe
|
|
|
23,173
|
|
|
27,049
|
|
|
46,125
|
|
|
46,680
|
|
U.S.
|
|
|
65,010
|
|
|
46,641
|
|
|
125,860
|
|
|
95,040
|
|
Rest
of the World
|
|
|
7,830
|
|
|
4,940
|
|
|
14,636
|
|
|
9,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,436
|
|
$
|
85,969
|
|
$
|
205,931
|
|
$
|
168,824
|
|
*
All sales shown for Ireland are export sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
b)
The
distribution of net revenue by business segment was as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Central
laboratory
|
|
$
|
11,516
|
|
$
|
6,123
|
|
$
|
20,805
|
|
$
|
12,494
|
|
Clinical
research
|
|
|
95,920
|
|
|
79,846
|
|
|
185,126
|
|
|
156,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107,436
|
|
$
|
85,969
|
|
$
|
205,931
|
|
$
|
168,824
|
|
c)
The
distribution of income from operations by geographical area was as follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Ireland
|
|
$
|
4,261
|
|
$
|
(781
|
)
|
$
|
3,932
|
|
$
|
(197
|
)
|
Rest
of Europe
|
|
|
1,186
|
|
|
8,344
|
|
|
6,371
|
|
|
10,724
|
|
U.S.
|
|
|
4,496
|
|
|
(152
|
)
|
|
8,905
|
|
|
(8,744
|
)
|
Rest
of the World
|
|
|
1,393
|
|
|
(60
|
)
|
|
2,194
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,336
|
|
$
|
7,351
|
|
$
|
21,402
|
|
$
|
2,114
|
|
d)
The
distribution of income from operations by business segment was as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Central
laboratory
|
|
$
|
323
|
|
$
|
(1,997
|
)
|
|
($334
|
)
|
$
|
(12,530
|
)
|
Clinical
research
|
|
|
11,013
|
|
|
9,348
|
|
|
21,736
|
|
|
14,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,336
|
|
$
|
7,351
|
|
$
|
21,402
|
|
$
|
2,114
|
|
e)
The
distribution of property, plant and equipment, net, by geographical area
was as
follows:
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands)
|
|
Ireland
|
|
$
|
24,467
|
|
$
|
22,538
|
|
Rest
of Europe
|
|
|
7,635
|
|
|
6,669
|
|
U.S.
|
|
|
18,130
|
|
|
16,720
|
|
Rest
of the World
|
|
|
2,742
|
|
|
1,725
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,974
|
|
$
|
47,652
|
|
f)
The
distribution of property, plant and equipment, net, by business segment
was as
follows:
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands)
|
|
Central
laboratory
|
|
$
|
3,730
|
|
$
|
3,380
|
|
Clinical
research
|
|
|
49,244
|
|
|
44,272
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,974
|
|
$
|
47,652
|
|
g)
The
distribution of depreciation and amortization by geographical area was
as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Ireland
|
|
$
|
1,306
|
|
$
|
1,304
|
|
$
|
2,525
|
|
$
|
2,682
|
|
Rest
of Europe
|
|
|
612
|
|
|
1,804
|
|
|
1,169
|
|
|
1,150
|
|
U.S.
|
|
|
1,576
|
|
|
214
|
|
|
3,081
|
|
|
2,794
|
|
Rest
of the World
|
|
|
195
|
|
|
227
|
|
|
359
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,689
|
|
$
|
3,549
|
|
$
|
7,134
|
|
$
|
6,973
|
|
h)
The
distribution of depreciation and amortization by business segment was as
follows:
|
Three
Months Ended
|
Six
Months Ended
|
|
June
30,
|
May
31,
|
June
30,
|
May
31,
|
|
2006
|
2005
|
2006
|
2005
|
|
(in
thousands)
|
(in
thousands)
|
Central
laboratory
|
|
$
|
316
|
|
$
|
260
|
|
$
|
622
|
|
$
|
515
|
|
Clinical
research
|
|
|
3,373
|
|
|
3,289
|
|
|
6,512
|
|
|
6,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,689
|
|
$
|
3,549
|
|
$
|
7,134
|
|
$
|
6,973
|
|
i)
The
distribution of total assets by geographical area was as follows:
|
|
June
30,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands)
|
|
Ireland
|
|
$
|
112,359
|
|
$
|
91,826
|
|
Rest
of Europe
|
|
|
79,302
|
|
|
80,700
|
|
U.S.
|
|
|
188,728
|
|
|
169,799
|
|
Rest
of the World
|
|
|
12,177
|
|
|
6,742
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
392,566
|
|
$
|
349,067
|
|
j)
The
distribution of total assets by business segment was as follows:
|
|
June
30,
2005
|
|
December
31,
2005
|
|
|
|
(in
thousands)
|
|
Central
laboratory
|
|
$
|
20,997
|
|
$
|
17,150
|
|
Clinical
research
|
|
|
371,569
|
|
|
331,917
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
392,566
|
|
$
|
349,067
|
|
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 Transition Report on Form 20-F for the seven
months ended December 31, 2005. The Consolidated Financial Statements have
been
prepared in accordance with accounting principles generally accepted in the
United States.
Overview
We
are a
contract research organization, or CRO, providing clinical research and
development services on a global basis to the pharmaceutical, biotechnology
and
medical device industries. Our focus is on supporting the conduct of clinical
trials. We have historically done so by providing such services as Phase
I - IV
clinical trials management, study design, laboratory services and drug
development support. We believe that we are one of a select group of CROs
with
the capability and expertise to conduct clinical trials in most major
therapeutic areas on a global basis. We
have
approximately 3,600 employees worldwide, with operations in 45 locations
in 30
countries including the United States and major markets in Europe and Rest
of
World. For the six months ended June 30, 2006, we derived approximately 61.1%,
31.8%, and 7.1% 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.
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 14
operations operating in U.S. dollars, 6 in Euros, 3 in pounds Sterling, and
1
each in Australian dollars, Singapore dollars, Yen, Israeli New Shekels,
Latvian
Lats, Swedish Krona, Argentine Peso, South African Rand, Indian Rupee, Russian
Rouble, Canadian dollar, Hungarian Forint, Polish Zloty, Lithuanian Litas,
Hong
Kong dollar, Taiwan dollar, Mexican Peso, Brazilian Real, Chilean Peso, South
Korean Won, Chinese Yuan Renminbi and Thai Baht. 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 June 30, 2006, we have received
$2,575,033 and $1,913,939 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 June 30, 2006 compared with Three Months Ended May 31,
2005
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
|
|
|
|
June
30,
|
May
31,
|
|
2005
|
|
2006
|
2005
|
|
to
2006
|
|
|
|
|
Percentage
|
|
Percentage
of Net Revenue
|
|
Increase/(decrease)
|
|
|
|
|
|
Net
revenue
|
100.0%
|
100.0%
|
|
25.0%
|
Costs
and expenses:
|
|
|
|
|
Direct
costs
|
55.9%
|
55.3%
|
|
26.3%
|
Selling,
general and administrative
|
30.2%
|
32.0%
|
|
17.6%
|
Depreciation
and
amortization
|
3.4%
|
4.1%
|
|
3.9%
|
Income
from operations
|
10.5%
|
8.6%
|
|
54.2%
|
Net
revenue increased by $21.5 million, or 25.0%, from $85.9 million for the
three
months ended May 31, 2005 to $107.4 million for the three months ended June
30,
2006. This
improvement arose through a combination of increased business from existing
clients and business won from new clients. Revenues in the United States,
Europe
and the Rest of World grew by 39.4%, 0.6% and 58.5%, respectively. In the
three
months ended June 30, 2006, net revenue from our central laboratory business
increased by 88.1% from $6.1 million to $11.5 million, while our clinical
research segment grew by 20.1% from $79.8 million to $95.9 million, in each
case
over the period ended May 31, 2005. The increase in net revenue in our central
laboratory segment is primarily due to higher testing volumes over the
comparative period. The growth in net revenue in our clinical research segment
is due to the expansion of our services to both existing and new clients,
increased use of outsourcing by the pharmaceutical, biotechnology and medical
device industries, an underlying increase in research and development spending
and consolidation in the CRO industry.
Direct
costs increased by $12.5 million, or 26.3%, from $47.5 million for the three
months ended May 31, 2005 to $60.0 million for the three months ended June
30,
2006, primarily due to increased staff numbers needed to support increased
project related activity and the inclusion of $0.57 million non-cash stock
compensation expense for the quarter ended June 30, 2006. Direct costs as
a
percentage of net revenue increased from 55.3% for the three months ended
May
31, 2005 to 55.9% for three months ended June 30, 2006.
Selling,
general and administrative expenses increased by $4.9 million, or 17.6%,
from
$27.5 for the three months ended May 31, 2005 million to $32.4 million for
the
three months ended June 30, 2006. This
increase is due to the continued expansion of our operations and the inclusion
of $0.47 million non-cash stock compensation expense. As
a
percentage of net revenue, selling, general and administrative expenses,
decreased from 32.0% in the three months ended May 31, 2005, to 30.2% in
the
three months ended June 30, 2006.
Depreciation
and amortization expense increased by $0.1 million, or 3.9%, from $3.6 million
for the three months ended May 31, 2005 to $3.7 million for the three months
ended June 30, 2006. 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 4.1% in the three months ended May 31, 2005 to
3.4%
in the three months ended June 30, 2006.
Income
from operations increased by $4.0 million, or 54.2%, from of $7.4 million
for
the three months ended May 31, 2005, to $11.3 million for the three months
ended
June 30, 2006. The operating income for the quarter is derived after the
recognition of the non cash stock compensation charge of which there was
no
charge in the comparable period. As a percentage of net revenue, income from
operations increased from 8.6% for the three months ended May 31, 2005, to
10.5%
of net revenues for the three months ended June 30, 2006.
The
three
months ended June 30, 2006, saw an improvement in the performance of the
central
laboratory business, from a loss from operations, as a percentage of net
revenue
of 32.6% for the three months ended May 31, 2005 to an operating profit of
2.8%
for the three months ended June 30, 2006. The central laboratory constitutes
approximately 10.7% of our business revenues for the three months ended June
30,
2006. Operating margins for our clinical research segment decreased from
11.7%
for the three months ended May 31, 2005 to 11.5% for the three months ended
June
30, 2006.
Interest
income for the three months ended June 30, 2006 was $1.0 million, an increase
of
$0.6 million over the amount of net interest income for the three months
ended
May 31, 2005. Higher average level of funds invested and higher interest
rates
over the prior period contributed to the increased interest income.
ICON's
effective tax rate for the three months ended June 30, 2006 was 24.0% compared
with 22.0% for the three months ended May 31, 2005. The increase is due mainly
to the impact of a non-cash stock compensation expense recorded in the current
quarter and changes in the geographic distribution of pre-tax earnings.
Six
Months Ended June 30, 2006 Compared with Six Months Ended May 31,
2005
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.
|
Six
Months Ended
|
|
|
|
June
30,
|
May
31,
|
|
2005
|
|
2006
|
2005
|
|
to
2006
|
|
|
|
|
Percentage
|
|
Percentage
of Net Revenue
|
|
Increase/(decrease)
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
100.0%
|
100.0%
|
|
22.0%
|
Costs
and expenses:
|
|
|
|
|
Direct
costs
|
55.7%
|
55.4%
|
|
22.6%
|
Selling,
general and administrative
|
30.4%
|
32.5%
|
|
14.1%
|
Depreciation
and
amortization
|
3.5%
|
4.1%
|
|
2.3%
|
Other
Charges
|
-
|
6.7%
|
|
(100.0%)
|
Income
from operations
|
10.4%
|
1.3%
|
|
912.0%
|
Net
revenue increased by
$37.1
million, or 22.0%, from $168.8 million for the six, months ended May 31,
2005 to
$205.9 million for the six months ended June 30, 2006. This
improvement arose through a combination of increased business from existing
clients and business won from new clients. Revenues in the United States,
Europe
and the Rest of World grew by 32.4%, 1.6% and 56.3% respectively. In the
six
months ended June 30, 2006, net revenue from our central laboratory business
increased by 66.5% from $12.5 for the six months ended May 31, 2005 million
to
$20.8 million for the six months ended June 30, 2006, while our clinical
research segment grew by 18.4% from $156.3 million to $185.1 million over
the
comparable period. The increase in net revenue in our central laboratory
segment
is primarily due to higher testing volumes in 2006. The growth in net revenue
in
our clinical research segment is due to the expansion of our services to
both
existing and new clients, increased use of outsourcing by the pharmaceutical,
biotechnology and medical device industries, an underlying increase in research
and development spending and consolidation in the CRO industry.
Direct
costs increased by $21.2 million, or 22.6%, from $93.5 million for the six
months ended May 31, 2005 to $114.7 million for the six months ended June
30,
2006, primarily due to increased staff numbers needed to support increased
project related activity and the inclusion of $1.08 million non-cash stock
compensation. Direct costs as a percentage of net revenue increased from
55.4%
in the six months ended May 31, 2005 to 55.7% in the six months ended June
30,
2006.
Selling,
general and administrative expenses increased by $7.8 million, or 14.1%,
from
$54.9 million for the six months ended May 31, 2005 to $62.7 million for
the six
months ended June 30, 2006. This
increase is due to the continued expansion of our operations and the inclusion
of $0.9 million non-cash stock compensation expense. As
a
percentage of net revenue, selling, general and administrative expenses,
decreased from 32.5% in the six months ended May 31, 2005 to 30.4% in the
six
months ended June 30, 2006.
Depreciation
and amortization expense increased by $0.1 million, or 2.3%, from $7.0 million
for the six months ended May 31, 2005 to $7.1 million for the six months
ended
June 30, 2006. 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 4.1% in the six months ended May 31, 2005 to
3.5%
in the six months ended June 30, 2006.
Other
charges of $11.3 million were recognised in the six months ended May 31,
2005.
These charges related to the recognition of an impairment in the carrying
value
of our investment in the central laboratory, a write down of certain fixed
assets and the lease termination and exit costs associated with the
consolidation of some of our office facilities in the U.S.
Income
from operations increased by $19.3 million, or 912%, from $2.1 for the six
months ended May 31, 2005 million to $21.4 million for the six months ended
June
30, 2006. As a percentage of net revenue, income from operations increased
from
1.3% for the
six
months
ended May 31, 2005 to 10.4% of net revenues for the six months ended June
30,
2006. The operating income for the six months is derived after the recognition
of the non cash stock compensation charge of which there was no charge in
the
comparable period. As a percentage of net revenue, losses from operations
for
the central laboratory decreased from 100.3% for the six months ended May
31,
2005, to 1.6% for the six months ended June 30, 2006, due to the efficiencies
gained in the higher testing volumes in fiscal 2006. For the six months ended
June 30, 2006, the central laboratory constituted approximately 10.1% of
our
business revenues. Operating margins for our clinical research segment increased
from 9.4% in the six months ended May 31, 2005 to 11.7% for the six months
ended
June 30, 2006.
Interest
income for the six months ended June 30, 2006 was $1.7 million, an increase
of
$0.9 million over the amount of net interest income for the six months ended
May
31, 2005. Higher average level of funds invested and higher interest rates
rates
over the prior period contributed to the increased interest income.
ICON's
effective tax rate for the six months ended June 30, 2006 was 26.4% compared
with 80.7% for the six months ended May 31, 2005. The decrease in the effective
rate was primarily due to the inclusion of once-off other charged for the
six
months ended May 31, 2005.
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 six months ended June
30,
2006 amounted to $123.8 million compared
to $101.4
million for the six months ended May 31, 2005. 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
June 30,
2006,
our
working capital amounted to $153.3 million, compared to $132.3 million at
December 31, 2005. The other significant influence on our operating cash
flow is revenue outstanding, which comprises accounts receivable and unbilled
revenue, less payments on account. The dollar values of these amounts and
the
related days revenue outstanding can vary due to the achievement of contractual
milestones, including contract signing, and the timing of cash receipts.
The
number of days revenue outstanding was 51 days at June
30,
2006, compared to 65
days at
December 31, 2005.
Net
cash
provided by operating activities was $30.4 million in the six months ended
June
30, 2006, compared to $27.2 million in the six months ended May
31,
2005.
Net
cash
used in investing activities was $25.9 million in the six months ended June
30,
2006, compared to $2.9 million in the six months ended May
31,
2005,
due to
additional purchase of short term investments during the period.
Net
cash
used in financing activities was $0.8 million in the six months ended June
30,
2006, compared to $9.2 million in the six months ended, May 31, 2005, primarily
due to repayment of bank credit lines.
As
a
result of these cash flows, cash and cash equivalents increased by $3.7 million
in the six months ended June 30, 2006, compared to an increase of $14.4 million
in the six months ended May 31, 2005.
On
July 3,
2003, ICON entered into a facility agreement (the "Facility Agreement") for
the
provision of a term loan facility of U.S.$40 million, multi-currency overdraft
facility of $5 million and revolving credit facility of $15 million (the
"Facilities") with The Governor and Company of the Bank of Ireland and Ulster
Bank Ireland Limited (the “Banks”). Our obligations under the Facilities are
secured by certain composite guarantees and indemnities and pledges in favour
of
each of the Banks. This facility bears interest at an annual rate equal to
the
Banks’ Prime Rate plus three quarters of one percent. ICON plc and its
subsidiaries are entitled to make borrowings under the term loan facility
of $40
million and the multi currency overdraft facility of $5 million. As at June
30,
2006, the full amounts of the term loan facility and the multi currency
overdraft were available to be drawn down. As at June 30, 2006, the full
amount
of the $15 million revolving credit facility was available to be drawn
down.
The
Company also entered into an overdraft agreement with Allied Irish Banks,
plc
(“AIB”) whereby the company guarantees any overdraft of its subsidiary ICON
Clinical Research GmbH up to an amount €120,000 (U.S.$150,612). As of June 30,
2006, the full facility was available to be drawn down.
Inflation
We
believe
the effects of inflation generally do not have a material adverse impact
on our
operations or financial conditions.
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
|
|
Ciaran
Murray
|
|
Chief
Financial Officer
|
20