ICON plc — FY2013 Form 20-F
Reporting period: Fiscal year ended December 31, 2013; filed March 12, 2014. This is an annual report, not a standalone 2013 Q4 report. Financial figures are in U.S. dollars; statement amounts below are in millions unless noted. ICON is an Ireland-based global contract research organization serving pharmaceutical, biotechnology and medical-device companies.
Key financial results
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Gross revenue | $1,784.3 | $1,504.0 | +18.6% |
| Net revenue | $1,336.1 | $1,115.0 | +19.8% |
| Operating income | $121.2 | $68.0 | +78.1% |
| Operating margin on net revenue | 9.1% | 6.1% | +3.0 percentage points |
| Operating income, excluding restructuring and other items | $130.2 | $73.7 | +76.8% |
| Net income | $102.8 | $55.4 | +85.5% |
| Diluted EPS | $1.65 | $0.92 | +79.3% |
| Net cash from operating activities | $221.2 | $113.4 | +$107.8 |
Gross revenue includes reimbursable expenses; net revenue deducts those client-reimbursed costs and is management’s primary growth measure. Direct costs were 63.3% of net revenue versus 64.4% in 2012. Net income margin was approximately 7.7%, compared with 5.0%.
Liquidity, capital and cash flow
- Cash and cash equivalents were $182.5 million and short-term investments were $138.3 million, totaling $320.8 million, up from $190.2 million at year-end 2012.
- Working capital was $352.3 million; current assets were $853.4 million and current liabilities $501.2 million.
- The company reported a $150 million committed revolving credit facility available at year-end; the filing reports no year-end borrowing under it. No material conventional debt balance is identified in the reported figures.
- Operating cash flow was $221.2 million. Investing activities used $184.4 million, including acquisitions, capital spending and purchases of short-term investments. Capital expenditure was $29.5 million; operating cash flow less capital expenditure was approximately $191.7 million.
- Financing activities provided $28.8 million, principally from $27.0 million of option exercises. Cash and cash equivalents increased $68.5 million during the year.
Changes versus the prior comparable period
- Net revenue growth accelerated to 19.8% from 17.9% in 2012. Operating margin expanded materially, while net income and diluted EPS also rose sharply.
- Operating cash flow nearly doubled; days revenue outstanding improved to 32 from 40 days.
- Cash and short-term investments increased by $130.6 million. Shareholders’ equity rose to $910.6 million from $754.6 million.
- ICON acquired Cross Country Healthcare’s Clinical Trial Services division in February 2013 for initial cash consideration of $51.9 million, adding contract staffing, functional service provision and drug-safety capabilities. The company also recorded $36.9 million of acquisition goodwill from the transaction.
- Customer concentration increased: the top five customers contributed 53% of net revenue, versus 48% in 2012. One customer accounted for 26%, up from 18%; another contributed 10%.
Outlook, commentary and risks
- Management described continued outsourcing, strategic partnerships with large sponsors, integrated service delivery and global expansion as opportunities. These are business expectations, not quantified revenue or earnings guidance; the filing provides no formal FY2014 earnings or revenue forecast.
- ICON expected to spend approximately $42.5 million over the next 12 months on IT, facility expansion and new offices, and said foreseeable cash needs could be funded from operating cash flow, cash balances and available credit.
- Year-end backlog was approximately $3.1 billion, up from $2.8 billion. Management cautioned that backlog may be delayed or cancelled and is not a reliable predictor of future revenue.
- FY2013 restructuring and other charges were $9.0 million, including workforce rationalizations and closure of the Omaha Phase I facility following expansion and consolidation in San Antonio. $2.2 million remained accrued at year-end, expected to be paid in 2014.
- Major operating risks include dependence on a small number of customers, termination or delays of clinical projects, fixed-fee contract cost overruns, staffing and patient/investigator recruitment, regulatory compliance, cybersecurity and confidential data protection, foreign-exchange movements, and acquisition integration and contingent consideration.
- Tax risk includes multijurisdictional audits and $5.8 million of unrecognized tax benefits at year-end; $1.2 million could potentially be affected by a statute-of-limitations expiry during 2014. The company reported no litigation expected to have a material adverse effect.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at December 31, 2013.
Important facts for investors to verify
- How much of reported growth reflects organic expansion versus the Cross Country acquisition and currency effects.
- Whether the unusually large contribution from the 26% customer persists, and the effect of continued sponsor consolidation or project cancellations.
- Backlog conversion, contract profitability and working-capital collection trends, including whether days revenue outstanding remains near 32.
- Progress and realized savings from the 2013 restructuring, alongside the planned $42.5 million of investment spending.
- Cash and investment quality, currency exposures, tax-audit outcomes and any changes in acquisition-related contingent payments.