ICON Public Limited Company (ICLR) Q3 2012 Earnings Report, Transcript and Summary

Good afternoon, good morning, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended 30th of September 2012. Also on the call today, we have our CEO, Mr. Ciaran Murray; and our CFO, Mr. Brendan Brennan. I'd just like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. I will now make the customary statement in relation to forward-looking statement. Certain statements in today's call are, or may, constitute forward-looking statements concerning the group's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties and depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, and as forward-looking statements are not guarantees of future performance, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements, unaudited U.S. GAAP. While non-GAAP financial measures are not superior to, or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. We will be limiting the call today to 1 hour and will, therefore, ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand the call over to our CFO, Mr. Brendan Brennan.

Thank you, Sam. Quarter 3 2012 net revenue is $285.5 million compared with $240.8 million in the same period last year, which represents an increase of 19% year-on-year. In addition to that, the constant currency revenue increase again over that period was 28% and the constant organic dollar increase in that period again was 23%. As expected, concentration levels amongst our top clients is increasing as their strategic programs continue to onboard. Year-to-date, our top client represented 16% of revenue, up from 13% for the full year 2011. Our top 5 clients represented 47% of revenue, up from 37% last year. Our top 10 clients represented 62% of revenue compared to 52% last year, while our top 25 accounted for 75% of revenue, compared to 69% last year. In terms of the geographic mix of business, there was a slight shift back toward the U.S. in the third quarter, driven by taking over legacy work for some large clients. That said, we expect a multiyear shift to internationalization of trials to continue. Year-to-date, 56.9% of our revenue was generated from outside of the U.S., 12.2% in Asia Pac and Latin America. During the quarter, we hired 347 people and closed the quarter with approximately 9,250 staff. In the quarter, our gross margin increased to 35.8% compared with 35% last quarter. In our chemical research segment, gross margin increased to 36.9% in the quarter. We continue to get leverage on our SG&A percentage, which was 24.8% of revenue in the quarter. This compares to 29.7% in Q3 2011. EBITDA in the quarter was $31.5 million or 11% of revenue. Depreciation in the quarter was $8.6 million, providing EBITA of $22.9 million or 8% of revenue. Total D&A was $10.6 million, broadly in line with last quarter and we would expect a similar level of D&A in the fourth quarter. Operating income was $20.9 million. The operating margin in Q3 was 7.3%, compared with 6% in Q2 and 4.7% in Q1 2012. The interest charge was $252,000 in the quarter and I would anticipate a similar level of overall interest charge in the fourth quarter. The effective tax rate in Q3 2012 was 14%, lower than our target range of 18% to 20% due to roll-off of some provisions under the statute of limitations. In the longer term, we would expect our tax model to trend to our targeted 18% to 20% range. The lower tax charge added $0.01 to the bottom line during the quarter. Net income in the quarter was $17.7 million, equating to EPS of $0.29. Our working capital management continues to perform well, and at the end of September 2012, our DSO was 38 days. Operating cash flow generated in the quarter was $29.3 million. CapEx for the quarter was $6.6 million, and we spent $17 million on earn-outs related to recent acquisitions. At the end of September 2012, net cash was $180 million. With all that said, I'd like to hand over to Ciaran now to talk about the business environment, our strategic plan and outlook.

Okay, thank you, Brendan, and good morning or good afternoon, everyone. Quarter 3 was another quarter of strong bookings for ICON. We reported gross bookings of USD 496 million, which is a record for us. This follows on from the strong quarters reported earlier this year and that means that we've now reported $1.5 billion of gross bookings so far in 2012. Bookings were healthy across the full range of our businesses and our clients. Cancellations in the quarter were $46 million or 2% of opening backlog. All of this resulted in a net bookings number of USD 450 million. I think that's a record, too, and it's a book-to-bill of almost 1.6x revenue. Backlog at the end of the quarter was $2.7 billion, that's up 19% from last year and that backlog provides 77% forward coverage of our next 12 months revenue expectation. In the quarter, we grew backlog and revenue, and we saw our operating margin continue to expand, reaching 7.3% as we execute the plan that we set out for 2012. All of our businesses in our clinical segment met expectations and reported a profit. The Central Lab continues to make progress in the turnaround plan we started back in the second half of 2010. It reported its highest-ever quarter of revenue at $24 million. Net awards were also very strong at $42 million for the quarter, resulting in a closing backlog for the laboratory of USD 224 million. Operating margin for the quarter was 4.3%, which is in line with the comments that we made on the Q2 call. Although we are still ironing out some kinks in the Lab performance, during the quarter, we identified some legacy cost allocation issues, which were related to freight and courier charges incorrectly allocated to some contracts. These amounts totaling $4 million were adjusted during the quarter, resulting in a direct cost increase for the period. On the plus side, these costs were offset by a $2 million reduction in SG&A, which was primarily related to some U.S. state and federal government grants and refunds. All of this resulted in a net negative impact of $2 million in the Lab in the quarter. Looking forward, I expect that in Q4, revenue will be in the range of $22.5 million to $23.5 million in the Lab and operating margin will continue to be in the range of 3% to 5%. Today, we announced our plans to change to a full-share listing on NASDAQ and replace our current ADR program. This has the potential to provide significant benefits to shareholders, including the possible inclusion in a number of high-profile indices and more flexibility of our execution of future buybacks. We have also decided to withdraw from the Irish Stock Exchange due to the low levels of activity on that exchange. I've also been asked by some of you about guidance for 2013. Traditionally, we've provided guidance on our Q4 earnings call and we intend to do the same this year. However, thinking about 2013, I am happy to give some high color commentary. Looking at the market for prospects for next year, I continue to see that opportunities will present themselves, both as our existing customers outsource more work and other potential customers adopt more strategic outsourcing models on which we are well-positioned to compete. So we head towards 2013 with reasonable momentum from this year's net business awards and with our backlog increasing 19% year-on-year with forward coverage rates of 77% and with a robust tone in the market. So I would expect next year that our revenue will grow in the low double-digit range. On top of that, we've expanded our operating margin consistently over the past 4 quarters and expect us to continue that expansion in 2013, albeit at a slower pace than this year as we continue to balance the right level of investment in future growth with the necessary focus that we have on earnings growth and shareholder value. Before I wrap up and hand over to questions, I'd like to take this opportunity to thank all of our 9,250 staff worldwide in ICON who work hard every day and devote themselves to making ICON the company that it is. So, Ritchie, we're ready to hand over for questions now.

[Operator Instructions] We will now take our first question from John Kreger of William Blair.

Ciaran, could you maybe just expand a bit on the trend towards more strategic deals? We've been talking about this for a few years. How are they playing out from your perspective? And are we reaching a point now where some of these are going to start moving into a contract renewal phase? And do you have any perspective on how that might play out?

Let's see, we have 2 questions there. I mean, the trend over -- on strategic deals, you're right. I mean, this has playing out for a number of years. When we look at it, I think we have to remember that these deals are a huge change management programs both for our clients and ourselves. They're based on a much higher level of collaboration, on partnership, on sharing of technology platforms, alignment and harmonization of SOPs, linking up our staff with our customer's staff to provide us sort of a seamless operating environment. We always say that we know these relationships are working when the staff that we have deployed in the project and the customer staff all feel that they're really working for the same organization and the same project. So we're seeing that play out over the last couple of years in our big accounts and we're very seeing encouraging signs. And as you would expect with any large-scale change transformation, it takes a while for these things to bed [ph] down and we've seen that on the first few ones. But as they move into the second and third year, you start to see the benefits. You start to see people really working together and you start to see opportunity as you embed the relationship and you see more potential opportunities, the chance to do more things for customers, the chance for us to become more solutions driven, to become a valued-added trusted advisor for our customers to provide solutions, and ultimately, to help our customers with the objective here of what we're doing, which is to improve the quality of their development efforts, to speed up and take out costs from the development cycle. And our feedback on the first year, there have been challenges in the early days with some of them. But you would expect that and we always expected that. And I think we talked quite openly about that way back at the end of 2010 on our last Analyst Day when we talked about some of the things we do, the investments we would make in providing that strategic offering. We were holding staff then and we further invested in staff ahead of revenue through 2011. We invested in our technology platforms so that we would be in a position to assist our customers with that staff solution to faster, better quality, lower-cost development and we've had success that we're happy with our ICONIK platform. We broadened our geographic footprint, invested heavily in Asia where we've 1,300 or 1,400 people now. We made the acquisition of Beijing Wits towards that end. So, we purchased Firecrest then to assist with our technology offering and again improve the quality of investigative sites and data collection. So we've done a lot and invested a lot in these programs and so have our customers. They've put a lot of work in and my take on it is there's further opportunity. So we look at the earlier contracts that we signed. They are up for renewal and people have been asking about that. But these contract renewals, they're like the repeat business that we used to get. I mean, ICON has grown to where it is just from its humble beginnings today because of our success of getting repeat business with customers and we have long-term working relationships with all of our significant customers. So when I look at the renewals of some of these bigger contacts, we look at them in the same way that we've always looked at this in the past. We look at the fact that we've all worked together for a period of time. We've invested together and we're having discussions with our customers that are constructive and that recognize the efforts on both sides. And I think, to that extent, we'll continue to work with the customers. There will be some element of negotiation as there always is in the real life -- in the real world of commerce. But we're going to work with our customers and we're looking at ways to enhance the scope of our relationships to get more opportunities to work with them. So that's really my take on where we are in those strategic deals and those upcoming renewals.

That's very helpful. And maybe just one very quick follow-up. You had another great quarter of bookings wins. How do you feel about the level of competitive pricing pressure out in the market today? And are you still comfortable with the longer-term EBIT margin goals that you have articulated in the last couple of quarters?

I would characterize the market pricing environment as being the same as it has been for the last year or more. There's no significant change. A lot of the larger deals that we worked off and a lot of our -- both strategic and preferred provider were working off MSAs, which have got rates set [ph] at points in the past. So the rates are generally agreed. I think when we look at how we work with customers, we share the benefits and we improve the development efforts, so there are challenges that allow us to enhance our margin both into these contracts. So I don't see a significant change so far in the competitive pricing from what we've been looking at for the last 4 to 6 quarters. And I think, if I look to the future, I see no reason to change our longer-term profit goal. If you look back historically, ICON sort of operated in that 10% to 12% or 13% EBIT margin, target. And of course, that -- some of those numbers were back in the days before you had to charge things like stock option costs and some of the other accounting adjustments. We've made a lot of progress in the last year. We're up to 7.3% in our operating margin from the 0-ish in this quarter last year. So we're happy that we're moving forward in the right direction and we're doing that while balancing the investment in the future. We've grown our margin, but we've also grown our backlog by 20%, and our revenues are up 18% and 19% this quarter. So historically, there has always been a balancing act and to some extent a trade-off in CROs where as you invest and your backlog grows, it does put the margin under pressure. So we're happy with the progress that we've made on that. And looking at that, we don't see any reason why that shouldn't continue as we go forward. So we're holding our low double-digit target margin for the future. I think we'll come back to that. It will be a question of how quickly we grow back to that. The margin expansion this year has been very satisfactory and it's been done in a growth environment. Next year, we will continue to expand margin and grow the business, so the expansion may not be at quite the rate that we've seen over the past 4 quarters. But we're very focused on getting to that double-digit margin in the medium term. And we're very focused in shareholder returns and profitability and I think we can point to what we've achieved as a management team and as a company and all the people working for us in the past year to say that's where we're going. So we'll see the margin continue to expand over the next 4 or 6 quarters and I see no reason why we won't work towards the longer-term margin. And to get there, it will be about continuing to improve our own efficiency, continuing to deploy new technology, to take time and cost out of the monitoring effort for data collection, to improve that, which will give us some benefits, and of course, working with our customers and taking costs out for them and sharing in those gains. So I think the opportunity is there for us to do that over the next couple of years.

We will now take our next question from Greg Bolan of Sterne Agee.

Maybe if I could take this to a different direction as it relates to partnership renewals. It's obviously been a hot topic. Can you maybe talk about any change in involvement by the procurement department as it relates to newer partnerships being negotiated? And maybe even existing partnerships where billable rates kind of are coming up for, I guess, a refresh?

I won't talk about any specific items, Greg. I'm sure you understand that, and there's always an element of negotiation in this. I think, it's fair to say that the nature of the strategic deals have meant that there's been significant influence from procurement in the original negotiation of all of these contracts. And in fact even if you go back beyond that, I think it would be fair to say that from probably 2004, 2005 when people started to move the more sort of transactional model to the halfway house of preferred providers and they consolidated some of their vendor lists that we've seen a considerable level of procurement involvement. So I don't see any significant change in the involvement of procurement with those customers where traditionally they've played a role. I think when it comes up to negotiation of rates, that's one part of a fairly complex equation when it comes to delivering work. It's about more than the rates. So when you sit down and talk to your customers -- I mean, our job here is to sit down and say, "Look, there's a bigger picture here than just the rate on the contract, on the contract renewal," and broadly, our customers, they get that and they understand it and they understand clinical development. Now, obviously, the job of any procurement organization is to focus on some of these things and our job is to take that onboard and work with them and look at the broader picture. But the benefit that we provide to our customers is around trying to sit down and eliminate duplication of work, to work together more seamlessly and speed up the development effort. And so, it's all about how to -- how project management interact, how we plan the project together, how we proactively look at roadblocks and solve them. And all of our customers, even the toughest ones, and some of them are tough, as you would expect, have said to us, "Look, to the extent that you provide benefits and you can take costs out of our development chain, we'll share these and we'll certainly look at that." So rates is one thing that we look at, but it's also about the amount of hours that it takes. The cost of a trial is timed by rates and then there's also the whole mix within the rates. We have some fairly sophisticated algorithms with our customers whereby there are different rates and different territories that reflect the different geographic factors and the cost base. And by working proactively with them and by having perhaps more influence on where some of the work is committed, we can adjust the overall cost of the project. So for me, the discussion really is about the total cost and the hundreds of million dollars of development costs that our customers are spending and how we assist them in taking that total cost down. There'll be the usual negotiation around rates within those algorithms, but I don't see it as being significantly different in the past. I think when we signed some of our earlier contracts, everybody signed them in good faith. Assumptions were made about where we might be located and how much we could plan it compared to customers. As -- look, no plan survives the first contact with the enemy. So over the past few years, we've constantly been making adjustments in collaboration with our partners where we've said, "Hey, look, we all thought it would work this way and it's worked a different way." Sometimes it's led to putting work in different regions. Sometimes it's led to increasing rates in some countries and decreasing them in other ones, as we've all learned. So I mean, this is a long way of saying that I don't see anything outside the normal course of what you expect in these negotiations.

Very helpful. Very educational. On the incremental operating margin for this quarter -- past couple of quarters, extremely impressive, 40-plus percent. Kind of looking at the year-to-date operating income relative to that of 2011 and just kind of backing into what that incremental margin expansion is and that's about 15%, is that -- that seems pretty, in my mind, reasonable to expect for maybe thinking about 2013. Is that kind of the way you're thinking about it as well or am I way off?

I'm going to look at Brendan on this one. I think that I'll preface it by saying that we've had a good-ish [ph] year this year in expanding margin quickly because we were sort of coming from an artificial low point where we've loaded up a lot of staff last year that we had on the payroll and then, of course, the business ramped up a little more slowly in Q2 and Q3 of last year. So we've been soaking up resources that were already on board. I think with the backlog up 20%, the wins we've had and heading into next year, the incremental increase won't be quite at that level. But I wouldn't be able to give you a more granular number. Let's see if Brendan has any comment on that.

I mean, not usually beyond that. As Ciaran said, it was -- this is really a recovery year, so you would expect that the expansion -- or the percentage expansion would be bigger this year, coming from a 0 last year to a 7.3 this quarter. So while we said at the outset there'll be expansion going forward, so I think the rate and pace will certainly be much more moderated.

We will now take our next question from Ross Muken of ISI Group.

As we think about your business wins, I mean, if you sort of dive down to the next level -- I know, Ciaran, you really -- when you came in focused on sort of fixing the business development effort and making sure there was a good balance to where folks are spending their time and when the hit rate on wins were kind of where you wanted to in all the different customer segments, I mean, do you feel like when look at the result from this last quarter, you're finally where you need to be at least from a biz development perspective? I mean, are you happy with sort of the mix, sort of large and small that underlie that nice number?

I actually am, Ross, and so are our BD people that are dialed in on this call, I'd like to say. They've made great efforts over this year and we've seen a nice balance of business. I think, if you go back to early in the year, a lot of people were asking specifically around one of our bigger strategic accounts, "How much is that? What's your work outside of that? Is all of your work coming from that account?" And we got significant volumes of business as we had hoped to and intended to and are happy to take. But over the last couple of our quarters, and I think, as you go back to Q1 I highlighted a couple of wins that we'd had outside of our normal customer base, a couple of significant ones. As we moved into Q2, we saw some more activity then in -- and the Q1 ones were also large pharma. But in Q2 and Q3, we've been focusing on a broader level of business. If I look at the mix of the wins in Q3, if you exclude our top customer, our book-to-bill is still above its normal target. It's north of 1.4 on the non-sort of large accounts. And if I -- so I look at that, this plate is sort of 1/2 in large pharma, 1/2 outside it, between biotech and midsized pharma, which are pretty good numbers and are addressing some of the bias that we had towards larger accounts at the back end of last year and early this year. But that being said, I think our view on this is that large pharma has been traditionally the mainstay of ICON's customer base and we've worked very well in that environment. We've built our business on those relationships. They are good customers to us and they have the high volume that's allowing us to build our business, to invest in it to get the leverage that we're seeing off of our cost base and our SG&A. So it's always going to be extremely important for us, and -- but we will seek to -- we are seeing -- Brendan mentioned the higher concentration. I mean, we called that a long time ago, that it was going to happen. So our BD guys have done a good job in trying to counterbalance that, but it takes a lot of work in the midsized and smaller segments to balance that kind of large dollar amounts that can come out of the big accounts.

On the capital deployment front, are you happy with sort of the pace of deals that you've been able to do and how would you sort of characterize that environment for tuck-ins?

Yes, I've been happy -- we did a number of deals, I suppose, over the last couple of years close together, PriceSpective and Oxford, to build out our kind of Phase IV offering at Firecrest, some technology. And then we deployed a lot of capital internally and we've very good IT platforms, and ICONIK's very strong. We have -- I think someone was saying to me recently, we've sort of under-invested in our business for a period of year. But I actually think that over the years, if you look at our CapEx, we've invested a lot in our IT platforms and we're seeing the benefit of that. We're seeing the benefit with good platforms and they're growing. And our investment levels have moderated because that reflects the money that we put into these over a long period, probably from 2005 onto now. So we're happy with capital deployment. We're integrating some of our newer acquisitions and the Oxford and PriceSpective acquisitions are working out well. There's a lot of very smart people in there. We're working them in, their sort of consulting skills and consulting sets into the core of our business. And that was a lot of change for everybody. And the Firecrest technology is really hot, and if anything, we've more opportunity to harvest that than we currently have time to focus on this as we bring it into the business. So we're kind of digesting what we have. We're continuing to invest internally in our sort of the next generation of the ICONIK platform and then the whole way of using data and where big data meets medical research and where we can change the way that monitoring is done and data is analyzed and captured and how it's used. So we're doing a lot of internal investment. It won't change our CapEx forecast for next year significantly from this year or last year because we have been spending money consistently in this area. So I'm happy with capital deployment. If I look at the active deal front, there's nothing at the minute. I think, opportunity over the next couple of years -- there's lots of opportunity for us with what we have. In the past 2 years, as I say, we -- I think it was late 2010, we kind of said, "Look, we're going to do a number of things. We're going to enhance our technology to improve [indiscernible] clinical trials. We're going to build out in Asia. We're going to enhance our Phase IV offering where we consider it we were weak [ph] and we've added some sort of strategic relationships on biomarkers and things like that. And our scientific offering, we've beefed up with internal investment on our Global Scientific Council and our knowledge base. So we've done a lot of stuff over the last few years and I think we're starting to see the benefits of those changes in the level of the new business awards, the quality and differentiation of our service offerings to our customers. And I'm happy with that. I'm happy to digest it. 2012 was a year when we wanted to say to the markets and our shareholders, "Look, we know about profit." Historically, we've made money and we've made these investments and we're going to prove that there is a path back to profitability and that they pay. And for me, 2013 is kind of -- it's kind of more of the same. There's lots of organic growth opportunities from existing customers whereas we talk about enhancing the relationship and expanding out. We see more opportunities and there are new -- potentially new customers that we're talking to and we want to leverage off our really excellent experience in running some of these big strategic deals. So between the opportunity we have and the digesting of the capability that we added recently, I'm happy with how capital is deployed. We did a small buyback during the year where we spent about $25 million of our capital, which is about 1/2 of the authorized buyback starting when the stock was lower at an average price of $19. We're changing our listings and I think that's something I should probably talk about in terms of capital deployment. This is -- I'm excited by this and I think I look at it in 2 ways. It's a milestone event. ICON is, what, 22 years in existence. We're on the market since 1998. We've grown to be one of the top global CROs in the world from our beginnings in Ireland. And it's a milestone that reflects our global -- we're not just -- we're proud of our Irish legacy and we get many benefits from it. But we're a global company that's based in Ireland and we're moving to a statement of intent which shows we're going for a full appropriate global listing of our ordinary shares on NASDAQ. The ADRs were -- provided obstacles for a lot of our shareholders, administratively and in other ways. So moving to full listing will really help in terms of liquidity, I believe, and adding -- and potentially adding indices, which going to help. And then of course, I mean most of our stock has been held in the U.S. for some time. And then the Irish listing has had very, very low levels of trading, so I think we're reflecting now that from a capital deployment, capital raising point of view we're a global company and we're going to set a marker of our intent for how we're going to grow ICON in the future by moving towards this listing.

We will now take our next question from Tim Evans of Wells Fargo.

Ciaran, I was hoping you might give us some sense of what kind of ammunition you're carrying into these contract renegotiations? Specifically wondering what are the key performance metrics that are important in these negotiations? How do you keep track of them and how do you measure them and how do you feel like you've measured up against those expectations over the course of the -- over the contracts in question?

I mean, Tim, there's a bunch of metrics that we use operationally that are very important, but very granular. But I won't go into too much detail. I think what I would say is the key overall ammunition that we have when we sit down with existing and potential strategic partners is that we have full range of clinical services across all the key therapies, well-trained staff, scientific, medical, operational. We have a geographic footprint where we can conduct trials pretty much where we want in the world. We back up our clinical offering with good technology, differentiated technology, in my view, with lab capacity, with our bioanalytical immunoassay labs. We've good Phase IV offerings, so we can put a whole package together, which takes you pretty much from Phase I through Phase IV, focus on market pricing with PriceSpective and reimbursement decisions and payer decisions. So we have all the pieces -- so at the top level, we have the pieces of the jigsaw that you pull together with the aim of saying better quality clinical development, faster, at lower cost. So we want to take our time on cost and we want our clients to get a better hit rate on their spend and reduce the spend that's wasted on drugs that never make it to market. So that's the big metric. Within that, then, you'll measure each project. There will be target timelines on performance at a project level and project management level. And basically, the core of a big pivotal clinical trial involves getting sites recruited and trained and started up and getting regulatory -- local regulatory and ethical approval. And then recruiting patients and getting the patients in to visit and get them through the visit schedule and collect the data and retain the sites and retain the patients and lock down the data into the database then when it gets to the medical writing and submission stage. So all of those key elements of a trial are measured and we measure it well, but look, it's a tough business, medical research. Some studies are tougher than others. There are inherent risks in medical development that are not unique to ICON or any CRO, but also to our customers when they develop the drugs in-house. Our customers are smart people and they've been doing this kind of thing for years, and so everybody understands some of the challenges. Sometimes it's harder to get patients for certain therapies than others. And so we measure the metrics and we set off, and generally, we perform them, but it doesn't mean that you don't have the odd trial where it gets more challenging. In which case, the information comes out quickly. We monitor real-time and we sit down amongst ourselves and then with our customers and say, "What are we," -- that information becomes the feedback for what do we do differently. So if I look across the portfolio of our projects, you're never happy with all of them. But I'm broadly happy with most of them and the ones where we need to focus on, we do and we have the metrics that are appropriate to give us the information that we need on a timely basis to adjust our approach, so I'm happy with all of that.

We will now take our next question from Eric Coldwell of Robert W. Baird.

I have a few. I'll try to get through these quickly. On the M&A front, in the quarter you had partial contribution from Firecrest, full quarter from Beijing Wits and a full quarter from PriceSpective. I'm getting to a sum of about $6.5 million. Is that in the ballpark? Could you give us the M&A contribution?

Brendan, do you....

So when you say that, Eric, you're talking about the revenue line?

Yes, the revenue contribution.

It'd be in that ballpark, yes.

The commentary on the Central Lab, I was a little bit thrown off on that. I just want to make sure I understand what happened. Can you tell us more specifically what happened with the legacy cost allocation, the $4 million in direct costs was -- maybe what happened, number one? Number two, did those costs shift from your allocation in clinical to an allocation in Central Lab, or are those incremental new costs? Are they onetime, are they recurring?

They're one-time. They're not recurring. They didn't shift from clinical into the Lab, Eric. It was basically that there were cost allocation metrics applied to some client contracts over a number of years that were incorrect and we had too much cost allocated into the contract, so we sat down and we reversed that. But it's a legacy issue and it's dealt with now. We have a few kinks probably to work through in Q4, but that's reflected in the outlook that I gave. So I think the good news with the Lab really is, if you look back at it, I mean, the Lab has a long legacy of volatile amount of performance [ph], and I think, we all remember in 2010 when it accumulated in losses of $13 million that year. That's when we really started to focus and confront a lot of operational and financial issues, management issues in the Lab. By 2011, we saw progress and we saw losses reduced to about $3 million, I think. And we've continued to see progress in 2012 in terms of continuing strong business awards from great BD efforts, building a good book of business, building a backlog to $224 million. And year-to-date this year, their [indiscernible] made about 5%, $3 million. By the end of the year, it should have made $4 million. So I think yes, we're working through the turnaround and we're clearing up some of the legacy issues. I think we're putting those substantially behind us and I think the thing that I'm focusing on when I look at the Lab and say, "Hey, why do we do this?" We do it because it fills out our portfolio with some service offering. It's a great source of data for the work we do on -- in our technology platform feeds. And we've moved it -- if you step back to a year where the losses have been eliminated and it's going to make the best part of $4 million by the time the year closes out and I think move forward and move on from that base in 2013. So that's really the commentary that we have around the Central Lab.

Okay, I just want to clarify, if you had too much cost allocated in the cap in the past, was this a pickup or a recovery, or was it a negative item? That's what I'm confused by.

It was a negative item. So we picked up a charge of $4 million for those costs offset by benefits of $2 million. So there's a net negative charge of $2 million in the quarter.

And the pickup was -- those were sales taxes? That was taxes that you applied above the line in operations?

No, the pickup was around certain states and federal refunds you get for certain activity that comes in at the SG&A line.

Okay, okay.

The cost was $4 million of direct cost in gross margin and the pickup was $2 million down in the SG&A line, so the net at the bottom line was $2 million.

Okay, got it. And on the tax rate, understand what happened in the quarter. Can you give us as a sense on where you think you're going to -- and you said long-term move back to your guided range, but what about for the fourth quarter? Are you targeting moving back into the 18% to 20% range this quarter, or will there be additional statute of limitation items?

Yes -- no. I mean, that's probably a kind of an annual once-off, so I expect to be back in that kind of 18% to 20% range in the fourth quarter.

We will now take our next question from Steve Unger of Lazard Capital Markets.

Ciaran, as we approach -- I know the fourth quarter, there's a lot of business folks who are sort of feeling like there's uncertainty in different aspects of the market whether it's globally or the fiscal cliff here and so forth. Should we be hedging or holding back our bookings expectations for the fourth quarter? Do you see your customer base being relatively unaffected by this sort of period of economic uncertainty that we're going through right now?

Yes, I mean, I don't think anyone is really unaffected by a period of economic uncertainty. I think if you look at the specifics of our customer base, these are long-term projects that we're talking about. They've been investments in the future. Most of our customers have -- they've a reasonable amount of cash and ability to invest in these things. But I think, yes, the psychology of what's happening in the world has got to impact everybody. And I think, too, as you move towards the end of a year, there's always the risk that decisions -- because of that undermining of confidence, because of the psychological impact, although the actual facts haven't changed and that you need to do a project, you know that it's going to cost so much, that you have, broadly, the funding available. And there can be a tendency sometimes to, if you don't have everything locked down sort of by the middle of the quarter or by sort of post-Thanksgiving, that things sometimes, in our experience, have slipped into Q1. I think if you look at this year, we've had 3 very strong quarters of bookings. It would be a brave man who would forecast the same level of bookings again in Q4, so we generally do our planning around a book-to-bill at 1.2. If I look out at Q4 and see where that's going to come from, there's a couple of things there that are good, that -- at the transaction level that we're talking to customers about. The ongoing business that comes out of the strategic account. But I think it's a fair comment to say, Steve, that Q4 may not provide the same bookings level that we saw in Q3.

And then just to follow up on that. I mean, you're already -- if you have sequentially flat revenues, you're going to hit the high end of your revenue guidance, so you're feeling very good about at least where you're at for the fourth quarter in terms of guidance. Both revenues and EPS should be sequentially up even with a higher tax rate, correct?

Yes, that's correct. I mean, we haven't revised Q4 guidance because -- I mean, we gave it a year ago. Actually it was this call last year just after I had assumed this job where there was a lot of variability in some of the market estimates that we felt we needed to go out a little bit earlier and give firmer guidance and depart from our traditional kind of Q4 practice. So look out a year, we're happy. You're right. I'm looking out and I'm going to see revenue top end of the guidance and we're going to see earnings up sequentially quarter-on-quarter. We're going to see them broadly in line with consensus and where the market is and that sort of margin target that we have should fall between 9% as we said the last time we talked about, so...

And then just one last question. As far as the listing is concerned, do you have a sense as to when you'll have that completed?

There are few -- as you can imagine, there are a few legal sort of hurdles and things to go through and some analysis. One of the steps will be -- will come to the shareholders. We have to get shareholder approval. We'll do that by means of circulating proxy material and having an extraordinary general meeting of the shareholders, which is just like our annual General Meeting, but it's not at the annual. That should happen in sort of mid-December, by the time you have to give statutory notice periods for these kinds of votes. When we get that approval, then we move through on the kind of legal, technical issues and it should happen, I think, Brendan can contradict me if I'm wrong, but sort of early in the new year, sometime in Q1.

Yes, yes, sometime in Q1. Hopefully, not too far in.

We're going to simplify a lot of things, Steve, in that listing.

We will now take our next question from Todd Van Fleet of First Analysis.

Ciaran, I think you mentioned that I think you expect to still invest in commercialization where you see an opportunity there. I'm hoping you could just elaborate on what you see as the market opportunity and how you think ICON can kind of differentiate itself to address that market need?

I think there is a market need amongst our large customer bases that -- it's around changed management. It's about looking at new ways to do things. I think ICON will help its customers by moving into a space where we have excellent knowledge base and skills and technology to deploy, to provide solutions, to move from the traditional. I mean, if you go back a number of years, I suppose CROs were generally more like a BPO outsourcer. You did -- your customer had the intellectual kind of capabilities and design protocols and spec'd out work and then sent out RFPs and said, "Do this -- we want to you to do this. How much it will cost and how long does it take?" Over the last number of years, that has been shifting to where it's sort of half of our business is in more strategic models where it's more collaborative. And really, these customers come in more often in the past few years saying, "What should we do? What do you think? Can we leverage your experience to look at using -- or different models to improve the quality and the speed and reduce the cost of our development efforts?" So for me, the market opportunity is being able to be that proactive solutions provider. And to be the solutions provider then it's about deploying elements that we have and pulling them together from earlier assessments of the health economics and the pricing strategy. People used to -- we'd always talk about proof concepts. I think early in the stage now, of drug development, the proof of the value is talked about as well. They go hand-in-hand, so it's really about that emphasis and us providing solutions for our customers. And then having the appropriate therapeutic knowledge, the regulatory skill to start up sites around the world, which we have. How we deploy technology to speed up data collection and get more sort of more site-related data that can lead you down to centralize and risk monitoring and improve efficiency, and then our late-phase capabilities in the groups that we built. So look, it's not about reinventing the wheel here. It's about customers that want to develop drugs and get them approved. It's about us being the solutions provider with the elements to help them do that and to work together through the change management. I don't want to underestimate the change management element and the fact that these things take time. And we've been doing that a lot. We're well-positioned to do it. So when I look at investment, it's about making sure you stay at the cutting edge of technology, making sure that we're up-to-date in all of our scientific and regulatory and operational and therapeutic knowledge, so that's where we'll look to invest.

Do you see any additional strategic moves for the company in that area in the way of a M&A, or do you -- is it really more just about kind of harnessing the resources that you have internally and just making them work better for you at that portion?

Yes, I think I kind of already answered that one, Todd, when I was talking about capital deployment. And I don't have much to add to that. I think I spoke about the fact that we've a lot of organic opportunity and that we're digesting a lot of the really cool stuff that we've added over the last few years. So that's where the primary focus is. Opportunistically, we'll always scan the market. But we have a lot of -- we've a strong history of largely organic growth. We have a lot of [indiscernible] potential clients so, so that's basically where we're at.

We will now take our next question from Sandy Draper of Raymond James.

Maybe just one clarification, Brendan. I'm just trying to go back to my notes. When you talked about the organic and constant dollar numbers, I felt you like you said constant currency revenue growth was 28% organic, with 20 -- so I'm just trying to understand how you're defining those because those numbers confused me a bit.

We're taking effectively, if we had used the same ruling translation rate at quarter 3 of last year and applied it to this year's revenue, Sandy, we're at a -- but the translation rate in the P&L this time last year was about above 40-something and it was above 20 this year, so obviously that has a big impact and that's what's driving the 28% versus the 19%. And then...

A 9% hit to growth due to FX.

Correct, yes. And then obviously, we're just pulling out -- on the constant organic dollar then we're just pulling out the acquisitions that we've done over the last while which are predominantly PSB, Beijing Wits and Firecrest.

So that's -- and that's off of that. That's off of the 28% to the -- there's about 5% incremental revenue from the acquisitions, constant currency.

Exactly, quarter-on-quarter.

We'll take our next question from Robert Jones of Goldman Sachs.

This is Kris on behalf of Bob. Just had a question on the cancellations. You mentioned that the quarter's cancellations were at 2% of the initial backlog. I just was wondering if you could let us know how we should think about it in the next quarter. Do you expect it to go back to the historical 4%?

Yes, this was a -- it was a relatively low quarter. We always had 2% to 4% of opening backlog, so we'd expect something again in that range in the next quarter. There's no reason to think it will stay at the 2% end, but 2% to 4% would be our normalized range.

We will now take our next question from the Tycho Peterson of JPMorgan.

Just one on hiring. It looks like you guys strengthened the leadership team in Asia and other parts of the world during the quarter. Can you just talk about where you are from a staffing perspective? And maybe, Ciaran, going back your prior comments on other strategics to also talk about your bandwidth for additional strategic deals should they come along?

Yes, from our own perspective, Tycho, I think we're in a good place. Look, I mean, an organization like ours, when you're backlog is growing 20% and your revenue, you're always a little bit distressed. So everybody's is doing a really good job in ICON this year in on-boarding some of the new accounts and working pretty hard in the organization to drive that growth and deliver to the bottom line. But we've increased our headcount pretty significantly to 9,250 people. We're in the market continuing to hire, so it would be fair to say that it's getting tight in places, particularly the U.S. I think some of our competitors noted that as well. But we've a good history of growing. I mean, I started in the company in late 2005. I think we had 2,800 people the month I started in September. From there we've gone to 9,250 people, so we've done this before. We know what we're doing. We will continue to hire to meet the backlog. Some of the key appointments you've seen are just to give us -- we have a global business and we run it as a global business, but we felt we needed more regional focus in some areas and some countries, so we've added some management bandwidth in growth areas. We've used the opportunity to -- I mean I'm in this job a year and there's always certain things you like to emphasis and change. So we focused some of our management bandwidth on different regions and we've added skill sets to different therapies. We're building a very strong management team. We're building a team, I think, that get known for delivery and for differentiation at ICON as we go forward. So that's really what we've been doing the last year. I think the bench strength is good, I'm very happy with it and I look at the bandwidth for strategic deals and I think it's good. I think, if you look back to one of the big ones we did more recently, it ramped up very, very quickly which is great. But it did put a lot of stress on both organizations in terms of having to focus and do it. Most of these deals ramp up more slowly and that's certainly our experience. So we'll be more than happy to add more strategic deals. I think as you look at it we're getting more leverage out of our technology. We've learned a lot. We can deploy kind of change management toolkits closer out-of-the-box. And the processes that we've used for alliance management and then pulling together our own organizational capabilities across the whole broad range of services, we've learned a lot. We're a bit slicker at it as you would expect, 2 or 3 years into some of these deals. So I feel pretty comfortable that we have the bandwidth to continue to win more strategic deals. We're trying our best to win them. We'll be very happy when we win them, and we'll be happy to onboard them and that's the plan.

And then just a quick follow-up. Are there -- as we think about your portfolio today, are there things that clients are asking for that you're not providing? I think you've built out some new imaging capabilities this quarter. Are there other obvious gaps to fill in things that clients are asking about?

It depends, project-to-project. I think it'd be fair to say we have very broad range of skills and geographic coverage and range of services, so there are no major holes. That being said, on specific projects at times, in specific therapies, on specific protocols you might be looking to add small pockets of skills, but there are no glaring holes in our offering at the minute.

We will now take our next question from David Windley of Jefferies.

I did jump on a little late, so I apologize if these are repeats. But I wondered in regard to the $2 million of net effect in the Lab that you described to Eric's question, is there any more -- do you anticipate that there would be any more charge to be taken in the fourth quarter or thereafter, or does this take care of it?

Yes -- no, this takes care of most of it. There are still a few little things we're just brushing up as we clean up some clean up some of the legacy issues in the Lab. I think I said we just have a few kinks, as I described them. I talked about the Lab revenue and making sort of in that 3% to 5% range in Q4, and I think that that should cover anything else that we want to clean up from a housekeeping point of view. I don't expect anything of concern. Known and unknowns, David, unknown and unknowns or not, but we've been working hard on the Lab over the last 2 years and we'd be happy that substantially this stuff will be behind us by Q4.

Okay. And so on that, so 3% to 5%, I presume, you mean margin from a 4% number -- a 4.3% number in the third quarter that includes the $2 million charge. So maybe help me to understand what kind of operationally -- in other words if I back out the charge, it's much higher than 4% in the current quarter, in the just-reported quarter. What makes that operationally sequentially go down?

Well I -- we talked about $24 million of revenue in Q3 in the Lab. And when I talked about the outlook for Q4, we were at a range of $22.5 million to $23.5 million in revenue. The Lab had a particularly strong quarter on one particular contract in Q3. So really you reduce the revenue on the Lab, and of course, it's a high fixed cost base, so the marginal contribution allows us kind of 40%, 50% at times. So it's really that that's driving it. And as I say we're being prudent about making sure that we tidy up any other housekeeping matters that we have to deal with this year.

Got it, okay. Moving over to strategic relationships, kind of dove-tailing off Tycho's question. You have an appetite for more, obviously. I'm wondering a couple of things around strategic deals. One is just around the general pricing environment and to the extent that you are now into some of these and have some experience, if you would describe pricing as stable or if the quest for savings by the strategic partner is getting more intense? And then, also embedded in that, I think one of the expectations I had was that DSOs would go up because one of the things that the strategic partner would seek would be more favorable payment terms and we're not seeing that happen. So if you could just kind of touch on the various pricing levers and strategic deals, I'd appreciate it.

I spoke of that at great length, David, at the start of the call, so I don't want to rehash all of it, but I think...

Okay. I'll go back and read the transcript then.

To summarize what I said, because I did speak at great length. And the pricing environment is stable in strategic deals. I think, as we move through them, we learn things that allow us to make savings. I think we're having discussions with some of our customers around -- and I talked at length about the total cost. How can we get together and deploy technology and work more closely, and rather than focus too much on the specifics of rates for CRAs or whatever, it's about how do we take off out of the development effort? How do we enhance our opportunity to provide more services within the relationships? But at the same time, look, there are commercial negotiations around prices that will happen. But I'm very encouraged by the tone of some of them, that everybody is realistic. We've all been doing clinical development for years. So there'll be some commercial negotiations, but a lot of the focus is can we increase the scope of our services? If we do that and from what we've learned if we operate in different ways and focus on improved quality, reduced costs, faster clinical trials, what does it do to the customer's total budget? And to integrate ourselves with more leverage of common technology platforms and common SOPs as we've learned over the years. So we're all in business and that's sort of in the future, but the discussions are good. On the DSOs, I'd probably hand that one over to Brendan, if you don't mind.

Just on odd [ph] days, I mean, you're obviously right. And we do -- the short answer is we still do expect our DSO to go up given the terms that are in some of these new strategic deals and I think we'll see that over the course of the coming year. It's what we've been successful at is in ensuring that there's no problems on the unbilled debt, and that's moving quickly into billed debt section. And also we've been very good at managing our pass-through costs. So those 2 elements have helped us to keep it under control, but I still would anticipate that 30s is not a place where we'll stay. We'll definitely move back up into the 40s.

Okay. And then my last question is just around your broad-brushed comments on 2013. Understand you're saying not as much margin improvement as you have seen in the last year. I guess, I want to make sure I understand what we're referring to. Is that the kind of breakeven a year ago to 7-plus now and -- or are we looking at kind of full year '11 versus full year '12?

I'm really talking about the fact that we've went from 0 to more than 7 in the last 12 months, so we won't be improving at that pace over the next 12. But I did say that we'd grow revenue in the low double-digits and we've continued to expand margin. I think in another question, I talked about the fact that we're holding in the medium term to moving it towards -- continue to move it towards double-digits. So we'll see the margin improve and expand over next year, but just not at the rate that we're seeing, that we went from 0 to 7.3%.

Is 10% margin achievable in 2013?

I'm just conscious -- we're well overtime here. I'm looking at Sam, and we need to bring this to a close. So no, we're not giving guidance for 2013. We'll be happy to answer all of those detailed questions when we do the guidance. And I gave you the color that I gave you that we're sticking to. The color is clearly and unambiguously improved, growing revenue and sequentially improving margins in the medium term we have against our kind of double-digit margin target.

Unfortunately, we are out of time and cannot take any more questions. I would like to hand the call back to Mr. Ciaran Murphy (sic) [Murray] for any additional or closing remarks.

Hi, Ritchie, and it's Ciaran Murray here. So I'd like to thank everyone for your time today. I'd like to apologize. I know it's busy in earning season and we've run a little bit overtime here, but we did our best to keep it to an hour. And we look forward to working through the remainder of the 2012 and into 2013 and continuing to be one of the global CRO partners of choice for the industry and we're going to continue to strive in delivering the best-in-class information and solutions, the best clinical performance and differentiate ourselves in the marketplace. So thanks very much, everyone.