Covance Reports 2Q07 Earnings of $0.64 Per Share
-Net Revenue Growth Accelerates to 13.7%; Backlog Grows 25.9% to $2.5 Billion-
PRINCETON, N.J., July 25 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its second quarter ended June 30, 2007 of $0.64/diluted share, representing 18.9% year-over-year EPS growth.
"Covance delivered another strong financial performance, including an increase in net revenue growth to 13.7% and an expansion in operating margins to 14.6%. Continued robust net orders of $481 million helped drive our backlog up 25.9% year-on-year to $2.5 billion which positions us for accelerated growth," said Joe Herring, Chairman and Chief Executive Officer. "Early Development net revenue growth was again very strong at 22.7% and operating margins increased both year-on-year and sequentially to 25.6%, as demand for our toxicology and chemistry services remains buoyant. The eight clinical pharmacology sites we purchased a year ago delivered another quarter of outstanding sequential growth in revenue and profit and were solidly accretive to our earnings. In Late-Stage Development, revenue grew 5.9% year- on-year and 6.1% from last quarter, and operating margins expanded both year- on-year and sequentially. Late-Stage Development results were led by exceptional year-over-year revenue growth in clinical development. In addition, a substantial increase in central laboratory kit volumes led to a 10.5% sequential growth in its revenues. Given its continued strong orders, as evidenced by a net book-to-bill of 1.5:1 in the second quarter, we expect central laboratory revenues to continue to increase throughout the year.
"Our relentless focus on operational and service excellence continues to deliver substantial benefits. Six Sigma, which is being utilized across more than two-thirds of the company, delivered approximately $5 million in incremental profitability in the first half of 2007. More importantly, Six Sigma reduces process variation, which improves project delivery, increases client satisfaction, and helps drive repeat business. By this time next year, we expect all of Covance's service offerings globally to have deployed Six Sigma. In addition, we continue to make strategic infrastructure investments in facilities, information technology, and talent to support our ability to capitalize on the extremely favorable, long-term outsourcing trend in drug development.
"Continued strong order performance furthers our confidence in achieving our full-year targets of low- to mid-teens revenue growth and diluted earnings per share of at least $2.63, reflecting acceleration in EPS growth in the second half of the year."
Selected Consolidated Results ($ in millions 2Q07 2Q06 Change 2007 YTD 2006 YTD Change except EPS) Total Revenues $404.1 $357.1 $781.1 $690.8 Less: Reimbursable Out-of-Pockets $23.0 $21.9 $41.6 $35.1 Net Revenues $381.1 $335.2 13.7 % $739.5 $655.7 12.8 % Operating Income $55.5 $47.0 18.0 % $107.6 $92.9 15.8 % Operating Margin % 14.6 % 14.0 % 14.5 % 14.2 % Net Income $41.5 $35.0 18.5 % $80.4 $68.4 17.5 % Diluted EPS $0.64 $0.54 18.9 % $1.24 $1.06 17.3 % Operating Segment Results Early Development ($ in millions) 2Q07 2Q06 Change 2007 YTD 2006 YTD Change Net Revenues $191.1 $155.7 22.7 % $370.3 $298.2 24.2 % Operating Income $49.0 $39.1 25.2 % $92.7 $74.6 24.2 % Margin % 25.6 % 25.1 % 25.0 % 25.0 %
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the second quarter of 2007 grew 22.7% to $191.1 million, compared to $155.7 million in the second quarter of 2006. Net revenue growth in the quarter included strong performances in toxicology, chemistry, and clinical pharmacology. Year-to-date, net revenues are up 24.2% to $370.3 million compared to $298.2 million in the first half of the prior year.
Operating income for the second quarter of 2007 increased 25.2% to $49.0 million compared to $39.1 million for the second quarter of last year. Operating margins for the second quarter of 2007 expanded to 25.6% versus 25.1% in the second quarter of the prior year and 24.4% last quarter. Strength in operating margin included strong performances in toxicology and chemistry services as well as a significant improvement in profitability from the eight clinical pharmacology sites acquired in 2006. Year-to-date, operating margins were 25.0%.
Late-Stage Development ($ in millions) 2Q07 2Q06 Change 2007 YTD 2006 YTD Change Net Revenues $190.0 $179.5 5.9 % $369.1 $357.6 3.2 % Operating Income $31.9 $28.5 11.8 % $61.1 $60.5 1.0 Margin % 16.8 % 15.9 % 16.6 % 16.9 %
The Late-Stage Development segment includes central laboratory, Phase II- III clinical development, commercialization services (periapproval services and market access services), and cardiac safety services. Late-Stage Development net revenues for the second quarter of 2007 grew 5.9% to $190.0 million compared to $179.5 million in the second quarter of 2006, driven by another very strong performance in clinical development. Sequentially, revenue grew $10.9 million or 6.1%, primarily on an increase in central laboratory revenue. Year-to-date, net revenues are up 3.2% to $369.1 million compared to $357.6 million in the first half of 2006.
Operating income for the second quarter of 2007 increased 11.8% to $31.9 million compared to $28.5 million in the second quarter of the prior year. Operating margins for the second quarter of 2007 expanded to 16.8% from 15.9% in the second quarter of 2006 and 16.3% last quarter. Strong year-on-year improvement in clinical development operating margin drove the 90 basis point increase in operating margin. Central laboratories operating margin grew sequentially on a significant increase in kit volume over first quarter levels. Year-to-date, operating margins were 16.6% compared to 16.9% in the first half of 2006.
The Company's backlog at June 30, 2007 grew 25.9% year-over-year to $2.5 billion compared to $2.0 billion at June 30, 2006. Net orders in the second quarter of 2007 were $481.1 million versus $554.8 million reported in the second quarter of 2006 (which included a $154 million dedicated space contract).
Corporate expenses totaled $25.4 million in the second quarter of 2007 compared to $20.9 million last quarter and $20.6 million in the second quarter of last year. This higher level of corporate spending reflects increases in compensation-related expenses and investments in infrastructure to support the higher levels of growth we have experienced and to sustain our ability to manage future growth.
The Company reported $208.0 million in cash and cash equivalents at June 30, 2007, up from $181.5 million at March 31, 2007. The company repurchased 196,200 shares of its common stock for $13.2 million during the quarter.
Free cash flow for the second quarter was $26.9 million, consisting of operating cash flow of $56.9 million and capital expenditures of $30.0 million. Free cash flow year-to-date was $30.0 million, consisting of operating cash flow of $91.8 million and capital expenditures of $61.8 million. We continue to expect full year 2007 capital spending to be approximately $160 million and free cash flow to be approximately $75 million, including significant expenditures for the new Arizona preclinical facility.
Net Days Sales Outstanding (DSO) was 46 days at June 30, 2007, unchanged from March 31, 2007, and an 11 day improvement compared to June 30, 2006.
The Company's investor conference call will be webcast on July 26 at 9:00 am EDT. Management's commentary and presentation slides will be available through http://www.covance.com .
Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with annual revenues greater than $1.3 billion, global operations in more than 20 countries, and more than 8,400 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at http://www.covance.com .
Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, difficulties or delays in integrating the business of Radiant and achieving anticipated efficiencies and synergies, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.
COVANCE INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Dollars in thousands, except per share data) (UNAUDITED) Three Months Six Months Ended June 30 Ended June 30 2007 2006 2007 2006 Net revenues $381,145 $335,240 $739,464 $655,749 Reimbursable out-of-pockets 23,029 21,934 41,649 35,063 Total revenues 404,174 357,174 781,113 690,812 Costs and expenses: Cost of revenue 251,078 222,723 485,457 436,383 Reimbursed out-of-pocket expenses 23,029 21,934 41,649 35,063 Selling, general and administrative 58,092 51,312 113,883 99,598 Depreciation and amortization 16,457 14,165 32,568 26,884 Total costs and expenses 348,656 310,134 673,557 597,928 Income from operations 55,518 47,040 107,556 92,884 Other (income) expense, net: Interest income, net (1,993) (1,682) (4,473) (3,495) Foreign exchange transaction (gain) loss, net (103) (195) 46 67 Other income, net (2,096) (1,877) (4,427) (3,428) Income before taxes and equity investee earnings 57,614 48,917 111,983 96,312 Taxes on income 16,816 14,407 32,857 28,663 Equity investee earnings 714 510 1,280 760 Net income $41,512 $35,020 $80,406 $68,409 Basic earnings per share $0.65 $0.55 $1.26 $1.08 Weighted average shares outstanding - basic 63,598,821 63,626,078 63,722,266 63,399,226 Diluted earnings per share $0.64 $0.54 $1.24 $1.06 Weighted average shares outstanding - diluted 64,628,294 64,849,638 64,745,006 64,623,847 COVANCE INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2007 and DECEMBER 31, 2006 (Dollars in thousands) June 30 December 31 2007 2006 (UNAUDITED) ASSETS Current Assets: Cash & cash equivalents $208,008 $219,810 Accounts receivable, net 220,327 205,473 Unbilled services 103,696 89,139 Inventory 51,583 49,628 Deferred income taxes 4,258 4,320 Prepaid expenses and other current assets 70,779 71,196 Total Current Assets 658,651 639,566 Property and equipment, net 543,202 500,057 Goodwill, net 119,725 119,725 Other assets 41,584 38,330 Total Assets $1,363,162 $1,297,678 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $32,077 $35,479 Accrued payroll and benefits 71,410 76,657 Accrued expenses and other current liabilities 48,966 50,855 Unearned revenue 134,230 109,559 Income taxes payable 6,670 17,154 Total Current Liabilities 293,353 289,704 Deferred income taxes 30,436 31,052 Other liabilities 58,802 53,627 Total Liabilities 382,591 374,383 Stockholders' Equity: Common stock 742 734 Paid-in capital 464,338 426,806 Retained earnings 837,583 757,809 Other Comprehensive Income: Cumulative translation adjustment 36,557 35,170 FAS 158 adjustment (23,389) (23,389) Treasury stock (335,260) (273,835) Total Stockholders' Equity 980,571 923,295 Total Liabilities and Stockholders' Equity $1,363,162 $1,297,678 COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Dollars in thousands) (UNAUDITED) Six Months Ended June 30 2007 2006 Cash flows from operating activities: Net income $80,406 $68,409 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 32,568 26,884 Non-cash compensation expense associated with employee benefit and stock compensation plans 15,817 14,331 Deferred income tax (benefit) provision (1,802) (697) Other (2,994) (713) Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable (14,854) 6,466 Unbilled services (14,557) (12,426) Inventory (1,955) (2,826) Accounts payable (3,402) 2,223 Accrued liabilities (2,982) (2,691) Unearned revenue 24,671 (4,121) Income taxes payable (6,143) (386) Other assets and liabilities, net (12,909) (15,658) Net cash provided by operating activities 91,864 78,795 Cash flows from investing activities: Capital expenditures (61,840) (49,335) Acquisition of businesses - (74,323) Other, net 85 586 Net cash used in investing activities (61,755) (123,072) Cash flows from financing activities: Stock issued under employee stock purchase and option plans 19,553 27,603 Purchase of treasury stock (61,425) (8,701) Net cash (used in) provided by financing activities (41,872) 18,902 Effect of exchange rate changes on cash (39) 2,296 Net change in cash and cash equivalents (11,802) (23,079) Cash and cash equivalents, beginning of period 219,810 160,717 Cash and cash equivalents, end of period $208,008 $137,638