Covance Reports 1Q08 Earnings Growth of 22.3% to $0.73 Per Share
- 15.1% Revenue Growth; Record Operating Margin of 15.2%; 20.1% Backlog Growth -
PRINCETON, N.J., April 28 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its first quarter ended March 31, 2008 of $0.76 per diluted share, inclusive of an additional $0.03 per share gain from the sale of its centralized ECG business in 2007. Excluding the gain on sale, earnings were $0.73 per diluted share, representing 22.3% year-over-year EPS growth.
"In the first quarter, we delivered strong revenue growth of 15.1% and a record operating margin performance," said Joe Herring, Chairman and Chief Executive Officer. "Early Development segment revenues grew 12.7% and operating margins increased both year-on-year and sequentially to 25.0%. Toxicology room renovations in North America are progressing as scheduled and additional capacity will come online in the second quarter. In Late-Stage Development, revenue growth was strong at 17.5% and operating margins expanded more than 200 basis points year-on-year and sequentially to 18.5%. In particular, we were pleased with the very strong revenue growth in central labs of more than 30%.
"First quarter net orders of $469 million were solid, although not indicative of the robust business environment we are currently experiencing. As an example, early in the second quarter, we were awarded a three-year, dedicated capacity toxicology agreement with a minimum contract commitment of $66 million. We were also selected as the primary provider of clinical development services by a top-ten pharmaceutical company and we expect significant 2008 orders from this agreement. Beyond these examples, our pipeline of opportunities is larger and more strategic than at any time in company history. Some of these opportunities are unprecedented in scope, combining multiple service lines in both our Early and Late-Stage Development segments. Our broad-based portfolio of services uniquely positions us to work with these clients to accelerate drug development timelines and make their cost structures more flexible. These favorable market conditions also give us increased confidence in our ability to deliver low- to mid-teens revenue growth and a 20% annual growth in EPS to $3.18 per diluted share in 2008, excluding the gain on sale from both periods."
Consolidated Results ($ in millions except EPS) 1Q08 1Q07 Change Total Revenues $434.0 $376.9 Less: Reimbursable Out-of-Pockets $21.6 $18.6 Net Revenues $412.4 $358.3 15.1% Operating Income $62.7 $52.0 20.6% Operating Margin % 15.2% 14.5% Net Income $49.1 $38.9 26.2% Diluted EPS $0.76 $0.60 27.4% Gain on Sale, net of tax $1.9 - Net Income Excluding Gain on Sale $47.2 $38.9 21.3% Diluted EPS Excluding Gain on Sale $0.73 $0.60 22.3% Operating Segment Results Early Development ($ in millions) 1Q08 1Q07 Change Net Revenues $202.0 $179.2 12.7% Operating Income $50.6 $43.7 15.8% Margin % 25.0% 24.4%
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the first quarter of 2008 grew 12.7% year- over-year to $202.0 million, compared to $179.2 million in the first quarter of 2007 and $207.9 million last quarter. Year-over-year revenue growth was led by toxicology and chemistry services. The sequential $5.8 million decline in revenue is attributable to a soft quarter in clinical pharmacology (as some studies slipped out of the first quarter), the negative impact of foreign exchange (from a decline of the British pound against the US dollar), and capacity constraints in North America toxicology (as rooms were taken off-line for renovation). We expect strong sequential revenue growth in the second quarter as new toxicology capacity is brought online in Madison, Wisconsin and as volume increases in clinical pharmacology.
Operating income for the first quarter of 2008 increased 15.8% to $50.6 million, compared to $43.7 million for the first quarter of last year. Operating margins for the first quarter of 2008 increased to 25.0% from 24.4% in the first quarter of 2007 and 24.8% last quarter. We expect expansion in Early Development operating margin in 2008 on a full-year basis.
Late-Stage Development ($ in millions) 1Q08 1Q07 Change Net Revenues $210.4 $179.1 17.5% Operating Income $38.9 $29.2 33.1% Margin % 18.5% 16.3%
The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services). Late-Stage Development net revenues for the first quarter of 2008 grew a strong 17.5% to $210.4 million compared to $179.1 million in the first quarter of 2007. Excluding the impact of the sale of our ECG business, which was divested in November 2007 but remains in the comparison year, Late-Stage Development revenue growth was 21.3%. Growth was led by outstanding performances in central laboratory (which delivered revenue growth in excess of 30% in the quarter due to an increase in kit volumes and a strengthening of the Swiss franc) and clinical development.
Operating income for the first quarter of 2008 was $38.9 million compared to $29.2 million in the first quarter of the prior year. Operating margins for the first quarter of 2008 increased substantially to 18.5% from 16.3% in the first quarter of 2007 and 16.0% last quarter. Central laboratory experienced significant operating margin expansion on both a year-over-year and sequential basis, while margins in clinical development rebounded strongly sequentially. We expect operating margin expansion in Late-Stage Development in 2008 on a full-year basis.
The Company's backlog at March 31, 2008 grew 20.1% year-over-year to $2.86 billion compared to $2.38 billion at March 31, 2007. Sequential backlog growth of 6.6% was driven by first quarter net orders of $469 million coupled with a $121 million impact from the weakening of the US dollar (primarily against the Swiss franc and Euro).
Corporate expenses totaled $26.7 million in the first quarter of 2008 compared to $23.0 million last quarter and $20.8 million in the first quarter of last year. We expect corporate expenses to average approximately 6.5% of revenue as we continue to make investments in infrastructure to enhance our ability to manage future growth.
Cash and cash equivalents at March 31, 2008 were $233 million compared to $319 million at December 31, 2007 and $182 million at March 31, 2007. At March 31, 2008, short-term debt totaled $43 million. The reduction in cash balance and use of debt compared to year-end is primarily attributable to the Company's repurchase of 1.5 million shares of its common stock for $127 million.
Free cash flow for the first quarter was negative $27 million, consisting of operating cash flow of $36 million (which includes the payment of annual bonuses) less capital expenditures of $63 million. We continue to expect full-year 2008 capital spending to be approximately $250 million, including significant expenditures for the new Arizona preclinical facility and investments in information technology infrastructure, and free cash flow to be approximately $40 million.
Net Days Sales Outstanding (DSO) were 39 days at March 31, 2008 compared to 36 days at December 31, 2007 and 46 days at March 31, 2007.
The Company's investor conference call will be webcast on April 29 at 9:00 am EDT. Management's commentary and presentation slides will be available through 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 $1.5 billion, global operations in more than 20 countries, and more than 8,900 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at 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, 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.
Financial Exhibits Follow COVANCE INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (Dollars in thousands, except per share data) (UNAUDITED) Three Months Ended March 31 2008 2007 Net revenues $412,432 $358,319 Reimbursable out-of-pockets 21,605 18,620 Total revenues 434,037 376,939 Costs and expenses: Cost of revenue 273,330 234,379 Reimbursed out-of-pocket expenses 21,605 18,620 Selling, general and administrative 59,017 55,791 Depreciation and amortization 17,348 16,111 Total costs and expenses 371,300 324,901 Income from operations 62,737 52,038 Other (income) expense, net: Interest income, net (2,596) (2,480) Foreign exchange transaction (gain) loss, net (1,065) 149 Gain on sale of business (2,978) - Other income, net (6,639)(a) (2,331) Income before taxes and equity investee earnings 69,376 (a) 54,369 Taxes on income 20,723 (a) 16,041 Equity investee earnings 449 566 Net income $49,102 (a) $38,894 Basic earnings per share $0.78 (a) $0.61 Weighted average shares outstanding - basic 63,312,592 63,845,710 Diluted earnings per share $0.76 (a) $0.60 Weighted average shares outstanding - diluted 64,322,979 64,895,239 (a) Includes the impact of a $2,978 gain on sale of Cardiac Safety Services ($1,936 net of tax) during the first quarter of 2008. Excluding the impact of the gain on sale of business in Q1'08: Income before taxes and equity investee earnings $66,398 n/a Taxes on income $19,681 n/a Net income $47,166 n/a Basic earnings per share $0.75 n/a Diluted earnings per share $0.73 n/a COVANCE INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2008 and DECEMBER 31, 2007 (Dollars in thousands) March 31 December 31 2008 2007 (UNAUDITED) ASSETS Current Assets: Cash & cash equivalents $232,624 $319,485 Accounts receivable, net 220,189 217,657 Unbilled services 96,115 88,835 Inventory 58,839 54,788 Deferred income taxes 7,960 7,825 Prepaid expenses and other current assets 90,538 81,467 Total Current Assets 706,265 770,057 Property and equipment, net 699,498 646,040 Goodwill, net 105,486 105,486 Other assets 38,866 38,602 Total Assets $1,550,115 $1,560,185 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $33,467 $32,252 Accrued payroll and benefits 74,004 95,313 Accrued expenses and other current liabilities 68,605 66,838 Unearned revenue 139,331 144,870 Short-term debt 43,000 - Income taxes payable 29,327 18,887 Total Current Liabilities 387,734 358,160 Deferred income taxes 31,918 32,562 Other liabilities 60,888 59,275 Total Liabilities 480,540 449,997 Stockholders' Equity: Common stock 749 746 Paid-in capital 507,612 492,373 Retained earnings 982,208 933,106 Other Comprehensive Income: Cumulative translation adjustment 69,978 45,328 FAS 158 adjustment (21,174) (21,174) Treasury stock (469,798) (340,191) Total Stockholders' Equity 1,069,575 1,110,188 Total Liabilities and Stockholders' Equity $1,550,115 $1,560,185 COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007 (Dollars in thousands) (UNAUDITED) Three Months Ended March 31 2008 2007 Cash flows from operating activities: Net income $49,102 $38,894 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,348 16,111 Non-cash compensation expense associated with employee benefit and stock compensation plans 6,044 8,256 Deferred income tax (benefit) provision (779) (1,037) Gain on sale of business (2,978) - Loss on sale of property and equipment 13 240 Equity investee earnings (449) (566) Changes in operating assets and liabilities: Accounts receivable (2,532) (152) Unbilled services (7,280) (13,108) Inventory (4,051) 1,342 Accounts payable 1,215 (6,042) Accrued liabilities (19,542) (15,875) Unearned revenue (5,539) 16,091 Income taxes payable 11,177 8,618 Other assets and liabilities, net (5,957) (17,866) Net cash provided by operating activities 35,792 34,906 Cash flows from investing activities: Capital expenditures (62,576) (31,800) Proceeds from sale of business 2,978 - Other, net 77 - Net cash used in investing activities (59,521) (31,800) Cash flows from financing activities: Net borrowings under revolving credit facility 43,000 - Stock issued under employee stock purchase and option plans 8,461 6,438 Purchase of treasury stock (129,607) (48,142) Net cash used in financing activities (78,146) (41,704) Effect of exchange rate changes on cash 15,014 336 Net change in cash and cash equivalents (86,861) (38,262) Cash and cash equivalents, beginning of period 319,485 219,810 Cash and cash equivalents, end of period $232,624 $181,548