- 14.6% Revenue Growth; Record Operating Margin of 15.4%; 21.3% Backlog Growth to $3 Billion -
PRINCETON, N.J., July 30 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its second quarter ended June 30, 2008 of $0.80 per diluted share, inclusive of an additional $0.01 per share gain from the sale of its centralized ECG business in 2007. Excluding the gain on sale, earnings were $0.79 per diluted share, representing 22.7% year-over-year EPS growth.
"In the second quarter Covance continued to capitalize on favorable market dynamics and delivered a strong, broad-based financial performance, including net revenue growth of 14.6% and record operating margin of 15.4%," said Joe Herring, Chairman and Chief Executive Officer. "Early Development revenues grew 5.5% sequentially and operating margins increased 40 basis points from last quarter to 25.4% as new toxicology space started coming online and several Phase I projects that were delayed out of the first quarter were initiated. In Late-Stage Development, central laboratory and clinical development drove robust segment results, including year-over-year revenue growth of 17.8% and exceptional operating margins of 19.2%.
"Record net orders of $611 million, representing a book-to-bill ratio of 1.4:1, drove our backlog up 21.3% year-on-year to $3 billion. Included in the second quarter orders were two Phase III wins totaling $70 million from the top-ten pharmaceutical company which awarded us a primary provider relationship earlier this quarter, as well as the previously announced $66 million dedicated toxicology capacity agreement. In addition, central laboratories also received record new business awards by a wide margin in the quarter. Given the strong market demand, we have continued confidence in our ability to deliver 20% annual growth in EPS to $3.18 per diluted share in 2008 (excluding the gain on sale from both periods) while continuing to invest for long-term growth."
Consolidated Results
($ in millions except EPS) 2Q08 2Q07 Change 1H08 1H07 Change
Total Revenues $461.8 $404.1 $895.9 $781.1
Less: Reimbursable
Out-of-Pockets $24.9 $23.0 $46.5 $41.6
Net Revenues $436.9 $381.1 14.6% $849.4 $739.5 14.9%
Operating Income $67.5 $55.5 21.5% $130.2 $107.6 21.0%
Operating Margin % 15.4% 14.6% 15.3% 14.5%
Net Income $50.9 $41.5 22.6% $100.0 $80.4 24.3%
Diluted EPS $0.80 $0.64 24.2% $1.56 $1.24 25.7%
Gain on Sale, net of tax $0.6 - $2.6 -
Net Income Excluding
Gain on Sale $50.3 $41.5 21.1% $97.4 $80.4 21.2%
Diluted EPS Excluding Gain
on Sale $0.79 $0.64 22.7% $1.52 $1.24 22.5%
Operating Segment Results
Early Development
($ in millions) 2Q08 2Q07 Change 1H08 1H07 Change
Net Revenues $213.1 $191.1 11.5% $415.2 $370.3 12.1%
Operating Income $54.2 $49.0 10.7% $104.8 $92.7 13.1%
Margin % 25.4% 25.6% 25.2% 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 2008 grew 11.5% year-over-year to $213.1 million, compared to $191.1 million in the second quarter of 2007 and $202.0 million last quarter. Year-over-year revenue growth was led by toxicology and chemistry services. The strong sequential growth of 5.5% was driven by an increase in study starts in clinical pharmacology and the addition of new capacity in North America toxicology.
Operating income for the second quarter of 2008 increased 10.7% year-over-year to $54.2 million, compared to $49.0 million in the second quarter of last year and $50.6 million last quarter. Operating margins for the second quarter of 2008 were 25.4% compared to 25.6% in the second quarter of 2007 and 25.0% last quarter. We expect expansion in Early Development operating margin in 2008 on a full-year basis.
Late-Stage Development
($ in millions) 2Q08 2Q07 Change 1H08 1H07 Change
Net Revenues $223.8 $190.0 17.8% $434.2 369.1 17.6%
Operating Income $43.0 31.9 34.8% 81.9 61.1 34.0%
Margin % 19.2% 16.8% 18.9% 16.6%
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 second quarter of 2008 grew a strong 17.8% to $223.8 million compared to $190.0 million in the second 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 21.6%. Growth was again led by outstanding performances in central laboratory (which delivered revenue growth of nearly 30% in the quarter on an increase in kit volumes and a strengthening of the Swiss franc) and clinical development.
Operating income for the second quarter of 2008 was $43.0 million compared to $31.9 million in the second quarter of the prior year. Operating margins for the second quarter of 2008 increased substantially to a record 19.2% from 16.8% in the second quarter of 2007 and 18.5% last quarter on the strong performances in central labs and clinical development. We expect operating margin expansion in Late-Stage Development in 2008 on a full-year basis.
Corporate Information
The Company's backlog at June 30, 2008 grew 21.3% year-over-year to $3.01 billion compared to $2.48 billion at June 30, 2007. Sequential backlog growth of 5.2% was driven by robust second quarter net orders of $611 million.
Corporate expenses totaled $29.8 million in the second quarter of 2008 compared to $26.7 million last quarter and $25.4 million in the second quarter of last year. We continue to 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 June 30, 2008 were $196 million compared to $233 million at March 31, 2008 and $208 million at June 30, 2007. At June 30, 2008, short-term debt totaled $35 million.
Free cash flow for the second quarter was negative $31 million, consisting of operating cash flow of $50 million less capital expenditures of $81 million. Free cash flow year-to-date was negative $57 million, consisting of operating cash flow of $86 million and capital expenditures of $143 million. We now expect full-year 2008 capital spending to be approximately $265 million, including significant expenditures for the new Arizona preclinical facility and investments in information technology infrastructure, and free cash flow to be approximately $25 million.
Net Days Sales Outstanding (DSO) were 39 days at June 30, 2008 compared to 39 days at March 31, 2008 and 46 days at June 30, 2007.
The effective tax rate in the second quarter was 28.9%, down from the 29.9% rate last quarter (or 28.8%, down from the 29.6% rate last quarter, after excluding the impact of the gain on sale in both periods), due to a favorable tax resolution. We expect that the effective tax rate will be in the 29.5% range in the back half of 2008.
The Company's investor conference call will be webcast on July 31 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 9,000 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 consummation of the joint venture with Wuxi PharmaTech, 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 AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands, except per share data)
(UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30
2008 2007 2008 2007
Net revenues $436,912 $381,145 $849,344 $739,464
Reimbursable out-of-
pockets 24,911 23,029 46,516 41,649
Total revenues 461,823 404,174 895,860 781,113
Costs and expenses:
Cost of revenue 286,884 251,078 560,214 485,457
Reimbursed out-of-
pocket expenses 24,911 23,029 46,516 41,649
Selling, general
and administrative 65,242 58,092 124,259 113,883
Depreciation and
amortization 17,331 16,457 34,679 32,568
Total costs
and expenses 394,368 348,656 765,668 673,557
Income from
operations 67,455 55,518 130,192 107,556
Other (income)
expense, net:
Interest income, net (1,501) (1,993) (4,097) (4,473)
Foreign exchange
transaction (gain)
loss, net (481) (103) (1,546) 46
Gain on sale of
business (949) - (3,927) -
Other income,
net (2,931)(a) (2,096) (9,570)(b) (4,427)
Income before taxes
and equity investee
earnings 70,386 (a) 57,614 139,762 (b) 111,983
Taxes on income 20,330 (a) 16,816 41,053 (b) 32,857
Equity investee
earnings 817 714 1,266 1,280
Net income $50,873 (a) $41,512 $99,975 (b) $80,406
Basic earnings per
share $0.81 (a) $0.65 $1.59 (b) $1.26
Weighted average
shares outstanding -
basic 62,825,444 63,598,821 63,069,018 63,722,266
Diluted earnings per
share $0.80 (a) $0.64 $1.56 (b) $1.24
Weighted average
shares outstanding -
diluted 63,756,789 64,628,294 64,058,649 64,745,006
(a) Includes the impact of a $949 gain on sale of Cardiac Safety Services
($617 net of tax) during the second quarter of 2008.
(b) Includes the impact of a $3,927 gain on sale of Cardiac Safety
Services ($2,553 net of tax) during the first six months of 2008.
Excluding the impact of the gain on sale of business in 2008:
Income before taxes
and equity investee
earnings $69,437 n/a $135,835 n/a
Taxes on income $19,998 n/a $39,679 n/a
Net income $50,256 n/a $97,422 n/a
Basic earnings per
share $0.80 n/a $1.54 n/a
Diluted earnings per
share $0.79 n/a $1.52 n/a
COVANCE INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 and DECEMBER 31, 2007
(Dollars in thousands)
June 30 December 31
2008 2007
(UNAUDITED)
ASSETS
Current Assets:
Cash & cash equivalents $195,655 $319,485
Accounts receivable, net 224,432 217,657
Unbilled services 106,749 88,835
Inventory 61,332 54,788
Deferred income taxes 8,796 7,825
Prepaid expenses and other current
assets 88,509 81,467
Total Current Assets 685,473 770,057
Property and equipment, net 760,634 646,040
Goodwill, net 105,486 105,486
Other assets 38,946 38,602
Total Assets $1,590,539 $1,560,185
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $26,740 $32,252
Accrued payroll and benefits 75,105 95,313
Accrued expenses and other current
liabilities 74,332 66,838
Unearned revenue 143,928 144,870
Short-term debt 35,000 -
Income taxes payable 20,267 18,887
Total Current Liabilities 375,372 358,160
Deferred income taxes 31,256 32,562
Other liabilities 59,353 59,275
Total Liabilities 465,981 449,997
Stockholders' Equity:
Common stock 751 746
Paid-in capital 521,167 492,373
Retained earnings 1,033,081 933,106
Other Comprehensive Income:
Cumulative translation
adjustment 61,351 45,328
FAS 158 adjustment (21,174) (21,174)
Treasury stock (470,618) (340,191)
Total Stockholders' Equity 1,124,558 1,110,188
Total Liabilities and
Stockholders' Equity $1,590,539 $1,560,185
COVANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Dollars in thousands)
(UNAUDITED)
Six Months Ended June 30
2008 2007
Cash flows from operating activities:
Net income $99,975 $80,406
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 34,679 32,568
Non-cash compensation expense
associated with employee benefit
and stock compensation plans 12,540 15,817
Deferred income tax (benefit)
provision (2,277) (1,802)
Gain on sale of business (3,927) -
Loss (gain) on sale of property
and equipment 253 (1,714)
Equity investee earnings (1,266) (1,280)
Changes in operating assets and
liabilities:
Accounts receivable (6,775) (14,854)
Unbilled services (17,914) (14,557)
Inventory (6,544) (1,955)
Accounts payable (5,512) (3,402)
Accrued liabilities (12,331) (2,982)
Unearned revenue (942) 24,671
Income taxes payable 2,565 (6,143)
Other assets and liabilities, net (6,676) (12,909)
Net cash provided by operating
activities 85,848 91,864
Cash flows from investing activities:
Capital expenditures (143,163) (61,840)
Proceeds from sale of business 3,927 -
Other, net 96 85
Net cash used in investing activities (139,140) (61,755)
Cash flows from financing activities:
Net borrowings under revolving
credit facility 35,000 -
Stock issued under employee stock
purchase and option plans 14,691 19,553
Purchase of treasury stock (130,427) (61,425)
Net cash used in financing activities (80,736) (41,872)
Effect of exchange rate changes on cash 10,198 (39)
Net change in cash and cash equivalents (123,830) (11,802)
Cash and cash equivalents, beginning
of period 319,485 219,810
Cash and cash equivalents, end of
period $195,655 $208,008