Covance Reports 3Q08 Earnings of $0.80 Per Share
PRINCETON, N.J., Oct. 22 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its third quarter ended September 30, 2008 of $0.80 per diluted share, representing 15.9% year-over-year EPS growth.
"In the third quarter, Covance's broad portfolio of market-leading drug development services delivered net revenue growth of 11.1%, record operating margin of 15.9%, and unprecedented new orders," said Joe Herring, Chairman and Chief Executive Officer. "During the quarter, we signed a landmark, ten-year strategic collaboration with Eli Lilly to provide a broad range of early and late-stage development services and to purchase Lilly's 450 acre early drug development campus in Greenfield, Indiana for $50 million. This groundbreaking asset transfer and services agreement provides tangible evidence that large pharmaceutical companies are challenging their vertically integrated business models and leveraging CRO expertise to make their cost structures more flexible and accelerate new product development timelines.
"Early Development grew revenues by 8.0% and had operating margin of 25.5% in the third quarter as strong results in North American preclinical labs were offset by softness in clinical pharmacology and slower European growth which was further impacted by the weakening of the British pound. We anticipate a sequential jump in revenue and operating income dollars in the fourth quarter as our newly-acquired preclinical campus in Greenfield, Indiana begins to contribute to our operating results. In Late-Stage Development, central laboratory and clinical development drove strong segment results during the third quarter, including year-over-year revenue growth of 14.4% and record operating margins of 19.7%.
"Net orders in the third quarter were $1.78 billion, driving our backlog over $4.2 billion and representing a book-to-bill ratio of 4.04:1. Excluding the $1.27 billion dedicated net order from Eli Lilly, net orders were $506 million. Both central laboratories and clinical development continued to deliver strong net orders in the quarter.
"In light of our growing backlog, we remain confident in the strong fundamentals of Covance's business model and market opportunity. However, with approximately 40% of our revenue coming from our overseas operations, the ongoing strengthening of the US Dollar is creating headwind. Based upon current foreign exchange rates, we expect 2008 revenue growth to be in the low-teens. While foreign exchange will increase pressure on earnings, we plan to closely manage costs and continue to target full year diluted earnings per share of $3.18 or 20% year-on-year growth (excluding the gain on sale in both periods)."
Consolidated Results ($ in millions except EPS) 3Q08 3Q07 Change 2008YTD 2007YTD Change Total Revenues $ 467.4 $ 414.7 $1,363.2 $1,195.8 Less: Reimbursable Out-of-Pockets $ 27.3 $18.7 $73.8 $60.4 Net Revenues $ 440.1 $ 396.0 11.1% $ 1,289.4 $1,135.4 13.6% Operating Income $70.0 $60.1 16.4% $ 200.2 $ 167.7 19.4% Operating Margin % 15.9% 15.2% 15.5% 14.8% Net Income $ 51.1 $ 44.6 14.6% $151.1 $125.0 20.8% Diluted EPS $ 0.80 $ 0.69 15.9% $ 2.36 $ 1.93 22.2% Gain on Sale, net of tax- - - $ 2.6 - Net Income Excluding Gain on Sale $ 51.1 $ 44.6 14.6% $148.5 $125.0 18.8% Diluted EPS Excluding Gain on Sale $ 0.80 $ 0.69 15.9% $ 2.32 $ 1.93 20.1% Operating Segment Results Early Development ($ in millions) 3Q08 3Q07 Change 2008 YTD 2007 YTD Change Net Revenues $215.4 $ 199.5 8.0% $ 630.6 $ 569.8 10.7% Operating Income $54.8 $51.8 5.9% $ 159.6 $ 144.4 10.5% Margin % 25.5% 26.0% 25.3% 25.4%
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the third quarter of 2008 grew 8.0% year-over-year to $215.4 million, compared to $199.5 million in the third quarter of 2007. Strong year-on-year growth in North American preclinical labs was offset by softness in clinical pharmacology and slower European preclinical laboratory growth which was further impacted by a decline of the British pound against the US dollar.
Operating income for the third quarter of 2008 increased 5.9% year-over-year to $54.8 million, compared to $51.8 million in the third quarter of last year. Operating margins for the third quarter of 2008 were 25.5% compared to 26.0% in the third quarter of 2007 and 25.4% last quarter. Third quarter operating margins reflect the impact of start-up costs relating to the recently-acquired Greenfield, Indiana campus and our preclinical entry into China.
Late-Stage Development ($ in millions) 3Q08 3Q07 Change 2008 YTD 2007 YTD Change Net Revenues $224.7 $ 196.5 14.4% $658.9 $ 565.6 16.5% Operating Income $44.3 $34.4 28.6% $ 126.1 $95.5 32.0% Margin % 19.7% 17.5% 19.1% 16.9%
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 third quarter of 2008 grew 14.4% to $224.7 million compared to $196.5 million in the third 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 18.8%. Growth was again led by a strong performance in central laboratory (which delivered revenue growth in excess of 20% in the quarter on a year-on-year increase in kit volumes and a strengthening of the Swiss franc) and continued accelerating results in clinical development.
Operating income for the third quarter of 2008 was $44.3 million compared to $34.4 million in the third quarter of the prior year. Operating margins for the third quarter of 2008 increased substantially to an exceptional 19.7% from 17.5% in the third quarter of 2007 and 19.2% last quarter on the record operating profit in clinical development and strong performance in central labs.
The Company's backlog at September 30, 2008 grew 62.1% year-over-year to $4.25 billion compared to $2.62 billion at September 30, 2007. Included in backlog is $1.27 billion in incremental net orders from Eli Lilly as part of the recently announced ten-year strategic relationship. Net orders excluding those from the ten-year agreement totaled $506 million in the third quarter. Foreign exchange negatively impacted the sequential backlog growth by approximately $100 million.
Corporate expenses totaled $29.2 million in the third quarter of 2008 compared to $29.8 million last quarter and $26.1 million in the third 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 September 30, 2008 were $209 million compared to $196 million at June 30, 2008 and $260 million at September 30, 2007. At September 30, 2008, short-term debt totaled $23 million. Early in the fourth quarter of 2008, the Company borrowed $50 million to finance the purchase of the Greenfield, Indiana campus from Eli Lilly.
Free cash flow for the third quarter was $24 million, consisting of operating cash flow of $87 million less capital expenditures of $63 million. Free cash flow year-to-date was negative $33 million, consisting of operating cash flow of $173 million less capital expenditures of $206 million. Including the $50 million fourth quarter purchase of the Greenfield campus, we now expect full-year 2008 capital spending to be approximately $315 million. Also, full year free cash flow is expected to be approximately negative $25 million, assuming the same level of DSO as the end of last year.
Net Days Sales Outstanding (DSO) were 41 days at September 30, 2008 compared to 39 days at June 30, 2008 and 47 days at September 30, 2007.
The effective tax rate in the third quarter of 2008 was 28.5%, down from 28.8% last quarter, and we now expect the effective tax rate will be in the 28.5% range for the foreseeable future.
The Company's investor conference call will be webcast on October 23 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 9,300 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands, except per share data) (UNAUDITED) Three Months Ended Nine Months Ended September 30 September 30 2008 2007 2008 2007 Net revenues $440,109 $395,989 $1,289,453 $1,135,453 Reimbursable out-of- pockets 27,263 18,712 73,779 60,361 Total revenues 467,372 414,701 1,363,232 1,195,814 Costs and expenses: Cost of revenue 287,804 258,355 848,018 743,812 Reimbursed out-of- pocket expenses 27,263 18,712 73,779 60,361 Selling, general and administrative 64,850 61,089 189,109 174,972 Depreciation and amortization 17,493 16,447 52,172 49,015 Total costs and expenses 397,410 354,603 1,163,078 1,028,160 Income from operations 69,962 60,098 200,154 167,654 Other (income) expense, net: Interest income, net (1,531) (2,298) (5,628) (6,771) Foreign exchange transaction (gain) loss, net 730 (284) (816) (238) Gain on sale of business - - (3,927) - Other income, net (801) (2,582) (10,371)(a) (7,009) Income before taxes and equity investee earnings 70,763 62,680 210,525 (a) 174,663 Taxes on income 20,167 18,469 61,220 (a) 51,326 Equity investee earnings 511 403 1,777 1,683 Net income $51,107 $44,614 $151,082 (a) $125,020 Basic earnings per share $0.81 $0.70 $2.40 (a) $1.96 Weighted average shares outstanding - basic 63,055,229 63,711,628 63,065,488 63,718,720 Diluted earnings per share $0.80 $0.69 $2.36 (a) $1.93 Weighted average shares outstanding - diluted 63,994,532 64,728,253 64,052,224 64,758,890
(a) Includes the impact of a $3,927 gain on sale of Cardiac Safety Services ($2,553 net of tax) during the first nine months of 2008.
Excluding the impact of the gain on sale of business in 2008: Income before taxes and equity investee earnings -- -- $206,598 -- Taxes on income -- -- $59,846 -- Net income -- -- $148,529 -- Basic earnings per share -- -- $2.36 -- Diluted earnings per share -- -- $2.32 -- COVANCE INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2008 and DECEMBER 31, 2007 (Dollars in thousands) September 30 December 31 2008 2007 (UNAUDITED) ASSETS Current Assets: Cash & cash equivalents $209,094 $319,485 Accounts receivable, net 240,761 217,657 Unbilled services 103,960 88,835 Inventory 67,644 54,788 Deferred income taxes 9,997 7,825 Prepaid expenses and other current assets 89,324 81,467 Total Current Assets 720,780 770,057 Property and equipment, net 790,429 646,040 Goodwill, net 105,486 105,486 Other assets 38,211 38,602 Total Assets $1,654,906 $1,560,185 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $44,677 $32,252 Accrued payroll and benefits 91,450 95,313 Accrued expenses and other current liabilities 64,500 66,838 Unearned revenue 145,701 144,870 Short-term debt 23,000 - Income taxes payable 27,734 18,887 Total Current Liabilities 397,062 358,160 Deferred income taxes 29,111 32,562 Other liabilities 58,694 59,275 Total Liabilities 484,867 449,997 Stockholders' Equity: Common stock 753 746 Paid-in capital 543,572 492,373 Retained earnings 1,084,188 933,106 Other Comprehensive Income: Cumulative translation adjustment 33,495 45,328 FAS 158 adjustment (21,174) (21,174) Treasury stock (470,795) (340,191) Total Stockholders' Equity 1,170,039 1,110,188 Total Liabilities and Stockholders' Equity $1,654,906 $1,560,185 COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Dollars in thousands) (UNAUDITED) Nine Months Ended September 30 2008 2007 Cash flows from operating activities: Net income $151,082 $125,020 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52,172 49,015 Non-cash compensation expense associated with employee benefit and stock compensation plans 19,190 21,472 Deferred income tax (benefit) provision (5,623) (2,475) Gain on sale of business (3,927) - Loss (gain) on sale of property and equipment 795 (1,740) Equity investee earnings (1,777) (1,683) Changes in operating assets and liabilities: Accounts receivable (23,104) (17,007) Unbilled services (15,125) (15,851) Inventory (12,856) (5,161) Accounts payable 12,425 6,963 Accrued liabilities (5,818) 18,901 Unearned revenue 831 12,616 Income taxes payable 11,322 (749) Other assets and liabilities, net (6,361) (13,222) Net cash provided by operating activities 173,226 176,099 Cash flows from investing activities: Capital expenditures (206,179) (104,820) Proceeds from sale of business 3,927 - Other, net 366 111 Net cash used in investing activities (201,886) (104,709) Cash flows from financing activities: Net borrowings under revolving credit facility 23,000 - Stock issued under employee stock purchase and option plans 29,158 25,948 Purchase of treasury stock (130,604) (61,562) Net cash used in financing activities (78,446) (35,614) Effect of exchange rate changes on cash (3,285) 4,245 Net change in cash and cash equivalents (110,391) 40,021 Cash and cash equivalents, beginning of period 319,485 219,810 Cash and cash equivalents, end of period $209,094 $259,831