Covance Reports 2Q08 Earnings Growth of 22.7% to $0.79 Per Share

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- 14.6% Revenue Growth; Record Operating Margin of 15.4%; 21.3% Backlog Growth to $3 Billion -

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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