Covance Reports Fourth Quarter and Full-Year 2008 Results

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PRINCETON, N.J., Jan. 28 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its fourth quarter ended December 31, 2008 of $0.72 per diluted share. For the full-year, earnings per share were $3.08, up 13.3% year-on-year from $2.71 in 2007. Excluding the gain on sale of Covance's centralized ECG business from both years, earnings per share grew 14.5% to $3.03 in 2008 from $2.65 in 2007.

"As previously announced, reduced demand in our Early Development segment from a combination of a lower level of new project initiations and increased project delays in our toxicology and clinical pharmacology services led to a sequential decline in segment revenue and operating income," said Joe Herring, Chairman and Chief Executive Officer. "Demand for our Late-Stage Development services remained on-track in the fourth quarter, including revenue growth of 10.5% (13.5% excluding the impact of foreign exchange), operating margins of 19.6%, record orders, and a net book-to-bill exceeding 1.6 to 1. On a consolidated basis, fourth quarter net revenues grew 6.7% (10.9% excluding the impact of foreign exchange), operating margin was 14.5%, and EPS was flat year-on-year (excluding the gain on sale from both periods).

"On the commercial front, adjusted net orders in the fourth quarter were $567 million ($555 million on an unadjusted basis), representing an adjusted book-to-bill ratio of 1.29 to 1. Backlog grew 62% year-on-year to $4.33 billion. In addition, in the latter part of 2008, we secured two seven-year, sole source contracts for our central laboratory services from top-ten drug companies, under which orders will be recognized as new projects are awarded.

    "On December 18 we released our targets for 2009, which outlined revenue
growth of 5% to 10% over 2008 and earnings per share in the range of $3.00 to
$3.20. These targets assumed demand for early development services begins to
pick up between the second and third quarters of this year, late-stage backlog
would continue to convert to revenue at historical rates, and foreign exchange
rates would remain at budgeted levels throughout the year. Relative to these
assumptions, we are off to a somewhat slower start in Early Development
services and there continues to be significant volatility in the US dollar,
although central laboratory kits are running ahead of budget. Balancing the
slower start in Early Development with the ongoing strength of new orders and
revenue flow in Late-Stage Development, we continue to maintain our full-year
earnings targets."

    Consolidated Results


    ($in millions
     except EPS)       4Q08    4Q07      Change  FY2008    FY2007    Change
                       ----    ----      ------  ------    ------    ------

    Total Revenues    $463.8   $435.7            $1,827.1  $1,631.5
    Less:
     Reimbursable
     Out-of-Pockets    $25.2    $24.7               $99.0     $85.1
    Net Revenues      $438.6   $411.0      6.7%  $1,728.1  $1,546.4     11.7%
    Operating Income   $63.5    $61.0      4.1%    $263.7    $228.6     15.3%
      Operating
       Margin %         14.5%    14.8%               15.3%     14.8%
    Net Income         $45.7    $50.9    (10.3)%   $196.8    $175.9     11.8%
    Diluted EPS        $0.72    $0.78     (8.4)%    $3.08     $2.71     13.3%
    Gain on Sale, net
     of tax             $0.1     $4.1                $2.6      $4.1
    Net Income
     Excluding Gain
     on Sale           $45.6    $46.8     (2.5)%   $194.1    $171.8     13.0%
    Diluted EPS
     Excluding Gain
     on Sale           $0.72    $0.72     (0.6)%    $3.03     $2.65     14.5%

    Operating Segment Results

    Early Development


    ($in millions)   4Q08    4Q07  Change    FY2008    FY2007    Change
                     ----    ----  ------    ------    ------    ------
    Net Revenues   $214.2  $207.9     3.1%   $844.8    $777.7      8.6%
    Operating
     Income         $45.8   $51.5   (11.1)%  $205.4    $195.9      4.8%
    Margin %         21.4%   24.8%             24.3%     25.2%

The Company's Early Development segment includes nonclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the fourth quarter of 2008 grew 3.1% year-over-year to $214.2 million, compared to $207.9 million in the fourth quarter of 2007. Continued solid growth in analytical chemistry was offset by a decline in revenues in toxicology and clinical pharmacology. In addition, foreign exchange negatively impacted revenue growth in the quarter by approximately 520 basis points. For the full year 2008, net revenues increased 8.6% to $844.8 million compared to $777.7 million in 2007.

Operating income for the fourth quarter of 2008 declined 11.1% year-over-year to $45.8 million, compared to $51.5 million in the fourth quarter of last year. Operating margins for the fourth quarter of 2008 were 21.4% compared to 24.8% in the fourth quarter of 2007 and 25.5% last quarter. Fourth quarter operating margins were impacted by a lower level of new project initiations and increased project delays in toxicology and clinical pharmacology. Full year operating margins were 24.3% compared to 25.2% in the prior year.

    Late-Stage Development


    ($in millions)   4Q08   4Q07   Change   FY2008   FY2007   Change
                     ----   ----   ------   ------   ------   ------
    Net Revenues   $224.4  $203.1   10.5%   $883.3   $768.8    14.9%
    Operating
     Income         $44.0   $32.6   35.1%   $170.1   $128.1    32.8%
    Margin %         19.6%   16.0%            19.3%    16.7%

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 fourth quarter of 2008 grew 10.5% to $224.4 million compared to $203.1 million in the fourth 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 12.9%. Growth was again led by central laboratory and clinical development. Foreign exchange negatively impacted revenue growth in the quarter by approximately 300 basis points. Full year Late-Stage Development net revenues grew 14.9% to $883.3 million compared to $768.8 million in 2007.

Operating income for the fourth quarter of 2008 was $44.0 million compared to $32.6 million in the fourth quarter of the prior year. Operating margins for the fourth quarter of 2008 increased to 19.6% from 16.0% in the fourth quarter of 2007 and on strong performances in clinical development and in central laboratory services. Full year operating margins were 19.3% compared to 16.7% in the prior year.

Corporate Information

The Company's backlog at December 31, 2008 grew 61.5% year-over-year to $4.33 billion compared to $2.68 billion at December 30, 2007. Foreign exchange negatively impacted sequential backlog growth by approximately $30 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $567 million in the fourth quarter of 2008 and $2.15 billion for the full year.

Corporate expenses totaled $26.3 million in the fourth quarter of 2008 compared to $29.2 million last quarter and $23.0 million in the fourth quarter of last year. Full-year corporate expenses totaled $111.9 million compared to $95.4 million in the prior year. We expect corporate expenses to average between 6.0% and 7.0% of revenues going forward as we continue to make investments in infrastructure to enhance our ability to manage future growth.

Cash and cash equivalents at December 31, 2008 were $221 million compared to $209 million at September 30, 2008 and $319 million at December 31, 2007. At December 31, 2008, short-term debt totaled $50 million. In October, the Company borrowed $50 million to finance the purchase of the Greenfield, Indiana campus from Eli Lilly.

Net Days Sales Outstanding (DSO) decreased significantly to 37 days at December 31, 2008 compared to 41 days at September 30, 2008 and 36 days at December 31, 2007.

Free cash flow (defined as operating cash flow less capital expenditures) for the fourth quarter was $0.2 million, consisting of operating cash flow of $113 million less capital expenditures of $113 million, which includes the $50 million to purchase the Greenfield, Indiana campus. Free cash flow for full year 2008 was negative $33 million, consisting of operating cash flow of $286 million less capital expenditures of $319 million. In 2009, we expect free cash flow to be approximately $90 million and capital expenditures to be approximately $200 million. The free cash flow target for 2009 assumes DSO at 40 days.

The effective tax rate in the fourth quarter of 2008 was 28.5%. The effective tax rate for 2009 is expected to increase slightly, to approximately 29.0%.

The Company's investor conference call will be webcast on January 29 at 9:00 am EST. 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 $1.7 billion, global operations in more than 20 countries, and more than 9,600 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 AND YEARS ENDED DECEMBER 31, 2008 AND 2007
                    (Dollars in thousands, except per share data)


                        Three Months Ended             Years Ended
                            December 31                December 31
                           -------------               ------------
                         2008         2007          2008           2007
                         ----         ----          ----           ----
                                          (UNAUDITED)

    Net revenues       $438,645     $410,966     $1,728,098    $1,546,419
    Reimbursable out-
     of-pockets          25,190       24,736         98,969        85,097
                         ------       ------         ------        ------
        Total revenues  463,835      435,702      1,827,067     1,631,516
                        -------      -------      ---------     ---------

    Costs and
     expenses:
      Cost of
       revenue          294,679      273,874      1,142,697     1,017,686
      Reimbursed
       out-of-
       pocket
       expenses          25,190       24,736         98,969        85,097
      Selling,
       general and
       administrative    61,071       58,918        250,180       233,890
      Depreciation and
       amortization      19,399       17,182         71,571        66,197
                         ------       ------         ------        ------
        Total costs
         and expenses   400,339      374,710      1,563,417     1,402,870
                        -------      -------      ---------     ---------

    Income from
     operations          63,496       60,992        263,650       228,646

    Other (income)
     expense, net:
      Interest
       income, net         (833)      (3,030)        (6,461)       (9,801)
      Foreign
       exchange
       transaction
       loss (gain),
       net                  674       (1,137)          (142)       (1,375)
      Gain on sale
       of business         (143)      (6,590)        (4,070)       (6,590)
                           ----       ------         ------        ------
        Other
         income,
         net               (302)(a)  (10,757)(b)    (10,673)( c ) (17,766)(b)
                           ----      -------        -------       -------

    Income before
     taxes and
     equity
     investee
     earnings            63,798(a)    71,749(b)     274,323( c )  246,412(b)

    Taxes on income      18,195(a)    21,608(b)      79,415( c )   72,934(b)

    Equity
     investee
     earnings                75          768          1,852         2,451

                        -------      -------       --------      --------
    Net income          $45,678(a)   $50,909(b)    $196,760( c ) $175,929(b)
                        =======      =======       ========      ========

    Basic earnings
     per share            $0.72(a)     $0.80(b)       $3.12( c )    $2.76(b)

    Weighted
     average
     shares
     outstanding -
     basic           63,188,155   63,834,768     63,096,155    63,747,732

    Diluted earnings
     per share            $0.72(a)     $0.78(b)       $3.08( c )    $2.71(b)

    Weighted
     average
     shares
     outstanding -
     diluted         63,647,684   64,921,515     63,981,505    64,820,406


    (a) Includes the impact of a $143 gain on sale of Cardiac Safety
        Services ($93 net of tax) during the fourth quarter of 2008.

    (b) Includes the impact of a $6,590 gain on sale of Cardiac Safety
        Services ($4,152 net of tax) during the fourth quarter of 2007.

    ( c ) Includes the impact of a $4,070 gain on sale of Cardiac Safety
          Services ($2,646 net of tax) during the year ended 2008.



    Excluding the impact of the gain on sale of business:
    -----------------------------------------------------

    Income before taxes
     and equity investee
     earnings                   $63,655  $65,159  $270,253  $239,822

    Taxes on income             $18,145  $19,170   $77,991   $70,496

    Net income                  $45,585  $46,757  $194,114  $171,777

    Basic earnings per share      $0.72    $0.73     $3.08     $2.69

    Diluted earnings per share    $0.72    $0.72     $3.03     $2.65



                            COVANCE INC.
                    CONSOLIDATED BALANCE SHEETS
                     DECEMBER 31, 2008 AND 2007
                       (Dollars in thousands)


                                       December 31,  December 31,
                                           2008         2007
                                           ----         ----

    ASSETS
    Current Assets:
      Cash & cash equivalents            $221,334     $319,485
      Accounts receivable, net            228,951      217,657
      Unbilled services                   112,719       88,835
      Inventory                            68,206       54,788
      Deferred income taxes                15,029        7,825
      Prepaid expenses and other
       current assets                      91,451       81,467
                                           ------       ------
          Total Current Assets            737,690      770,057

    Property and equipment, net           860,957      646,040
    Goodwill, net                         105,486      105,486
    Other assets                           48,955       38,602
                                           ------       ------
          Total Assets                 $1,753,088   $1,560,185
                                       ==========   ==========

    LIABILITIES and STOCKHOLDERS'
     EQUITY
    Current Liabilities:
      Accounts payable                    $41,887      $32,252
      Accrued payroll and benefits        104,607       95,313
      Accrued expenses and other
       current liabilities                 86,521       66,838
      Unearned revenue                    162,556      144,870
      Short-term debt                      50,000            -
      Income taxes payable                 14,224       18,887
                                           ------       ------
          Total Current Liabilities       459,795      358,160

    Deferred income taxes                  51,385       32,562
    Other liabilities                      47,059       59,275
                                           ------       ------
          Total Liabilities               558,239      449,997
                                          -------      -------

    Stockholders' Equity:
      Common stock                            754          746
      Paid-in capital                     551,598      492,373
      Retained earnings                 1,129,569      933,106
      Accumulated other
       comprehensive income               (13,975)      24,154
      Treasury stock                     (473,097)    (340,191)
                                         --------     --------
          Total Stockholders' Equity    1,194,849    1,110,188
                                        ---------    ---------
          Total Liabilities and
           Stockholders'  Equity       $1,753,088   $1,560,185
                                       ==========   ==========



                              COVANCE INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
                         (Dollars in thousands)


                                                     Years Ended
                                                     December 31
                                                     -----------

                                                     2008      2007
                                                     ----      ----
    Cash flows from operating activities:
      Net income                                 $196,760  $175,929
      Adjustments to reconcile net income to
       net cash provided by operating activities:
        Depreciation and amortization              71,571    66,197
        Non-cash compensation expense associated
         with employee benefit and stock
         compensation plans                        25,389    26,508
        Deferred income tax provision (benefit)     9,343    (4,903)
        Gain on sale of business                   (4,070)   (6,590)
        Loss (gain) on sale of property
         and equipment                              1,064    (1,346)
        Equity investee earnings                   (1,852)   (2,451)
    Changes in operating assets and
     liabilities, net of businesses
     acquired and sold:
           Accounts receivable                    (11,294)  (16,847)
           Unbilled services                      (23,884)      304
           Inventory                              (13,418)   (5,336)
           Accounts payable                         9,635    (2,836)
           Accrued liabilities                     26,952    37,153
           Unearned revenue                        17,686    35,392
           Income taxes payable                    (2,702)    9,310
           Other assets and liabilities, net      (15,023)  (16,954)
                                                  -------   -------
    Net cash provided by operating activities     286,157   293,530
                                                  -------   -------

    Cash flows from investing activities:
      Capital expenditures                       (318,928) (201,037)
      Proceeds from sale of business                4,070    35,200
      Minority equity investment                   (3,136)        -
      Other, net                                      385       322
                                                   ------    ------
    Net cash used in investing activities        (317,609) (165,515)
                                                 --------  --------

    Cash flows from financing activities:
      Net borrowings under revolving
       credit facility                             50,000         -
      Stock issued under employee stock
       purchase and option plans                   31,500    33,423
      Purchase of treasury stock                 (132,906)  (66,356)
                                                 --------   -------
    Net cash used in financing activities         (51,406)  (32,933)
                                                  -------   -------
    Effect of exchange rate changes on cash       (15,293)    4,593
                                                  -------     -----
    Net change in cash and cash equivalents       (98,151)   99,675

    Cash and cash equivalents,
     beginning of period                          319,485   219,810
                                                  -------   -------

    Cash and cash equivalents, end of period     $221,334  $319,485
                                                 ========  ========