Covance Announces Record Results & Raises 2006 EPS Target
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- Q4 Revenue Growth Accelerates to 19.9% and Operating Margin Increases to 15.0% - - Record Q4 Net Orders of $434 Million -
PRINCETON, N.J., Jan. 25 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported fourth quarter earnings of $0.54/diluted share, up 28.6% year-over-year, after adjusting for the impact of a one-time $4.4 million repatriation-related income tax charge. This income tax charge of approximately seven cents per share was associated with the repatriation of $103 million of accumulated foreign earnings under the American Jobs Creation Act. Full-year earnings on the same basis were $1.94/diluted share, a 27.6% increase over full-year 2004. GAAP earnings for the fourth quarter ended December 31, 2005 were $0.47/diluted share and full-year earnings were $1.88/diluted share.
"I congratulate the entire Covance team for delivering a fifth consecutive year of at least 25% earnings growth for our shareholders. Outstanding project delivery for clients led to continued strong repeat work and record orders of $434 million in the fourth quarter, driving backlog to $1.67 billion," said Joe Herring, Covance's Chairman and Chief Executive Officer. "The fourth quarter's robust revenue growth of nearly 20% and record operating margins of 15.0% were broad-based and featured continued strong performances by our market-leading toxicology services and central laboratory services. Our Early Development segment achieved exceptionally strong revenue growth of 24.1% and operating margin of 25.0%, and our Late-Stage Development segment grew revenues 16.4% and increased its operating margin 50 basis points sequentially to 16.2%. Strong order flow over the past two years translated into a doubling of our full-year top-line growth rate to 16.9%. Fourth quarter orders included two dedicated capacity contracts totaling approximately $34 million, consisting of the extension of an existing contract and a smaller, new contract with a top ten pharmaceutical client."
"Looking forward, we will continue to focus on our three service-based strategies: delivering operational and service excellence for our clients; creating integrated drug development solutions that reduce the time and cost of drug development; and driving more strategic, partner-based outsourcing. Continued successful execution of these strategies leads us to raise our 2006 earnings target from at least $2.30 per share to at least $2.33 per share (excluding the impact of expensing stock options under SFAS 123(R), which we estimate to be approximately $0.16 to $0.18 cents per share in 2006)."
Consolidated Results ($ in millions except EPS) 4Q05 4Q04 Change FY 2005 FY 2004 Change Net Revenues $322.3 $268.9 19.9% $1,192.9 $1,020.4 16.9% Reimbursable Out-of-Pockets $20.8 $13.5 $57.5 $36.0 Total Revenues $343.1 $282.4 $1,250.4 $1,056.4 Costs and Expenses $274.1 $230.6 18.9% $1,017.8 $879.9 15.7% Reimbursable Out-of-Pockets $20.8 $13.5 $57.5 $36.0 Total Costs and Expenses $294.9 $244.1 $1,075.3 $915.9 Operating Income $48.2 $38.3 26.0% $175.1 $140.5 24.7% Operating Margin % 15.0% 14.2% 14.7% 13.8% Net Income $30.0 $27.3 $119.6 $97.9 Diluted EPS $0.47 $0.42 $1.88 $1.52 Tax on Repatriated Earnings $4.4 n/a $4.4 n/a Net Income excluding tax charge $34.4 $27.3 25.9% $124.0 $97.9 26.6% Diluted EPS excluding tax charge $0.54 $0.42 28.6% $1.94 $1.52 27.6% Operating Segment Results Early Development
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, and clinical pharmacology services. Early Development net revenues for the fourth quarter of 2005 grew an exceptionally strong 24.1% to $150.9 million compared to $121.7 million in the fourth quarter of 2004 on robust performances across our broad portfolio of services. Full-year net revenues grew 17.4% to $562.2 million compared to $478.7 million in the prior year.
Operating income for the fourth quarter of 2005 increased 35.8% to $37.8 million compared to $27.8 million for the fourth quarter of last year. Operating margin for the fourth quarter of 2005 increased 210 basis points to 25.0%, from the 22.9% recorded in the fourth quarter of the prior year. Operating margin growth was led by continued strong performance in toxicology, chemistry, and North American clinical pharmacology. Full-year operating margin expanded to 24.9% from 23.3% in the prior year.
($ in millions) 4Q05 4Q04 Change FY 2005 FY 2004 Change Net Revenues $150.9 $121.7 24.1% $562.2 $478.7 17.4% Operating Income $37.8 $27.8 35.8% $140.1 $111.6 25.6% Margin % 25.0% 22.9% 24.9% 23.3% Late-Stage Development
The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, commercialization services (Phase IV studies and market access services), and cardiac safety services. Fourth quarter net revenues were $171.4 million, up 16.4% from the $147.2 million in the fourth quarter of 2004. Net revenue growth of 16.4% year-on-year and 10.7% sequentially was broad-based across the segment. Full-year revenues grew 16.4% to $630.8 million compared to $541.7 million in the prior year.
Operating income for the fourth quarter of 2005 grew to $27.8 million compared to $25.2 million in the fourth quarter of the prior year. Central laboratories, commercialization services, and cardiac safety services were the strongest contributors to the solid margin performance in the quarter. Operating margins increased 50 basis points sequentially to 16.2%, primarily as a result of improved profitability in clinical development. Full-year operating margin was 16.6% compared to 15.7% in the prior year.
($ in millions) 4Q05 4Q04 Change FY 2005 FY 2004 Change Net Revenues $171.4 $147.2 16.4% $630.8 $541.7 16.4% Operating Income $27.8 $25.2 10.3% $ 104.7 $84.9 23.3% Margin % 16.2% 17.1% 16.6% 15.7% Corporate Information
During the year, the Company's backlog increased $210 million, or 14.4%, to a record $1.67 billion at December 31, 2005, despite a $63 million negative impact from the strengthening of the US dollar. Backlog increased on a year-over-year and sequential basis in both Early Development and Late-Stage Development.
The Company reported an increase of $20.3 million in cash and cash equivalents in the fourth quarter to $160.7 million at December 31, 2005 from $140.4 million at September 30, 2005.
Capital expenditures for the fourth quarter were $58.8 million and totaled $153.1 million for full year 2005. Free cash flow (cash from operations less capital spending) was $28.9 million for full year 2005. We expect 2006 capital spending to be approximately $125 million and 2006 free cash flow to be approximately $90 million.
Net Days Sales Outstanding (DSO) improved to 56 days at December 31, 2005 from 63 days at September 30, 2005.
The Company's investor conference call will be webcast on Thursday, January 26 at 9:00 am EST. The CEO commentary and presentation slides are available through http://www.covance.com. In addition, on January 26 at approximately 6:20 am EST, Joe Herring will be interviewed on Bloomberg Radio; at approximately 6:50 am EST, Joe Herring will be interviewed on Bloomberg Television's Morning Call.
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 billion, global operations in more than 20 countries, and more than 7,300 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at http://www.covance.com.
Use of Non-GAAP Financial Information
This Press Release contains non-GAAP earnings per share information adjusted to exclude the impact of a one-time income tax charge for the repatriation of accumulated foreign earnings under the American Jobs Creation Act. This information is provided because management believes that this tax charge is not indicative of Covance's operational results and, as this non-GAAP financial measure is used by management as a basis for evaluating Company performance, investors' understanding of Covance's performance is enhanced by such disclosure.
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.
COVANCE INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2005 AND 2004 (Dollars in thousands, except per share data) Three Months Ended December 31 Years Ended December 31 2005 2004 2005 2004 (UNAUDITED) Net revenues $322,354 $268,857 $1,192,950 $1,020,429 Reimbursable out-of- pockets 20,778 13,487 57,504 35,968 Total revenues 343,132 282,344 1,250,454 1,056,397 Costs and expenses: Cost of revenue 214,345 179,995 791,654 677,945 Reimbursed out-of- pocket expenses 20,778 13,487 57,504 35,968 Selling, general and administrative 47,069 38,663 178,368 155,656 Depreciation and amortization 12,729 11,943 47,821 46,354 Total costs and expenses 294,921 244,088 1,075,347 915,923 Income from operations 48,211 38,256 175,107 140,474 Other (income) expense, net: Interest income, net (927) (865) (3,637) (2,290) Foreign exchange transaction loss (gain), net 124 (476) 1,073 238 Other (income) expense, net (803) (1,341) (2,564) (2,052) Income before taxes and equity investee earnings 49,014 39,597 177,671 142,526 Taxes on income 19,342 (a) 12,464 58,786 (a) 45,532 Equity investee earnings 301 177 734 953 Net income $29,973 (a) $27,310 $119,619 (a) $97,947 Basic earnings per share $0.48 (a) $0.44 $1.91 (a) $1.57 Weighted average shares outstanding - basic 62,649,863 62,382,374 62,602,454 62,474,345 Diluted earnings per share $0.47 (a) $0.42 $1.88 (a) $1.52 Weighted average shares outstanding - diluted 63,749,470 64,406,413 63,773,188 64,644,149
(a) Includes the impact of a one-time $4.4 million income tax charge associated with the repatriation of $103 million of accumulated foreign earnings under the American Jobs Creation Act.
Excluding the impact of the $4.4 million repatriation related one-time tax charge: Taxes on income 14,942 n/a 54,386 n/a Net income $34,373 n/a $124,019 n/a Basic earnings per share $0.55 n/a $1.98 n/a Diluted earnings per share $0.54 n/a $1.94 n/a COVANCE INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2005 and 2004 (Dollars in thousands) December 31 December 31 2005 2004 ASSETS Current Assets: Cash & cash equivalents $160,717 $177,712 Accounts receivable, net 206,098 178,518 Unbilled services 88,297 63,220 Inventory 40,293 40,999 Deferred income taxes 2,062 8,042 Prepaid expenses and other current assets 49,243 40,463 Total Current Assets 546,710 508,954 Property and equipment, net 410,665 319,747 Goodwill, net 61,262 56,876 Other assets 37,966 39,108 Total Assets $1,056,603 $924,685 LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $26,975 $24,346 Accrued payroll and benefits 64,226 63,143 Accrued expenses and other current liabilities 48,298 39,722 Unearned revenue 96,987 87,325 Income taxes payable 16,242 4,590 Total Current Liabilities 252,728 219,126 Deferred income taxes 45,545 46,104 Other liabilities 26,559 21,769 Total Liabilities 324,832 286,999 Stockholders' Equity: Common stock 718 700 Paid-in capital 350,678 289,952 Retained earnings 612,811 493,192 Cumulative translation adjustment 13,367 41,451 Treasury stock (245,803) (187,609) Total Stockholders' Equity 731,771 637,686 Total Liabilities and Stockholders' Equity $1,056,603 $924,685 COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (Dollars in thousands) Years Ended December 31 2005 2004 Cash flows from operating activities: Net income $119,619 $97,947 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 47,821 46,354 Non-cash compensation expense associated with employee benefit and stock compensation plans 16,595 13,473 Deferred income tax provision 5,421 7,516 Other (80) (420) Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable (24,569) (21,719) Unbilled services (25,077) (19,167) Inventory 763 (1,073) Accounts payable 2,114 4,217 Accrued liabilities 9,082 15,397 Unearned revenue 9,662 5,098 Income taxes payable 23,384 20,789 Other assets and liabilities, net (2,686) (5,326) Net cash provided by operating activities 182,049 163,086 Cash flows from investing activities: Capital expenditures (153,138) (72,887) Acquisition of businesses (7,110) - Equity method investment - (20,741) Other, net 158 142 Net cash used in investing activities (160,090) (93,486) Cash flows from financing activities: Stock issued under employee stock purchase and option plans 32,417 60,783 Purchase of treasury stock (58,194) (134,188) Net cash used in financing activities (25,777) (73,405) Effect of exchange rate changes on cash (13,177) 9,917 Net change in cash and cash equivalents (16,995) 6,112 Cash and cash equivalents, beginning of period 177,712 171,600 Cash and cash equivalents, end of period $160,717 $177,712