- 21.7% Growth in Net Orders; Backlog up 17.4%; Record Margins of 14.3% -
PRINCETON, N.J., April 26 /PRNewswire-FirstCall/ -- Covance Inc.
(NYSE: CVD) today reported earnings for its first quarter ended March 31, 2006
of $0.52/diluted share, including stock-based compensation expense of $0.04
per diluted share related to SFAS 123(R). This represents year-over-year EPS
growth of 30.0% with both periods including stock-based compensation expense.
"Covance began 2006 with another strong, balanced financial performance,
including top-line growth of 14.0% and record operating margins of 14.3%
(including the impact of SFAS 123R). We also continued to win significant and
strategic new business orders," said Joe Herring, Chairman and Chief Executive
Officer. "Early Development reported another quarter of strong operating
margins of 24.9%, despite incremental expenses associated with opening new
toxicology capacity, and revenue growth of 8.8%. In Late-Stage Development,
revenue growth accelerated to 18.5% and operating margins increased to 18.0%,
primarily driven by very strong performance in our central laboratory
services."
"Covance also delivered another quarter of strong new business flow, as
net orders grew 21.7% to $375 million and backlog increased 17.4% to $1.72
billion. During the first quarter, we were awarded a $29 million extension
and expansion of a dedicated space toxicology contract from a top ten
pharmaceutical client who has decided to contract its in-house GLP testing.
Coupled with the expansion we announced last quarter, this contract further
validates our strategic approach to drug development as a winning solution for
our clients and Covance. With the phased opening of our large toxicology
expansion in Madison, WI last month and our recent agreement to acquire eight
early clinical development sites from Radiant Research, Covance has
strengthened our position to accommodate the continued strong demand for our
integrated early development service offerings."
"Reflecting the estimated impact of expensing stock-based compensation
under SFAS 123(R) of $0.17 per diluted share, Covance has modified our 2006
earnings target to be at least $2.16 per diluted share."
Consolidated Results
($ in millions 1Q06 1Q05 1Q05 1Q05 Change
except EPS) as reported SFAS 123 Pro Forma
Expense
Net Revenues $320.5 $281.3 $281.3 14.0%
Reimbursable
Out-of-Pockets $13.1 $11.5 $11.5
Total Revenues $333.6 $292.8 $292.8
Costs and Expenses $274.7 $240.4 $4.9 $245.3 12.0%
Reimbursable
Out-of-Pockets $13.1 $11.5 $11.5
Total Costs and
Expenses $287.8 $251.9 $4.9 $256.8
Operating Income $45.8 $40.9 ($4.9) $36.0 27.2%
Operating Margin % 14.3% 14.5% (1.7%) 12.8%
Net Income $33.4 $28.9 ($3.4) $25.5 31.0%
Diluted EPS $0.52 $0.45 ($0.05) $0.40 30.0%
Operating Segment Results
Early Development
The Company's Early Development segment includes preclinical toxicology,
analytical chemistry, clinical pharmacology services, and research products.
Early Development net revenues for the first quarter of 2006 grew 8.8% to
$142.4 million compared to $131.0 million in the first quarter of 2005.
Excluding the impact of exchange rate differences between both periods,
revenue growth would have been 11.4%. Revenue was down sequentially following
an exceptionally strong fourth quarter, which included significant year-end
customer purchases of research products and a very high level of large animal
study starts. Although year-on-year growth was constrained by limited North
American toxicology capacity, we expect the recent addition of new capacity to
enable low- to mid-teen revenue growth in this segment beginning in the second
quarter.
Operating income for the first quarter of 2006 increased 11.0% to $35.5
million compared to $32.0 million for the first quarter of last year.
Operating margins for the first quarter of 2006 were 24.9% versus 24.4% in the
first quarter of the prior year. The primary drivers of the year-on-year
operating margin expansion were toxicology services and research products.
($ in millions) 1Q06 1Q05 Change
Net Revenues $142.4 $131.0 8.8%
Operating Income $35.5 $32.0 11.0%
Margin % 24.9% 24.4%
Late-Stage Development
The Late-Stage Development segment includes central laboratory, Phase II-
III clinical development, commercialization services (periapproval services
and market access services), and cardiac safety services. Late-Stage
Development net revenue growth for the first quarter of 2006 accelerated to
18.5% with net revenues of $178.1 million compared to $150.3 million in the
first quarter of 2005. Central laboratory services was the strongest
contributor to this quarter's year-on-year growth.
Operating income for the first quarter of 2006 increased 24.7% to $32.0
million compared to $25.6 million in the first quarter of the prior year.
Operating margins for the first quarter of 2006 were 18.0% versus 17.1% in the
first quarter of the prior year and 16.2% in the fourth quarter of 2005. The
primary driver of the year-on-year and sequential expansion in operating
margins was the very strong performance in central laboratory services.
Although clinical development contributed to revenue and margin growth in the
first quarter, we anticipate a slower conversion of backlog to revenue in the
second and third quarters due to the delay of three large studies.
($ in millions) 1Q06 1Q05 Change
Net Revenues $178.1 $150.3 18.5%
Operating Income $32.0 $25.6 24.7%
Margin % 18.0% 17.1%
Corporate Information
The Company's backlog at March 31, 2006 grew 17.4% year-over-year to $1.72
billion compared to $1.46 billion at March 31, 2005. Net orders in the first
quarter of 2006 were $374.7 million, up 21.7% over the $308.0 million reported
in the first quarter of 2005.
Corporate expenses, which totaled $21.6 million in the first quarter of
2006, includes $4.0 million of incremental expenses relating to the expensing
of stock-based compensation under SFAS 123(R).
The Company reported an increase of $30.4 million in cash and cash
equivalents in the first quarter of 2006 to $191.1 million at March 31, 2006
from $160.7 million at December 31, 2005.
Capital expenditures for the first quarter of 2006 were $19.2 million.
Free cash flow (cash from operations less capital spending) was $13.4 million.
We continue to expect 2006 capital spending to be approximately $125 million
and 2006 free cash flow to be approximately $90 million.
Net Days Sales Outstanding (DSO) were 56 days at both March 31, 2006 and
December 31, 2005 and 55 days at March 31, 2005.
The Company's investor conference call will be webcast on April 27 at
9:00 am EDT. Management's commentary and presentation slides will be
available through http://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 billion, global operations in more than 20 countries,
and more than 7,400 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.
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, our ability to obtain necessary regulatory approval on a timely
basis and close the Radiant transaction, difficulties or delays in integrating
the business of Radiant and achieving anticipated efficiencies and synergies,
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.
Statement Regarding Adoption of SFAS 123(R)
Prior to 2006, Covance followed the disclosure-only provisions of SFAS 123
as it related to expensing of stock options. Accordingly, the Company had
accounted for stock awards granted under its equity plans under the
recognition and measurement principles of APB25, which provide that no expense
is recorded for stock options issued with an exercise price equal to the fair
market value of the underlying stock on the date of grant. Covance reflected
the expense associated with the fair value of stock option grants in its
required pro forma footnote disclosure under SFAS 123 in its SEC filings.
Beginning January 1, 2006, Covance adopted SFAS 123(R). Under SFAS 123(R),
all share-based payments to employees, including grants of employee stock
options, are recognized in the financial statements based upon their fair
values. Management believes that it may be useful for investors in evaluating
current period financial performance to compare to 2005 results that include
stock option expense computed in accordance with SFAS 123. Management does
not assert that such pro forma numbers are superior to the 2005 "as reported"
results; however, the pro forma numbers may help investors compare results
including stock option expense across both periods. Although the Company has
begun to use the Lattice-Binomial valuation method for valuing stock options
granted beginning in 2006 (whereas previously the Company had used the Black-
Scholes Merton valuation method), management believes that the Lattice-
Binomial and the Black-Scholes Merton valuation methods, with the assumptions
used by the Company, result in fair values which are substantially similar in
all material respects. As a result, the Company believes that the 2006 "as
reported" amounts under SFAS 123(R) are comparable to the 2005 "pro forma"
amounts as previously disclosed under SFAS 123.
COVANCE INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands, except per share data)
(UNAUDITED)
Three Months Ended March 31
2006 (1) 2005 (2)
Net revenues $320,509 $281,265
Reimbursable out-of-pockets 13,129 11,518
Total revenues 333,638 292,783
Costs and expenses:
Cost of revenue 213,660 186,772
Reimbursed out-of-pocket expenses 13,129 11,518
Selling, general and administrative 48,286 42,136
Depreciation and amortization 12,719 11,501
Total costs and expenses 287,794 251,927
Income from operations 45,844 40,856
Other (income) expense, net:
Interest income, net (1,813) (1,012)
Foreign exchange transaction loss, net 262 582
Other income, net (1,551) (430)
Income before taxes and equity
investee earnings 47,395 41,286
Taxes on income 14,256 12,718
Equity investee earnings 250 296
Net income $33,389 $28,864
Basic earnings per share $0.53 $0.46
Weighted average shares outstanding -
basic 63,172,374 62,755,085
Diluted earnings per share $0.52 $0.45
Weighted average shares outstanding -
diluted 64,446,222 63,990,948
(1) 2006 financial results include stock-based compensation expense as
measured under SFAS 123R.
(2) 2005 financial results reflect stock-based compensation expense as
measured under APB 25 and, accordingly, do not include stock-based
compensation expense as measured under SFAS 123.
COVANCE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 and DECEMBER 31, 2005
(Dollars in thousands)
March 31 December 31
2006 2005
(UNAUDITED)
ASSETS
Current Assets:
Cash & cash equivalents $191,097 $160,717
Accounts receivable, net 193,736 206,098
Unbilled services 96,207 88,297
Inventory 40,520 40,293
Deferred income taxes 2,085 2,062
Prepaid expenses and other current
assets 58,651 49,243
Total Current Assets 582,296 546,710
Property and equipment, net 416,697 410,665
Goodwill, net 61,262 61,262
Other assets 38,335 37,966
Total Assets $1,098,590 $1,056,603
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $24,679 $26,975
Accrued payroll and benefits 50,875 64,226
Accrued expenses and other current
liabilities 49,408 48,298
Unearned revenue 90,655 96,987
Income taxes payable 18,450 16,242
Total Current Liabilities 234,067 252,728
Deferred income taxes 44,365 45,545
Other liabilities 28,385 26,559
Total Liabilities 306,817 324,832
Stockholders' Equity:
Common stock 725 718
Paid-in capital 377,980 350,678
Retained earnings 646,200 612,811
Cumulative translation adjustment 13,234 13,367
Treasury stock (246,366) (245,803)
Total Stockholders' Equity 791,773 731,771
Total Liabilities and
Stockholders' Equity $1,098,590 $1,056,603
COVANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands)
(UNAUDITED)
Three Months Ended March 31
2006 2005
Cash flows from operating activities:
Net income $ 33,389 $ 28,864
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 12,719 11,501
Non-cash compensation expense
associated with employee benefit
and stock compensation plans 6,697 3,478
Deferred income tax provision (1,203) (1,052)
Other (195) 145
Changes in operating assets and
liabilities:
Accounts receivable 12,362 (4,451)
Unbilled services (7,910) (10,392)
Inventory (227) 1,926
Accounts payable (2,296) (2,043)
Accrued liabilities (12,241) (19,582)
Unearned revenue (6,332) (2,008)
Income taxes payable 5,260 15,044
Other assets and liabilities, net (7,462) (15,079)
Net cash provided by operating
activities 32,561 6,351
Cash flows from investing activities:
Capital expenditures (19,158) (23,659)
Other, net 22 -
Net cash used in investing activities (19,136) (23,659)
Cash flows from financing activities:
Stock issued under employee stock
purchase and option plans 17,560 19,035
Purchase of treasury stock (563) (12,072)
Net cash provided by financing
activities 16,997 6,963
Effect of exchange rate changes on cash (42) (4,657)
Net change in cash and cash
equivalents 30,380 (15,002)
Cash and cash equivalents, beginning
of period 160,717 177,712
Cash and cash equivalents, end of
period $191,097 $162,710