- 14.0% Net Revenue Growth; $555 Million in Net Orders Drives Backlog Growth
of 31.2% -
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PRINCETON, N.J., July 24 /PRNewswire-FirstCall/ -- Covance Inc.
(NYSE: CVD) today reported earnings for its second quarter ended June 30, 2006
of $0.54/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 29.8% with both periods including stock-based compensation expense.
"Covance delivered another strong financial performance, including net
revenue growth of 14.0% and operating margins of 14.0%. In the second
quarter, we also achieved record net orders of $555 million driving our
backlog up 31.2% to $1.97 billion. Our continued strong order performance
positions us well for future growth," said Joe Herring, Chairman and Chief
Executive Officer. "Early Development net revenue growth accelerated to 11.4%
and operating margins were a healthy 25.1%. In Late-Stage Development,
outstanding performances in both central laboratory and commercialization
services were partially offset by weakness in clinical development, resulting
in year-over-year revenue growth of 16.4% and operating margins of 15.9%."
"Repeat business and the development of strategic client relationships
continue to spur new order growth. Included in the second quarter's record
net orders was the previously announced expanded dedicated capacity contract
which secures toxicology space for a client through 2013, adding $150 million
to our second quarter backlog. In addition, we experienced a robust flow of
new orders in Late-Stage Development, where our book-to-bill exceeded 1.35:1.
On May 31, we completed the acquisition of eight early clinical sites from
Radiant Research and are encouraged by the large number of requests for
proposals we are seeing for Phase I/IIa projects."
"As a result of our strong operating, financial, and order performance
through the first half of the year, we are raising our 2006 earnings target
from at least $2.16 per diluted share to at least $2.19 per diluted share."
Consolidated Results
Three Months Ended June 30
($ in millions except EPS)
2Q06 2Q05 2Q05 2Q05 Change
as SFAS 123 Pro
reported Expense Forma
Net Revenues $335.2 $294.0 $294.0 14.0%
Reimbursable Out-of-
Pockets $21.9 $13.4 $13.4
Total Revenues $357.1 $307.4 $307.4
Costs and Expenses $288.2 $252.1 $4.5 $256.6 12.3%
Reimbursable Out-of-
Pockets $21.9 $13.4 $13.4
Total Costs and Expenses $310.1 $265.5 $4.5 $270.0
Operating Income $47.0 $41.9 ($4.5) $37.4 25.7%
Operating Margin % 14.0% 14.3% (1.6%) 12.7%
Net Income $35.0 $29.6 ($3.1) $26.5 32.2%
Diluted EPS $0.54 $0.46 ($0.05) $0.42 29.8%
Six Months Ended June 30
($ in millions except EPS)
2006 2005 2005 2005 Change
YTD YTD YTD YTD
as SFAS 123 Pro
reported Expense Forma
Net Revenues $655.7 $575.2 $575.2 14.0%
Reimbursable Out-of-
Pockets $35.1 $25.0 $25.0
Total Revenues $690.8 $600.2 $600.2
Costs and Expenses $562.8 $492.4 $9.4 $501.8 12.2%
Reimbursable Out-of-
Pockets $35.1 $25.0 $25.0
Total Costs and Expenses $597.9 $517.4 $9.4 $526.8
Operating Income $92.9 $82.8 ($9.4) $73.4 26.6%
Operating Margin % 14.2% 14.4% (1.6%) 12.8%
Net Income $68.4 $58.4 ($6.4) $52.0 31.5%
Diluted EPS $1.06 $0.92 ($0.10) $0.82 29.9%
Operating Segment Results
Early Development
($ in millions) 2Q06 2Q05 Change 2006 YTD 2005 YTD Change
Net Revenues $155.7 $139.8 11.4% $298.2 $270.7 10.2%
Operating Income $39.1 $33.7 16.1% $74.6 $65.7 13.6%
Margin % 25.1% 24.1% 25.0% 24.3%
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 2006 grew 11.4% year-
on-year to $155.7 million, compared to $139.8 million in the second quarter of
2005, and were up a strong $13.3 million or 9.3% sequentially. Net revenue
growth in the quarter was broad-based. Year-to-date, net revenues are up
10.2% to $298.2 million compared to $270.7 million in the first half of the
prior year. We expect the continued ramp up of new toxicology capacity and
further increases in sales of research products to drive mid-teens revenue
growth in this segment in the third quarter.
Operating income for the second quarter of 2006 increased 16.1% to $39.1
million compared to $33.7 million for the second quarter of last year.
Operating margins for the second quarter of 2006 expanded to 25.1% versus
24.1% in the second quarter of the prior year. Toxicology and chemistry
services were the primary drivers of the year-on-year operating margin
expansion. Year-to-date, operating margins increased to 25.0% from 24.3% in
the prior year.
Late-Stage Development
($ in millions) 2Q06 2Q05 Change 2006 YTD 2005 YTD Change
Net Revenues $179.5 $154.2 16.4% $357.6 $304.5 17.4%
Operating Income $28.5 $26.9 6.1% $60.5 $52.5 15.2%
Margin % 15.9% 17.4% 16.9% 17.3%
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 revenues for the second quarter of 2006 grew 16.4% to $179.5
million compared to $154.2 million in the second quarter of 2005. Central
laboratory and commercialization services were the strongest contributors to
this quarter's growth. Year-to-date, net revenues grew 17.4% to $357.6
million compared to $304.5 million in the prior year.
Operating income for the second quarter of 2006 increased 6.1% to $28.5
million compared to $26.9 million in the second quarter of the prior year.
Operating margins for the second quarter of 2006 were 15.9% versus 17.4% in
the second quarter of 2005. Year-to-date, operating margins were 16.9%
compared to 17.3% in the prior year. Strong performances in central
laboratories and commercialization services were partially offset by results
in clinical development which were impacted by the previously announced delay
of three large studies and somewhat slower conversion of backlog to revenue.
Of the three delayed studies, one initiated in June, another in July, and the
third is scheduled to begin by the end of the year.
Corporate Information
The Company's backlog at June 30, 2006 grew 31.2% year-over-year to $1.97
billion compared to $1.50 billion at June 30, 2005. Net orders in the second
quarter of 2006 were $555 million, up 55.8% over the $356 million reported in
the second quarter of 2005.
Corporate expenses, which totaled $20.6 million in the second quarter of
2006, include $3.8 million of incremental expenses relating to the expensing
of stock-based compensation under SFAS 123(R).
Cash and cash equivalents at June 30, 2006 were $137.6 million compared to
$191.1 million at March 31, 2006. The Company used $74 million in cash
during the second quarter to finance the acquisitions of Signet Laboratories
and eight early clinical sites from Radiant Research.
Capital expenditures for the second quarter were $30.2 million and totaled
$49.3 million in the first half of 2006. Free cash flow (cash from operations
less capital spending) was $16.1 million in the quarter and $29.5 million year
to date. 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 57 days at June 30, 2006 versus 56
days at March 31, 2006 and 60 days at June 30, 2005.
The Company's investor conference call will be webcast on July 25 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 greater than 7,900 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, 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 SFAS123
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 SFAS123 in its SEC filings.
Beginning January 1, 2006, Covance adopted SFAS123(R). Under SFAS123(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 SFAS123(R) are comparable to the 2005 "pro forma"
amounts as previously disclosed under SFAS123.
COVANCE INC.
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands, except per share data)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
2006 (1) 2005 (2) 2006 (1) 2005 (2)
Net revenues $335,240 $293,963 $655,749 $575,228
Reimbursable out-of-
pockets 21,934 13,449 35,063 24,967
Total revenues 357,174 307,412 690,812 600,195
Costs and expenses:
Cost of revenue 222,723 195,714 436,383 382,486
Reimbursed out-of-pocket
expenses 21,934 13,449 35,063 24,967
Selling, general and
administrative 51,312 44,490 99,598 86,626
Depreciation and
amortization 14,165 11,833 26,884 23,334
Total costs and
expenses 310,134 265,486 597,928 517,413
Income from operations 47,040 41,926 92,884 82,782
Other (income) expense,
net:
Interest income, net (1,682) (975) (3,495) (1,987)
Foreign exchange
transaction (gain)
loss, net (195) 369 67 951
Other income, net (1,877) (606) (3,428) (1,036)
Income before taxes and
equity investee earnings 48,917 42,532 96,312 83,818
Taxes on income 14,407 13,041 28,663 25,759
Equity investee earnings 510 59 760 355
Net income $35,020 $29,550 $68,409 $58,414
Basic earnings per share $0.55 $0.47 $1.08 $0.93
Weighted average shares
outstanding - basic 63,626,078 62,506,556 63,399,226 62,630,820
Diluted earnings per share $0.54 $0.46 $1.06 $0.92
Weighted average shares
outstanding - diluted 64,849,638 63,651,043 64,623,847 63,820,766
(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
JUNE 30, 2006 and DECEMBER 31, 2005
(Dollars in thousands)
June 30 December 31
2006 2005
(UNAUDITED)
ASSETS
Current Assets:
Cash & cash equivalents $137,638 $160,717
Accounts receivable, net 205,315 206,098
Unbilled services 100,723 88,297
Inventory 43,533 40,293
Deferred income taxes 5,245 2,062
Prepaid expenses and other current
assets 66,353 49,243
Total Current Assets 558,807 546,710
Property and equipment, net 442,914 410,665
Goodwill, net 118,827 61,262
Other assets 46,439 37,966
Total Assets $1,166,987 $1,056,603
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $29,322 $26,975
Accrued payroll and benefits 61,555 64,226
Accrued expenses and other current
liabilities 50,752 48,298
Unearned revenue 95,189 96,987
Income taxes payable 11,677 16,242
Total Current Liabilities 248,495 252,728
Deferred income taxes 41,430 45,545
Other liabilities 29,463 26,559
Total Liabilities 319,388 324,832
Stockholders' Equity:
Common stock 729 718
Paid-in capital 396,780 350,678
Retained earnings 681,220 612,811
Cumulative translation adjustment 23,374 13,367
Treasury stock (254,504) (245,803)
Total Stockholders' Equity 847,599 731,771
Total Liabilities and
Stockholders' Equity $1,166,987 $1,056,603
COVANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Dollars in thousands)
(UNAUDITED)
Six Months Ended June 30
2006 2005
Cash flows from operating activities:
Net income $68,409 $58,414
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 26,884 23,334
Non-cash compensation expense
associated with employee benefit
and stock compensation plans 14,331 6,913
Deferred income tax provision (697) (2,018)
Other (713) 185
Changes in operating assets and
liabilities, net of businesses
acquired:
Accounts receivable 6,466 (14,942)
Unbilled services (12,426) (10,859)
Inventory (2,826) 4,484
Accounts payable 2,223 3,538
Accrued liabilities (2,691) (13,973)
Unearned revenue (4,121) (13,478)
Income taxes payable (386) 18,247
Other assets and liabilities,
net (15,658) (8,129)
Net cash provided by operating
activities 78,795 51,716
Cash flows from investing activities:
Capital expenditures (49,335) (54,892)
Acquisition of businesses (74,323) (873)
Other, net 586 44
Net cash used in investing activities (123,072) (55,721)
Cash flows from financing activities:
Stock issued under employee stock
purchase and option plans 27,603 23,980
Purchase of treasury stock (8,701) (54,963)
Net cash provided by (used in)
financing activities 18,902 (30,983)
Effect of exchange rate changes on
cash 2,296 (10,210)
Net change in cash and cash
equivalents (23,079) (45,198)
Cash and cash equivalents, beginning
of period 160,717 177,712
Cash and cash equivalents, end of
period $137,638 $132,514