- $432 Million in Net Orders Drive Backlog Growth of 31.8% -
- 15.6% Net Revenue Growth; EPS Growth of 23.6% -
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PRINCETON, N.J., Oct. 25 /PRNewswire-FirstCall/ -- Covance Inc.
(NYSE: CVD) today reported earnings for its third quarter ended September 30,
2006 of $0.59 per diluted share, including a $0.04 per diluted share gain from
the favorable resolution of several income tax matters during the third
quarter. Excluding the income tax gain, earnings were $0.55 per diluted
share, representing year-over-year EPS growth of 23.6%, with both periods
including stock-based compensation expense.
"In the third quarter, Covance achieved strong results, reaching new highs
in EPS, net revenues, operating income, free cash flow, and backlog. We are
particularly pleased to report an increase in net revenue growth to 15.6%, a
sequential 40 basis point increase in operating margin, and robust net orders
of $432 million," said Joe Herring, Chairman and Chief Executive Officer. "In
Early Development, net revenue growth accelerated to 19.1% and operating
margins were a healthy 24.1%. In Late-Stage Development, revenue grew 12.4%
and operating margins increased 160 basis points sequentially to 17.5%. On
the commercial front, net orders of $432 million, which represents a book-to-
bill of 1.27:1, drove backlog up 31.8% year-on-year to $2.07 billion. Robust
net orders in our central laboratory and clinical development service
offerings drove our Late-Stage Development book-to-bill ratio in excess of
1.5:1.
"We continue to deliver service solutions that help our clients accelerate
the development of new products. An example is our Program Management
capability, which provides integrated IND-enabling services. We currently
manage 128 molecules for 72 different clients, representing growth of
approximately 50% over this time last year. We also see increasing demand for
integrated service solutions across Late-Stage Development where Covance is
well-positioned to deliver differentiated and valuable services for our
clients.
"Looking forward to 2007, based upon our strong performance again this
quarter and our expanding backlog, we are targeting revenue growth in the low-
to mid-teens range and earnings per share growth of 20% over our 2006 target
of at least $2.19 per diluted share (excluding the third quarter income tax
gain)."
Consolidated Results
Three Months Ended Sept. 30
($ in millions
except EPS) 3Q06 3Q05 3Q05 3Q05 Change
as reported SFAS 123 Pro Forma
Expense
Net Revenues $341.5 $295.4 $295.4 15.6%
Reimbursable
Out-of-Pockets $14.7 $11.7 $11.7
Total Revenues $356.2 $307.1 $307.1
Costs and Expenses $292.4 $251.3 $4.2 $255.5 14.4%
Reimbursable
Out-of-Pockets $14.7 $11.7 $11.7
Total Costs and
Expenses $307.1 $263.0 $4.2 $267.2
Operating Income $49.0 $44.1 ($4.2) $39.9 22.7%
Operating Margin % 14.4% 14.9% (1.4%) 13.5%
Net Income $38.3 $31.2 ($2.8) $28.4 34.8%
Diluted EPS $0.59 $0.49 ($0.04) $0.45 32.2%
Income Tax Gain $2.5 - - -
Net Income excluding
tax gain $35.8 $31.2 ($2.8) $28.4 26.1%
Diluted EPS excluding
tax gain $0.55 $0.49 ($0.04) $0.45 23.6%
Nine Months Ended Sept. 30
($ in millions
except EPS) 2006 YTD 2005 YTD 2005 YTD 2005 YTD Change
as reported SFAS 123 Pro Forma
Expense
Net Revenues $997.2 $870.6 $870.6 14.5%
Reimbursable
Out-of-Pockets $49.8 $36.7 $36.7
Total Revenues $1,047.0 $907.3 $907.3
Costs and Expenses $855.3 $743.7 $13.6 $757.3 12.9%
Reimbursable
Out-of-Pockets $49.8 $36.7 $36.7
Total Costs and
Expenses $905.1 $780.4 $13.6 $794.0
Operating Income $141.9 $126.9 ($13.6) $113.3 25.2%
Operating Margin % 14.2% 14.6% (1.6%) 13.0%
Net Income $106.7 $89.6 ($9.2) $80.4 32.7%
Diluted EPS $1.65 $1.41 ($0.14) $1.27 30.7%
Income Tax Gain $2.5 - - - -
Net Income excluding
tax gain $104.2 $89.6 ($9.2) $80.4 29.6%
Diluted EPS excluding
tax gain $1.61 $1.41 ($0.14) $1.27 26.7%
Operating Segment Results
Early Development
($ in millions) 3Q06 3Q05 Change 2006 YTD 2005 YTD Change
Net Revenues $167.4 $140.5 19.1% $465.6 $411.2 13.2%
Operating Income $40.3 $36.6 10.1% $115.0 $102.3 12.3%
Margin % 24.1% 26.1% 24.7% 24.9%
The Company's Early Development segment includes preclinical toxicology,
analytical chemistry, clinical pharmacology services, and research products.
Early Development net revenues for the third quarter of 2006 grew 19.1% year-
on-year to $167.4 million, compared to $140.5 million in the third quarter of
2005. Net revenue growth in the quarter was driven by exceptionally strong
performances in our global toxicology and chemistry services. Year-to-date,
net revenues increased 13.2% to $465.6 million compared to $411.2 million in
the first nine months of the prior year.
Operating income for the third quarter of 2006 increased 10.1% to $40.3
million compared to $36.6 million for the third quarter of last year.
Operating margins for the third quarter of 2006 were 24.1% versus 26.1% in the
third quarter of the prior year. Our North American toxicology and chemistry
had outstanding operating performance, fueled by our new toxicology capacity
and improving results in bioanalytical chemistry. The year-on-year reduction
in operating margins in the third quarter is almost entirely attributable to
dilution resulting from the acquisition of Radiant Research. Year-to-date,
operating margins were 24.7% compared to 24.9% in the prior year.
Late-Stage Development
($ in millions) 3Q06 3Q05 Change 2006 YTD 2005 YTD Change
Net Revenues $174.1 $154.9 12.4% $531.7 $459.4 15.7%
Operating Income $30.4 $24.3 25.2% $90.9 $ 76.8 18.4%
Margin % 17.5% 15.7% 17.1% 16.7%
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 third quarter of 2006 grew 12.4% to $174.1
million compared to $154.9 million in the third quarter of 2005. Central
laboratory and clinical development services were the primary drivers of this
quarter's growth. Year-to-date, net revenues grew 15.7% to $531.7 million
compared to $459.4 million in the prior year.
Operating income for the third quarter of 2006 increased 25.2% to $30.4
million compared to $24.3 million in the third quarter of the prior year.
Operating margins for the third quarter of 2006 expanded to 17.5% versus 15.7%
in the third quarter of 2005. Clinical development and central laboratory
services were the primary drivers of the year-on-year operating margin
expansion. Year-to-date, operating margins were 17.1% compared to 16.7% in
the prior year.
Corporate Information
The Company's backlog at September 30, 2006 grew 31.8% year-over-year to
$2.07 billion compared to $1.57 billion at September 30, 2005. Net orders in
the third quarter of 2006 were $432 million, up 17.5% over the $368 million
reported in the third quarter of 2005.
Corporate expenses, which totaled $21.7 million in the third 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 September 30, 2006 was a record $210.1
million compared to $137.6 million at June 30, 2006. Capital expenditures for
the third quarter were $22.4 million and totaled $71.8 million for the first
nine months of 2006. Free cash flow (cash from operations less capital
spending) was $64.1 million in the quarter and $93.6 million year to date. We
expect full-year 2006 capital spending to be in the range of $130 to $140
million and 2006 free cash flow to be approximately $95 million.
Net Days Sales Outstanding (DSO) decreased to 55 days at September 30,
2006 compared to 57 days at June 30, 2006 and 63 days at September 30, 2005.
The Company's investor conference call will be webcast on October 26 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 8,000 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 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Dollars in thousands, except per share data)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
2006 (1) 2005 (2) 2006 (1) 2005 (2)
Net revenues $341,478 $295,368 $997,227 $870,596
Reimbursable out-of-
pockets 14,681 11,759 49,744 36,726
Total revenues 356,159 307,127 1,046,971 907,322
Costs and expenses:
Cost of revenue 223,662 194,823 660,045 577,309
Reimbursed out-of-pocket
expenses 14,681 11,759 49,744 36,726
Selling, general and
administrative 54,196 44,673 153,794 131,299
Depreciation and
amortization 14,584 11,758 41,468 35,092
Total costs and
expenses 307,123 263,013 905,051 780,426
Income from operations 49,036 44,114 141,920 126,896
Other (income) expense,
net:
Interest income, net (1,693) (723) (5,188) (2,710)
Foreign exchange
transaction (gain)
loss, net (95) (2) (28) 949
Other income, net (1,788) (725) (5,216) (1,761)
Income before taxes and
equity investee earnings 50,824 44,839 147,136 128,657
Taxes on income 12,726 13,685 41,389 39,444
Equity investee earnings 178 78 938 433
Net income $38,276 $31,232 $106,685 $89,646
Basic earnings per share $0.60 $0.50 $1.68 $1.43
Weighted average shares
outstanding - basic 63,827,555 62,498,313 63,542,002 62,586,651
Diluted earnings per share $0.59 $0.49 $1.65 $1.41
Weighted average shares
outstanding - diluted 64,965,380 63,696,805 64,758,456 63,757,590
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Excluding the impact of
the $2.5 million income
tax gain:
Taxes on income $15,193 n/a $43,856 n/a
Net income $35,809 n/a $104,218 n/a
Basic earnings per share $0.56 n/a $1.64 n/a
Diluted earnings per share $0.55 n/a $1.61 n/a
(1) 2006 financial results include stock-based compensation expense as
measured under SFAS 123(R).
(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
SEPTEMBER 30, 2006 and DECEMBER 31, 2005
(Dollars in thousands)
September 30 December 31
2006 2005
(UNAUDITED)
ASSETS
Current Assets:
Cash & cash equivalents $210,080 $160,717
Accounts receivable, net 212,802 206,098
Unbilled services 95,661 88,297
Inventory 44,794 40,293
Deferred income taxes 5,468 2,062
Prepaid expenses and other current
assets 62,278 49,243
Total Current Assets 631,083 546,710
Property and equipment, net 455,753 410,665
Goodwill, net 119,730 61,262
Other assets 47,463 37,966
Total Assets $1,254,029 $1,056,603
LIABILITIES and STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $27,824 $26,975
Accrued payroll and benefits 75,270 64,226
Accrued expenses and other current
liabilities 50,693 48,298
Unearned revenue 100,991 96,987
Income taxes payable 19,573 16,242
Total Current Liabilities 274,351 252,728
Deferred income taxes 41,696 45,545
Other liabilities 31,145 26,559
Total Liabilities 347,192 324,832
Stockholders' Equity:
Common stock 731 718
Paid-in capital 412,499 350,678
Retained earnings 719,496 612,811
Cumulative translation adjustment 28,619 13,367
Treasury stock (254,508) (245,803)
Total Stockholders' Equity 906,837 731,771
Total Liabilities and
Stockholders' Equity $1,254,029 $1,056,603
COVANCE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(Dollars in thousands)
(UNAUDITED)
Nine Months Ended September 30
2006 2005
Cash flows from operating activities:
Net income $106,685 $89,646
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 41,468 35,092
Non-cash compensation expense
associated with employee benefit
and stock compensation plans 21,990 10,257
Deferred income tax (benefit)
provision (658) (2,349)
Other (1,125) 116
Changes in operating assets and
liabilities, net of businesses acquired:
Accounts receivable (998) (24,042)
Unbilled services (7,364) (17,210)
Inventory (4,087) (964)
Accounts payable 725 (1,937)
Accrued liabilities 10,003 (1,855)
Unearned revenue 1,978 (5,956)
Income taxes payable 8,274 23,234
Other assets and liabilities, net (11,558) (4,495)
Net cash provided by operating
activities 165,333 99,537
Cash flows from investing activities:
Capital expenditures (71,755) (94,338)
Acquisition of businesses (74,561) (6,627)
Other, net 699 115
Net cash used in investing activities (145,617) (100,850)
Cash flows from financing activities:
Stock issued under employee stock
purchase and option plans 34,901 29,675
Purchase of treasury stock (8,705) (55,213)
Net cash provided by (used in)
financing activities 26,196 (25,538)
Effect of exchange rate changes on
cash 3,451 (10,461)
Net change in cash and cash
equivalents 49,363 (37,312)
Cash and cash equivalents, beginning
of period 160,717 177,712
Cash and cash equivalents, end of
period $210,080 $140,400