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Covance Reports 4Q EPS of $0.59 & Sixth Consecutive Year of 25% EPS Growth
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- $477 Million in 4Q06 Net Orders; Year-on-Year Backlog Growth of 33.4% - - Record 15.0% Operating Margin in 4Q06 -

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PRINCETON, N.J., Jan 24, 2007 /PRNewswire-FirstCall via COMTEX News Network/ -- Covance Inc. (NYSE: CVD) today reported earnings for its fourth quarter ended December 31, 2006 of $0.59 per diluted share. For the full year, EPS was $2.24, including a $0.04 per share gain from the favorable resolution of several income tax matters during the third quarter. Excluding the income tax gain, earnings were $2.20 per share, representing year-over-year EPS growth of 25.1%, with both periods including stock-based compensation expense and excluding the $0.07 per share repatriation-related income tax charge in 2005.

"I congratulate the entire Covance team for delivering a sixth consecutive year of at least 25% earnings growth for our shareholders. Continued investment in state-of-the-art capacity and outstanding project delivery for clients led to strong repeat work and 33% growth in our backlog to more than $2.2 billion," said Joe Herring, Chairman and Chief Executive Officer. "In the fourth quarter, overall revenue growth was 6.4%, reflecting difficult comparisons to the exceptionally strong fourth quarter in 2005 and lower testing volume in our central laboratory due to slow enrollment in large Phase III clinical trials. Robust central laboratory orders, which have driven a year-on-year 25% increase in its backlog, gives us confidence that volumes will ramp up as the year progresses. We expect a return to double-digit growth in total company revenue beginning in the first quarter of 2007 with low- to mid-teens growth for the full year. Total company net orders were $477 million in the fourth quarter, which represents a book-to-bill of 1.39 to 1. This outstanding performance was not only driven by robust net orders in our central laboratory, but also by strong orders in our clinical development services."

"I am also pleased to announce that last week a fifth client has entered into a dedicated capacity contract with Covance. This top ten pharmaceutical client has made a minimum contract commitment of $55 million over a multi-year period, which will be included in our first quarter 2007 orders. This contract is the first dedicated agreement spanning multiple continents, and provides our global client with the opportunity to standardize its global toxicology organization and study processes. We continue discussions and negotiations with a number of our other toxicology clients that see the value in shifting their GLP toxicology study conduct to Covance."

"Our focus on productivity enhancements and the expansion of Six Sigma programs continued to pay dividends as evidenced by the 120 basis point expansion in operating margin to 14.4% for the full year and culminating in a very strong 15% performance in the fourth quarter. In addition, Covance delivered strong free cash flow of $23.8 million in the fourth quarter, and we reduced our DSO to 49 days, the lowest level in three years. In 2007, we expect low- to mid-teens revenue growth and earnings of at least $2.63 per diluted share."


    Consolidated Results


    Quarter Ended Dec 31         4Q06     4Q05       4Q05      4Q05     Change
     ($ in millions except EPS)            as      SFAS 123  Pro Forma
                                        reported    Expense
    Net Revenues                $343.0   $322.3                $322.3    6.4%
      Reimbursable
       Out-of-Pockets            $16.1    $20.8                 $20.8
    Total Revenues              $359.1   $343.1                $343.1

    Costs and Expenses          $291.7   $274.1      $3.8      $277.9    4.9%
      Reimbursable
       Out-of-Pockets            $16.1    $20.8                 $20.8
    Total Costs and Expenses    $307.8   $294.9      $3.8      $298.7

    Operating Income             $51.3    $48.2     ($3.8)      $44.4   15.7%
      Operating Margin %         15.0%    15.0%     (1.2%)      13.8%
    Net Income                   $38.3    $30.0     ($2.6)      $27.4
    Diluted EPS                  $0.59    $0.47    ($0.04)      $0.43

    Tax on 2005 Repatriated
     Earnings                              $4.4                  $4.4
    Net Income ex-2005
     tax charge                  $38.3    $34.4                 $31.8   20.7%
    Diluted EPS ex-2005
     tax charge                  $0.59    $0.54                 $0.50   18.7%



    Year Ended Dec 31             2006     2005      2005      2005    Change
     ($ in millions except EPS)             as     SFAS 123  Pro Forma
                                         reported   Expense
    Net Revenues               $1,340.2  $1,192.9             $1,192.9   12.3%
      Reimbursable
       Out-of-Pockets             $65.9     $57.5                $57.5
    Total Revenues             $1,406.1  $1,250.4             $1,250.4

    Costs and Expenses         $1,147.0  $1,017.8    $17.4    $1,035.2   10.8%
      Reimbursable
       Out-of-Pockets             $65.9     $57.5                $57.5
    Total Costs and Expenses   $1,212.9  $1,075.3    $17.4    $1,092.7

    Operating Income             $193.2    $175.1   ($17.4)     $157.7   22.5%
      Operating Margin %          14.4%     14.7%    (1.5%)      13.2%
    Net Income                   $145.0    $119.6   ($11.9)     $107.7
    Diluted EPS                   $2.24     $1.88   ($0.19)      $1.69

    Income Tax (gain)
     charge                       ($2.5)     $4.4                 $4.4
    Net Income ex-tax
     (gain) charge               $142.5    $124.0               $112.1   27.1%
    Diluted EPS ex-tax
     (gain) charge                $2.20     $1.94                $1.76   25.1%


    Operating Segment Results


    Early Development


    ($ in millions)     4Q06      4Q05   Change   2006 YTD   2005 YTD   Change
    Net Revenues      $167.2    $150.9    10.8%    $632.8     $562.2    12.6%
    Operating Income   $38.6     $37.8     2.2%    $153.6     $140.1     9.6%
    Margin %           23.1%     25.0%              24.3%      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 fourth quarter of 2006 grew 10.8% year- on-year to $167.2 million, compared to $150.9 million in the fourth quarter of 2005. Net revenue growth in the quarter was driven by global preclinical laboratories and clinical pharmacology. The year-on-year growth rate was impacted by the exceptionally strong 4Q05, when we experienced extraordinary demand in our research products offering. For the full year 2006, net revenues increased 12.6% to $632.8 million compared to $562.2 million in 2005.

Operating income for the fourth quarter of 2006 increased 2.2% to $38.6 million compared to $37.8 million for the fourth quarter of last year. Operating margins for the fourth quarter of 2006 were 23.1% versus 25.0% in the fourth quarter of the prior year. Our global toxicology and chemistry services delivered strong results again this quarter. Comparisons to the prior year were impacted by the exceptional demand and margins delivered by research products in 4Q05 and dilution resulting from the acquisition of Radiant Research. Full year operating margins were 24.3% compared to 24.9% in the prior year. Excluding dilution from the Radiant acquisition, full year operating margins increased year-over-year, fueled by toxicology capacity expansions in 2006. We expect to see continued growth in Early Development operating margin in 2007.


    Late-Stage Development


    ($ in millions)     4Q06      4Q05   Change  2006 YTD   2005 YTD   Change
    Net Revenues      $175.8    $171.4     2.5%    $707.4     $630.8    12.2%
    Operating Income   $32.7     $27.8    17.5%    $123.6     $104.7    18.1%
    Margin %           18.6%     16.2%              17.5%      16.6%


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 fourth quarter of 2006 were $175.8 million compared to $171.4 million in the fourth quarter of 2005. Clinical development services delivered double-digit sequential revenue growth this quarter and solid growth on a year-over-year basis. While central laboratory services grew modestly year-over-year, slower enrollment in large Phase III clinical trials led to a slight sequential decline in revenues. Full year Late-Stage Development net revenues grew 12.2% to $707.4 million compared to $630.8 million in 2005.

Operating income for the fourth quarter of 2006 increased 17.5% to $32.7 million compared to $27.8 million in the fourth quarter of the prior year. Operating margins for the fourth quarter of 2006 expanded to a record 18.6% versus 16.2% in the fourth quarter of 2005. Clinical development and central laboratory services were the primary drivers of the year-on-year operating margin expansion. Full year operating margins were 17.5% compared to 16.6% in the prior year. We expect to see continued operating margin expansion in Late-Stage Development in 2007.

Corporate Information

The Company's backlog at December 31, 2006 grew 33.4% year-over-year to $2.23 billion compared to $1.67 billion at December 31, 2005. Net orders in the fourth quarter of 2006 were $477 million, up 10.5% sequentially and up 9.9% over the $434 million reported in the fourth quarter of 2005. For the year, net orders grew 25.4% to $1.84 billion.

Corporate expenses, which totaled $20.0 million in the fourth quarter of 2006, include $3.9 million of incremental expenses relating to the expensing of stock-based compensation under SFAS 123R. For the full year, incremental expenses relating to the expensing of stock-based compensation under SFAS 123R were $15.5 million.

Cash and cash equivalents at December 31, 2006 grew to a record $219.8 million compared to $210.1 million at September 30, 2006 and $160.7 million at the end of last year. In the fourth quarter, Covance repurchased 279,800 shares for approximately $16.2 million. Capital expenditures for the fourth quarter were $65.0 million and totaled $136.8 million for the year. Free cash flow (cash from operations less capital spending) was $23.8 million in the quarter and $117.4 million for the year. We expect full year 2007 capital spending to be approximately $160 million, including significant expenditures for the new Arizona preclinical facility, and 2007 free cash flow to be approximately $75 million.

Net Days Sales Outstanding (DSO) decreased to 49 days at December 31, 2006 compared to 55 days at September 30, 2006 and 56 days at December 31, 2005.

The Company's investor conference call will be webcast on January 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 $1.3 billion, global operations in more than 20 countries, and more than 8,100 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 123R

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 SFAS 123R. Under SFAS 123R, 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 SFAS123. 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 123R are comparable to the 2005 "pro forma" amounts as previously disclosed under SFAS123.



                                 COVANCE INC.

                        CONSOLIDATED INCOME STATEMENTS

        FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2006 AND 2005

                 (Dollars in thousands, except per share data)

                         Three Months Ended             Years Ended
                             December 31                December 31
                        2006 (1)    2005 (2)       2006 (1)      2005 (2)
                            (UNAUDITED)

    Net revenues         $342,976    $322,354     $1,340,203    $1,192,950
    Reimbursable out-
     of-pockets            16,111      20,778         65,855        57,504
         Total revenues   359,087     343,132      1,406,058     1,250,454

    Costs and
     expenses:
      Cost of revenue     222,145     214,345        882,190       791,654
      Reimbursed out-
       of-pocket
       expenses            16,111      20,778         65,855        57,504
      Selling, general
       and administrative  53,594      47,069        207,388       178,368
      Depreciation and
       amortization        15,920      12,729         57,388        47,821
         Total costs and
          expenses        307,770     294,921      1,212,821     1,075,347

    Income from
     operations            51,317      48,211        193,237       175,107

    Other (income)
     expense, net:
      Interest income,
       net                 (2,376)       (927)        (7,564)       (3,637)
      Foreign exchange
       transaction
       loss,  net             240         124            212         1,073
         Other income,
          net              (2,136)       (803)        (7,352)       (2,564)

    Income before
     taxes and equity
     investee earnings     53,453      49,014        200,589       177,671

    Taxes on income        15,790      19,342 (a)     57,179 (b)    58,786 (a)

    Equity investee
     earnings                 650         301          1,588           734

    Net income            $38,313     $29,973 (a)   $144,998 (b)  $119,619 (a)


    Basic earnings per
     share                  $0.60       $0.48 (a)      $2.28 (b)     $1.91 (a)

    Weighted average
     shares
     outstanding -
     basic             63,716,880  62,649,863     63,585,722    62,602,454

    Diluted earnings
     per share              $0.59       $0.47 (a)      $2.24 (b)     $1.88 (a)

    Weighted average
     shares
     outstanding -
     diluted           64,795,375  63,749,470     64,782,212    63,773,188

    (a) Includes the impact of a one-time $4,400 or $0.07 per share income tax
     charge associated with the repatriation of $103 million of accumulated
     foreign earnings under the American Jobs Creation Act in the fourth
     quarter of 2005.

    (b) Includes the impact of a $2,467 or $0.04 per share income tax gain
     from the resolution of several income tax matters during the third
     quarter of 2006.


    Excluding the impact of the tax gain/charge:

    Taxes on income       n/a         $14,942        $59,646       $54,386

    Net income            n/a         $34,373       $142,531      $124,019

    Basic earnings per
     share                n/a           $0.55          $2.24         $1.98

    Diluted earnings
     per share            n/a           $0.54          $2.20         $1.94

    (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

                           DECEMBER 31, 2006 and 2005

                             (Dollars in thousands)

                                               December 31       December 31
                                                   2006              2005
    ASSETS
    Current Assets:
       Cash & cash equivalents                    $219,810          $160,717
       Accounts receivable, net                    205,473           206,098
       Unbilled services                            89,139            88,297
       Inventory                                    49,628            40,293
       Deferred income taxes                         4,320             2,062
       Prepaid expenses and other current
        assets                                      71,196            49,243
           Total Current Assets                    639,566           546,710

    Property and equipment, net                    500,057           410,665
    Goodwill, net                                  119,725            61,262
    Other assets                                    38,330            37,966
           Total Assets                         $1,297,678        $1,056,603

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
       Accounts payable                            $35,479           $26,975
       Accrued payroll and benefits                 76,657            64,226
       Accrued expenses and other current
        liabilities                                 50,855            48,298
       Unearned revenue                            109,559            96,987
       Income taxes payable                         17,154            16,242
           Total Current Liabilities               289,704           252,728

    Deferred income taxes                           31,052            45,545
    Other liabilities                               53,627            26,559
           Total Liabilities                       374,383           324,832

    Stockholders' Equity:
       Common stock                                    734               718
       Paid-in capital                             426,806           350,678
       Retained earnings                           757,809           612,811
       Other Comprehensive Income:
            Cumulative translation adjustment       35,170            13,367
            FAS 158 adjustment                     (23,389)              -
       Treasury stock                             (273,835)         (245,803)
           Total Stockholders' Equity              923,295           731,771
           Total Liabilities and
            Stockholders' Equity                $1,297,678        $1,056,603



                                  COVANCE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005

                             (Dollars in thousands)

                                                  Years Ended December 31

                                                   2006              2005
    Cash flows from operating activities:
      Net income                                  $144,998          $119,619
      Adjustments to reconcile net income
       to net cash provided by operating
       activities:
        Depreciation and amortization               57,388            47,821
        Non-cash compensation expense
         associated with employee benefit
         and stock compensation plans               30,397            16,595
        Deferred income tax (benefit)
         provision                                     561             5,421
        Other                                       (1,577)              (80)
        Changes in operating assets and
         liabilities, net of businesses
         acquired:
           Accounts receivable                       6,332           (24,569)
           Unbilled services                          (842)          (25,077)
           Inventory                                (8,921)              763
           Accounts payable                          8,380             2,114
           Accrued liabilities                      12,547             9,082
           Unearned revenue                         10,544             9,662
           Income taxes payable                      6,754            23,384
           Other assets and liabilities, net       (12,392)           (2,686)
    Net cash provided by operating activities      254,169           182,049

    Cash flows from investing activities:
      Capital expenditures                        (136,800)         (153,138)
      Acquisition of businesses                    (75,668)           (7,110)
      Other, net                                       806               158
    Net cash used in investing activities         (211,662)         (160,090)

    Cash flows from financing activities:
      Stock issued under employee stock
       purchase and option plans                    39,905            32,417
      Purchase of treasury stock                   (28,032)          (58,194)
    Net cash provided by (used in)
     financing activities                           11,873           (25,777)

    Effect of exchange rate changes on cash          4,713           (13,177)

    Net change in cash and cash equivalents         59,093           (16,995)

    Cash and cash equivalents, beginning
     of period                                     160,717           177,712

    Cash and cash equivalents, end of
     period                                       $219,810          $160,717


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