Covance Reports 4Q EPS of $0.59 & Sixth Consecutive Year of 25% EPS Growth
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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.
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