PRINCETON, N.J., Jan. 28 /PRNewswire-FirstCall/ -- Covance Inc. today reported earnings for its fourth quarter ended December 31, 2008 of $0.72 per diluted share. For the full-year, earnings per share were $3.08, up 13.3% year-on-year from $2.71 in 2007. Excluding the gain on sale of Covance’s centralized ECG business from both years, earnings per share grew 14.5% to $3.03 in 2008 from $2.65 in 2007.
“As previously announced, reduced demand in our Early Development segment from a combination of a lower level of new project initiations and increased project delays in our toxicology and clinical pharmacology services led to a sequential decline in segment revenue and operating income,” said Joe Herring, Chairman and Chief Executive Officer. “Demand for our Late-Stage Development services remained on-track in the fourth quarter, including revenue growth of 10.5% (13.5% excluding the impact of foreign exchange), operating margins of 19.6%, record orders, and a net book-to-bill exceeding 1.6 to 1. On a consolidated basis, fourth quarter net revenues grew 6.7% (10.9% excluding the impact of foreign exchange), operating margin was 14.5%, and EPS was flat year-on-year (excluding the gain on sale from both periods).
“On the commercial front, adjusted net orders in the fourth quarter were $567 million ($555 million on an unadjusted basis), representing an adjusted book-to-bill ratio of 1.29 to 1. Backlog grew 62% year-on-year to $4.33 billion. In addition, in the latter part of 2008, we secured two seven-year, sole source contracts for our central laboratory services from top-ten drug companies, under which orders will be recognized as new projects are awarded.
“On December 18 we released our targets for 2009, which outlined revenue growth of 5% to 10% over 2008 and earnings per share in the range of $3.00 to $3.20. These targets assumed demand for early development services begins to pick up between the second and third quarters of this year, late-stage backlog would continue to convert to revenue at historical rates, and foreign exchange rates would remain at budgeted levels throughout the year. Relative to these assumptions, we are off to a somewhat slower start in Early Development services and there continues to be significant volatility in the US dollar, although central laboratory kits are running ahead of budget. Balancing the slower start in Early Development with the ongoing strength of new orders and revenue flow in Late-Stage Development, we continue to maintain our full-year earnings targets.”
Consolidated Results
Operating Segment Results
Early Development
The Company’s Early Development segment includes nonclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the fourth quarter of 2008 grew 3.1% year-over-year to $214.2 million, compared to $207.9 million in the fourth quarter of 2007. Continued solid growth in analytical chemistry was offset by a decline in revenues in toxicology and clinical pharmacology. In addition, foreign exchange negatively impacted revenue growth in the quarter by approximately 520 basis points. For the full year 2008, net revenues increased 8.6% to $844.8 million compared to $777.7 million in 2007.
Operating income for the fourth quarter of 2008 declined 11.1% year-over-year to $45.8 million, compared to $51.5 million in the fourth quarter of last year. Operating margins for the fourth quarter of 2008 were 21.4% compared to 24.8% in the fourth quarter of 2007 and 25.5% last quarter. Fourth quarter operating margins were impacted by a lower level of new project initiations and increased project delays in toxicology and clinical pharmacology. Full year operating margins were 24.3% compared to 25.2% in the prior year.
Late-Stage Development
The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services). Late-Stage Development net revenues for the fourth quarter of 2008 grew 10.5% to $224.4 million compared to $203.1 million in the fourth quarter of 2007. Excluding the impact of the sale of our ECG business, which was divested in November 2007 but remains in the comparison year, Late-Stage Development revenue growth was 12.9%. Growth was again led by central laboratory and clinical development. Foreign exchange negatively impacted revenue growth in the quarter by approximately 300 basis points. Full year Late-Stage Development net revenues grew 14.9% to $883.3 million compared to $768.8 million in 2007.
Operating income for the fourth quarter of 2008 was $44.0 million compared to $32.6 million in the fourth quarter of the prior year. Operating margins for the fourth quarter of 2008 increased to 19.6% from 16.0% in the fourth quarter of 2007 and on strong performances in clinical development and in central laboratory services. Full year operating margins were 19.3% compared to 16.7% in the prior year.
Corporate Information
The Company’s backlog at December 31, 2008 grew 61.5% year-over-year to $4.33 billion compared to $2.68 billion at December 30, 2007. Foreign exchange negatively impacted sequential backlog growth by approximately $30 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $567 million in the fourth quarter of 2008 and $2.15 billion for the full year.
Corporate expenses totaled $26.3 million in the fourth quarter of 2008 compared to $29.2 million last quarter and $23.0 million in the fourth quarter of last year. Full-year corporate expenses totaled $111.9 million compared to $95.4 million in the prior year. We expect corporate expenses to average between 6.0% and 7.0% of revenues going forward as we continue to make investments in infrastructure to enhance our ability to manage future growth.
Cash and cash equivalents at December 31, 2008 were $221 million compared to $209 million at September 30, 2008 and $319 million at December 31, 2007. At December 31, 2008, short-term debt totaled $50 million. In October, the Company borrowed $50 million to finance the purchase of the Greenfield, Indiana campus from Eli Lilly.
Net Days Sales Outstanding (DSO) decreased significantly to 37 days at December 31, 2008 compared to 41 days at September 30, 2008 and 36 days at December 31, 2007.
Free cash flow (defined as operating cash flow less capital expenditures) for the fourth quarter was $0.2 million, consisting of operating cash flow of $113 million less capital expenditures of $113 million, which includes the $50 million to purchase the Greenfield, Indiana campus. Free cash flow for full year 2008 was negative $33 million, consisting of operating cash flow of $286 million less capital expenditures of $319 million. In 2009, we expect free cash flow to be approximately $90 million and capital expenditures to be approximately $200 million. The free cash flow target for 2009 assumes DSO at 40 days.
The effective tax rate in the fourth quarter of 2008 was 28.5%. The effective tax rate for 2009 is expected to increase slightly, to approximately 29.0%.
The Company’s investor conference call will be webcast on January 29 at 9:00 am EST. Management’s commentary and presentation slides will be available through 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 $1.7 billion, global operations in more than 20 countries, and more than 9,600 employees worldwide. Information on Covance’s products and services, recent press releases, and SEC filings can be obtained through its website at 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, 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.
Financial Exhibits Follow
CONTACT: Paul Surdez of Covance Inc., +1-609-452-4807
Web site: http://www.covance.com/
