PRINCETON, N.J., Oct. 25 /PRNewswire-FirstCall/ -- Covance Inc. 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 ------------------------------------------------------------------------- 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
Covance Inc.CONTACT: Covance Investor Relations, +1-609-452-4807
Web site: http://www.covance.com/
