PRINCETON, N.J., Oct. 19 /PRNewswire-FirstCall/ -- Covance Inc. today reported earnings for its third quarter ended September 30, 2005 of $0.49/diluted share and net revenue of $295.4 million.
“In the third quarter, Covance continued to deliver strong financial results with revenue growth of 15.2% and operating margins of 14.9%, leading to another quarter of earnings growth in excess of 25%,” said Joe Herring, Covance’s President and CEO. “Revenue growth was balanced between our Early Development and Late-Stage Development segments which were up 16.0% and 14.5%, respectively. Covance’s operating margin increased 60 basis points sequentially to a record high 14.9%, led by exceptionally strong margins in Early Development of 26.1%. Overall company productivity, as measured by revenue per employee and operating margin per employee, continued to increase on both a year-over-year and sequential basis. We expect further overall margin expansion to be fueled by economies of scale in our lab-based businesses, faster growth of our more profitable service offerings, and further productivity enhancements through the expansion of our Six Sigma program and technology automation.
“On the business development front, we are very pleased to report record net orders of $368 million in the third quarter, driving a $68 million sequential increase in our backlog. We continue to see strong demand for outsourced drug development services as our pharmaceutical and biotechnology clients seek more effective methods for bringing new drugs to market. We intend to capitalize on these positive market dynamics by focusing on operational and service excellence, continuing to invest in our unique integrated service offerings, and further developing strategic client relationships.
“Our strong year-to-date results lead us to increase our 2005 earnings target from at least $1.88 per share to at least $1.91 per share. In addition, our growing backlog of orders leads us to target 2006 earnings per share of at least $2.30 (excluding the impact of expensing stock options under SFAS 123R), representing Covance’s sixth consecutive year of earnings growth in excess of 20%.” Consolidated Results ($ in millions except EPS) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change Net Revenues $295.4 $256.3 15.2% $870.6 $751.6 15.8% Reimbursable Out-of-Pockets $11.7 $7.6 $36.7 $22.5 Total Revenues $307.1 $263.9 $907.3 $774.1 Costs and Expenses $251.3 $220.2 14.1% $743.7 $649.4 14.5% Reimbursable Out-of-Pockets $11.7 $7.6 $36.7 $22.5 Total Costs and Expenses $263.0 $227.8 $780.4 $671.9 Operating Income $44.1 $36.1 22.2% $126.9 $102.2 24.1% Operating Margin % 14.9% 14.1% 14.6% 13.6% Net Income $31.2 $25.2 24.1% $89.6 $70.6 26.9% Diluted EPS $0.49 $0.39 25.8% $1.41 $1.09 28.8% Operating Segment Results Early Development
The Company’s Early Development segment includes preclinical toxicology, analytical chemistry, and Phase I clinical trial services. Early Development net revenues for the third quarter of 2005 grew 16.0% to $140.5 million compared to $121.1 million in the third quarter of 2004 on strong performances across the broad portfolio of the segment’s service offerings. Year-to-date, net revenues grew 15.2% to $411.2 million compared to $357.1 million in the prior year.
Operating income for the third quarter of 2005 increased 26.6% to $36.6 million compared to $28.9 million for the third quarter of last year. Operating margin for the third quarter of 2005 was an exceptionally strong 26.1% versus 23.9% in the third quarter of the prior year and 24.1% last quarter. Margins were robust across Early Development service offerings. Year-to-date, operating margins were 24.9% compared to 23.5% in the prior year.
($ in millions) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change Net Revenues $140.5 $121.1 16.0% $411.2 $357.1 15.2% Operating Income $36.6 $28.9 26.6% $102.3 $83.8 22.2% Margin % 26.1% 23.9% 24.9% 23.5% Late-Stage Development
The Late-Stage Development segment includes central laboratory, Phase II- III clinical development, commercialization services (Phase IV studies and market access services), and cardiac safety services. Late-Stage Development net revenues for the third quarter of 2005 grew 14.5% to $154.9 million compared to $135.2 million in the third quarter of 2004. Revenue growth was led by the continued robust performance in central laboratories. Year-to-date net revenues grew 16.4% to $459.4 million compared to $394.5 million in the prior year.
Operating income for the third quarter of 2005 grew 12.1% to $24.3 million compared to $21.7 million in the third quarter of the prior year. Operating margin for the third quarter of 2005 was 15.7% versus 16.0% in the third quarter of the prior year. Strong performances in central laboratories, cardiac safety, and commercialization services were partially offset by clinical development, which was impacted by seasonal softness and increased hiring to service its rapidly growing backlog of new orders. Year-to-date, operating margins were 16.7% compared to 15.1% in the prior year.
($ in millions) 3Q05 3Q04 Change 2005 YTD 2004 YTD Change Net Revenues $154.9 $135.2 14.5% $459.4 $394.5 16.4% Operating Income $24.3 $21.7 12.1% $76.8 $59.6 28.9% Margin % 15.7% 16.0% 16.7% 15.1% Corporate Information
The Company’s backlog at September 30, 2005 increased to a record $1.57 billion, up 19% from the $1.32 billion reported at this time last year and grew $68 million sequentially from the $1.50 billion on June 30, 2005.
The Company reported cash and cash equivalents of $140.4 million at September 30, 2005 versus $132.5 million at June 30, 2005.
Capital expenditures for the third quarter were $39.4 million and totaled $94.3 million in the first nine months of 2005. Free cash flow (cash from operations less capital spending) was $8.4 million in the quarter and $5.2 million year-to-date. We continue to expect 2005 capital spending to be in the range of $140-$150 million and 2005 free cash flow to be in the range of $20-$30 million.
Net Days Sales Outstanding (DSO) were 63 days at September 30, 2005 versus 60 days at June 30, 2005 and 56 days at September 30, 2004.
The Company’s investor conference call will be webcast on October 20 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 18 countries, and more than 7,000 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, 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.
COVANCE INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (Dollars in thousands, except per share data) (UNAUDITED) Three Months Ended Nine Months Ended September 30 September 30 2005 2004 2005 2004 Net revenues $295,368 $256,334 $870,596 $751,572 Reimbursable out-of- pockets 11,759 7,602 36,726 22,481 Total revenues 307,127 263,936 907,322 774,053 Costs and expenses: Cost of revenue 194,823 169,254 577,309 497,950 Reimbursed out-of-pocket expenses 11,759 7,602 36,726 22,481 Selling, general and administrative 44,673 39,746 131,299 116,993 Depreciation and amortization 11,758 11,220 35,092 34,411 Total costs and expenses 263,013 227,822 780,426 671,835 Income from operations 44,114 36,114 126,896 102,218 Other (income) expense, net: Interest income, net (723) (681) (2,710) (1,425) Foreign exchange transaction (gain) loss, net (2) 296 949 714 Other (income) expense, net (725) (385) (1,761) (711) Income before taxes and equity investee earnings 44,839 36,499 128,657 102,929 Taxes on income 13,685 11,667 39,444 33,068 Equity investee earnings 78 341 433 776 Net income $31,232 $25,173 $89,646 $70,637 Basic earnings per share $0.50 $0.40 $1.43 $1.13 Weighted average shares outstanding - basic 62,498,313 62,407,776 62,586,651 62,505,003 Diluted earnings per share $0.49 $0.39 $1.41 $1.09 Weighted average shares outstanding - diluted 63,696,805 64,570,014 63,757,590 64,697,286 COVANCE INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 and DECEMBER 31, 2004 (Dollars in thousands) September 30 December 31 2005 2004 (UNAUDITED) ASSETS Current Assets: Cash & cash equivalents $140,400 $177,712 Accounts receivable, net 205,571 178,518 Unbilled services 80,430 63,220 Inventory 42,020 40,999 Deferred income taxes 8,577 8,042 Prepaid expenses and other current assets 49,936 40,463 Total Current Assets 526,934 508,954 Property and equipment, net 368,118 319,747 Goodwill, net 61,325 56,876 Other assets 37,816 39,108 Total Assets $994,193 $924,685 LIABILITIES and STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $22,924 $24,346 Accrued payroll and benefits 64,070 63,143 Accrued expenses and other current liabilities 38,063 39,722 Unearned revenue 81,369 87,325 Income taxes payable 17,822 4,590 Total Current Liabilities 224,248 219,126 Deferred income taxes 44,290 46,104 Other liabilities 24,876 21,769 Total Liabilities 293,414 286,999 Stockholders’ Equity: Common stock 715 700 Paid-in capital 339,871 289,952 Retained earnings 582,838 493,192 Cumulative translation adjustment 20,177 41,451 Treasury stock (242,822) (187,609) Total Stockholders’ Equity 700,779 637,686 Total Liabilities and Stockholders’ Equity $994,193 $924,685 COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (Dollars in thousands) (UNAUDITED) Nine Months Ended September 30 2005 2004 Cash flows from operating activities: Net income $89,646 $70,637 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,092 34,411 Stock issued under employee benefit and stock compensation plans 10,257 8,984 Deferred income tax provision (2,349) (2,363) Other 116 (422) Changes in operating assets and liabilities, net of businesses acquired: Accounts receivable (24,042) (4,738) Unbilled services (17,210) (20,067) Inventory (964) 2,489 Accounts payable (1,937) 921 Accrued liabilities (1,855) 8,382 Unearned revenue (5,956) (13,468) Income taxes payable 23,234 22,176 Other assets and liabilities, net (4,495) (13,155) Net cash provided by operating activities 99,537 93,787 Cash flows from investing activities: Capital expenditures (94,338) (37,623) Acquisition of businesses (6,627) - Equity method investment - (20,741) Other, net 115 109 Net cash used in investing activities (100,850) (58,255) Cash flows from financing activities: Stock issued under employee stock purchase and option plans 29,675 49,134 Purchase of treasury stock (55,213) (95,287) Net cash used in financing activities (25,538) (46,153) Effect of exchange rate changes on cash (10,461) 108 Net change in cash and cash equivalents (37,312) (10,513) Cash and cash equivalents, beginning of period 177,712 171,600 Cash and cash equivalents, end of period $140,400 $161,087
Covance Inc.
CONTACT: Paul Surdez, Covance, +1-609-452-4807
Web site: http://www.covance.com//
