UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission File Number: 1-12213
COVANCE INC.
(Exact name of Registrant as specified in its Charter)
Delaware 22-3265977
(State of Incorporation) (I.R.S. Employer Identification No.)
210 Carnegie Center, Princeton, New Jersey 08540
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (609) 452-4400
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each Class on which Registered
----------------------------- ---------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 23, 1997, the Registrant had 57,435,962 shares of Common Stock
outstanding.
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Covance Inc.
Form 10-Q For the Quarterly Period Ended June 30, 1997
INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1997 and December 31, 1996............................. 3
Consolidated Statements of Income--Three and Six Months ended June 30, 1997 and 1996......... 4
Consolidated Statements of Cash Flows--Six Months ended June 30, 1997 and 1996.............. 5
Notes to Consolidated Financial Statements................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K....................................................... 14
Signature Page.................................................................................. 15
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
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<CAPTION>
(Dollars in thousands) June 30, December 31,
1997 1996
________ ________
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............................................. $ 27,097 $ 25,416
Accounts receivable, net.............................................. 94,014 93,700
Unbilled services..................................................... 47,965 39,313
Inventory............................................................. 17,300 16,410
Deferred income taxes................................................. 15,720 17,529
Prepaid expenses and other assets..................................... 25,063 25,526
________ ________
Total Current Assets................................................ 227,159 217,894
Property and equipment, net........................................... 173,975 167,809
Goodwill, net......................................................... 52,126 53,271
Other assets.......................................................... 8,935 12,073
________ ________
Total Assets........................................................ $462,195 $451,047
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable...................................................... $ 21,373 $ 26,652
Accrued payroll and benefits.......................................... 33,981 28,212
Accrued expenses and other liabilities................................ 33,016 35,840
Unearned revenue...................................................... 53,401 57,794
Short-term debt....................................................... 9,050 --
Income taxes payable.................................................. 12,156 3,450
________ ________
Total Current Liabilities........................................... 162,977 151,948
Long-term debt.......................................................... 148,000 163,000
Deferred income taxes................................................... 9,870 9,957
Other liabilities....................................................... 13,100 15,438
________ ________
Total Liabilities................................................... 333,947 340,343
________ ________
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock - Par value $0.01 per share; 140,000,000 shares authorized;
57,156,882 and 57,063,644 shares issued and outstanding at
June 30, 1997 and December 31, 1996, respectively 572 571
Paid-in capital....................................................... 50,252 48,970
Retained earnings..................................................... 77,156 58,010
Cumulative translation adjustment..................................... 268 3,153
________ ________
Total Stockholders' Equity.......................................... 128,248 110,704
________ ________
Total Liabilities and Stockholders' Equity........................ $462,195 $451,047
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
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Three Months Ended Six Months Ended
June 30 June 30
______________________ ______________________
(Dollars in thousands, except per share data) 1997 1996 1997 1996
______ ________ ______ ________
<S> <C> <C> <C> <C>
Net revenues................................. $145,392 $121,530 $281,115 $ 230,227
Cost and expenses
Cost of revenue.......................... 95,154 78,197 185,979 149,624
Selling, general and administrative
expenses............................... 22,595 19,548 43,246 36,946
Depreciation and amortization............ 7,421 6,450 14,529 12,284
________ ________ ________ _________
Total................................ 125,170 104,195 243,754 198,854
________ ________ ________ _________
Income from operations....................... 20,222 17,335 37,361 31,373
________ ________ ________ _________
Other expense, net
Interest expense, net.................... 2,173 1,555 4,188 2,663
Other (income) expense................... (525) 60 (51) 108
________ ________ ________ _________
Other expense, net................... 1,648 1,615 4,137 2,771
________ ________ ________ _________
Income before taxes and equity investee
earnings................................. 18,574 15,720 33,224 28,602
Taxes on income.............................. 7,940 6,861 14,093 12,480
Equity investee loss (gain).................. 115 29 (15) (15)
________ ________ ________ _________
Net income................................... $ 10,519 $ 8,830 $ 19,146 $ 16,137
======== ======== ======== =========
Earnings per share........................... $ 0.18 $ 0.15 $ 0.34 $ 0.28
Weighted average shares outstanding.......... 57,125,803 57,063,644 57,094,723 57,063,644
The accompanying notes are an integral part of these consolidated financial statements.
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
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<CAPTION>
Six Months Ended June 30
___________________________
(Dollars in thousands) 1997 1996
_______ _______
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Cash flows from operating activities
Net income....................................................... $19,146 $16,137
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization................................ 14,529 12,284
Deferred income tax provision................................ 1,722 (240)
Related party charges........................................ -- 1,052
Other........................................................ 35 645
Changes in operating assets and liabilities, net of
effects of acquisitions
Accounts receivable.......................................... (314) (4,745)
Unbilled services............................................ (8,652) (7,592)
Inventory.................................................... (890) 194
Accounts payable............................................. (5,279) (4,007)
Accrued liabilities.......................................... 2,945 9,143
Unearned revenue............................................. (4,393) (6,026)
Income taxes payable......................................... 8,706 1,895
Other assets and liabilities, net............................ 1,263 (3,720)
_______ _______
Net cash provided by operating activities........................ 28,818 15,020
_______ _______
Cash flows from investing activities
Capital expenditures......................................... (22,354) (12,210)
Acquisition of businesses, net of cash acquired.............. -- (14,890)
Other, net................................................... 85 153
_______ _______
Net cash used in investing activities............................ (22,269) (26,947)
_______ _______
Cash flows from financing activities
Repayments of long-term debt................................. (15,000) --
Proceeds from short-term debt................................ 9,050 --
Stock issued under employee benefit plans.................... 1,082 --
Due to Corning Incorporated and affiliates................... -- 5,378
Acquisition loan from Corning Incorporated................... -- 14,890
Dividends paid................................................ -- (3,358)
_______ _______
Net cash (used in) provided by financing activities.............. (4,868) 16,910
_______ _______
Net change in cash and cash equivalents.......................... 1,681 4,983
Cash and cash equivalents, beginning of period................... 25,416 8,068
_______ _______
Cash and cash equivalents, end of period......................... $27,097 $13,051
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements reflect all
adjustments of a normal recurring nature, which are, in the opinion of
management, necessary for a fair statement of the results of operations for the
interim periods presented. The consolidated financial statements have been
compiled without audit and are subject to such year-end adjustments as may be
considered appropriate and should be read in conjunction with the historical
consolidated financial statements of Covance Inc. and subsidiaries ("Covance")
for the years ended December 31, 1996, 1995 and 1994 included in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. Operating
results for the three and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31, 1997.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of these unaudited consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Earnings Per Share
Earnings per share is computed by dividing net income by the weighted
average number of shares outstanding. Earnings per share has been presented for
the three and six months ended June 30, 1996 based upon the number of Covance
shares issued and outstanding as a result of the December 1996 spin-off from
Corning. Common stock equivalents are not included in the earnings per share
computation because they do not result in material dilution.
3. Supplemental Cash Flow Information
Cash paid for interest for the six months ended June 30, 1997 and 1996,
respectively, totaled $4.4 million and $3.1 million. Cash paid for income taxes
for the six months ended June 30, 1997 and 1996, respectively, totaled $2.4
million and $2.7 million.
6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the unaudited
Consolidated Financial Statements and related Notes thereto of Covance included
herein, and the Consolidated Financial Statements and related Notes thereto
included in the Annual Report on Form 10-K for the fiscal year ended December
31, 1996.
Overview
Covance is a leading contract research organization ("CRO") providing a
wide range of integrated product development services on a worldwide basis to
the biotechnology, pharmaceutical and medical device industries. In addition,
and to a lesser extent, Covance provides services such as health economics for
managed care organizations, hospitals and health care provider networks, and
early development and laboratory testing services to the chemical, agrochemical
and food industries. The foregoing services can be broadly classified into six
lines of business: preclinical, biomanufacturing, clinical and periapproval,
central laboratory, clinical packaging, and health economics. These six lines of
business can be further categorized as non-clinical (preclinical and
biomanufacturing) and clinical (clinical and periapproval, central laboratory,
clinical packaging and health economics). Covance believes it is one of the
largest biopharmaceutical CROs, based on 1996 annual net revenue, and one of
only a few that are capable of providing comprehensive global product
development services. Covance offers its clients high quality services designed
to reduce product development time, allowing them to introduce their products
into the marketplace faster and, thus, maximize the period of marketing
exclusivity and monetary return on their investments. Additionally, Covance's
comprehensive services and broad experience provide clients with a variable cost
alternative to fixed cost internal development capabilities.
The businesses that today constitute Covance were acquired by Corning
Incorporated ("Corning"), starting in 1987, as part of a strategy to create a
global, integrated and full service product development company. In keeping with
this strategy, during the period 1994 through the present, Covance has purchased
the remaining interest in a jointly owned company, acquired a significant
minority interest in a complementary service business, acquired three new
businesses and formed a major new business venture. Specifically, in April 1994,
Covance acquired the remaining interest in SciCor S.A., a provider of central
laboratory testing services based in Switzerland. The transaction was accounted
for as a purchase business combination. In October 1994, Covance acquired a
significant minority equity position in Bio-Imaging Technologies, Inc.
("Bio-Imaging"), which uses proprietary imaging technology to quantify the
diagnostic and therapeutic effectiveness of experimental drugs and devices.
Covance expanded its offering of value added product development services in
January 1995 with the acquisition of National Packaging Systems, Inc., a leading
clinical packaging company. The transaction was accounted for as a purchase
business combination. In February 1995, Covance formed Covance Biotechnology
Services Inc., a majority-owned company which will enable Covance to engage in
biomanufacturing. In recognition of the rapid changes in the biopharmaceutical
industry's marketplace, particularly the need for the industry to further
demonstrate the benefits and cost effectiveness of their products to payors,
Covance purchased in March 1996 all the assets and substantially all of the
liabilities of Health Technology Associates, Inc. ("HTA"), a
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leading health economics company, in a transaction accounted for as a purchase
business combination. In October 1996, Covance expanded its clinical packaging
capabilities to Europe with the purchase of Swiss based CRS Pacamed AG (now
known as Covance Pharmaceutical Packaging Services AG). In addition, Covance
acquired a 91,000 square foot facility in Horsham, England, which will be used,
among other things, to provide clinical packaging services in Europe.
A substantial amount of Covance's net revenues are earned under contracts,
which generally range in duration from a few months to two years. Revenue from
these contracts is recognized as costs are incurred on the basis of the
relationship between costs incurred and estimated total costs. Typically,
Covance's contracts in the preclinical, central laboratory, clinical packaging
and health economics areas are fixed price or fee-for-service and in the
clinical and periapproval areas are fee-for-service with a cap. To a lesser
extent, some of the contracts in the clinical and periapproval areas are fixed
price or fee-for-service without a cap. The contracts may contain provisions for
renegotiation for cost overruns arising from changes in the scope of work.
Renegotiated amounts are included in net revenues when earned and realization is
assured. In some cases, for multi-year contracts involving preclinical and
clinical and periapproval trials, a portion of the contract fee is paid at the
time the trial is initiated, with performance-based installments payable over
the contract duration, in some cases on a milestone achievement basis. Covance
routinely subcontracts with independent physician investigators in connection
with multi-site clinical trials. Investigator fees are not reflected in net
revenues or expenses since such fees are granted by customers on a "pass-thru
basis" without risk or reward to Covance. While most contracts are terminable
either immediately or upon notice by the client, they typically require payment
of expenses to wind down a study and fees earned to date, and, in some cases, a
termination fee or a payment of some portion of the fees or profit that could
have been earned under the contract if it had not been terminated early.
Covance's cost of revenue includes appropriate amounts necessary to
complete the net revenues and earnings process and includes direct labor and
related benefit charges, other direct costs and allocable expenses (including
indirect labor, facility charges and information technology costs). These costs,
as a percentage of net revenues, tend to fluctuate from one period to another
(generally within a range of up to 2% in either direction) principally as a
result of changes in labor utilization and the mix of service offerings
involving hundreds of studies conducted during any period of time. Accordingly,
changes in cost of revenue as a percentage of net revenues plus or minus 2% are
expected from one period to another.
Quarterly Results
Covance's quarterly operating results are subject to variation, and are
expected to continue to be subject to variation, as a result of factors such as
delays in initiating or completing significant preclinical and clinical and
periapproval trials, termination of preclinical and clinical and periapproval
trials, acquisitions and exchange rate fluctuations. Delays and terminations of
studies or trials are often the result of actions taken by clients or regulatory
authorities and are not typically controllable by Covance. Since a large amount
of Covance's operating costs are relatively fixed while revenue is subject to
fluctuation, minor variations in the commencement, progress or completion of
preclinical and clinical and periapproval trials may cause significant
variations in quarterly operating results.
8
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Results of Operations
Three Months Ended June 30, 1997 Compared with Three Months Ended June 30, 1996.
Net revenues increased 19.6% to $145.4 million for the three months ended
June 30, 1997 from $121.5 million for the corresponding 1996 period. Excluding
the impact of the 1996 Swiss packaging acquisition, growth in net revenues was
18.0%. Changes in foreign exchange rates negatively affected net revenues by
approximately $1.0 million for the three months ended June 30, 1997 as compared
to the corresponding 1996 period. Net revenues from Covance's combined clinical
lines of business, excluding the Swiss packaging business acquired in 1996 and
the impact of foreign exchange rate differences, grew 20.0%, benefiting from the
continuing trend in outsourcing of clinical development activities, while net
revenues from Covance's combined non-clinical lines of business grew in excess
of 15%.
Cost of revenue increased 21.7% to $95.2 million for the three months ended
June 30, 1997 from $78.2 million for the corresponding 1996 period as a result
of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, increased to 65.4% for the three months ended June 30, 1997 from 64.3%
for the corresponding 1996 period. This increase is primarily attributable to
Covance's biomanufacturing business. During the first eleven months of 1996, all
costs incurred by Covance's biomanufacturing business were of an administrative
nature as the facility was being prepared for revenue producing operations
(which began in December 1996). Now that the biomanufacturing business has begun
generating revenue, many expenses have shifted from administrative to cost of
revenue.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 15.6% to $22.6 million for
the three months ended June 30, 1997 from $19.5 million for the corresponding
1996 period. As a percentage of net revenues, selling, general and
administrative expense decreased to 15.5% for the three months ended June 30,
1997 from 16.1% for the corresponding 1996 period. The decrease in selling,
general and administrative expense as a percentage of net revenues is primarily
a result of the shift in expenses in Covance's biomanufacturing business, as
discussed above, which accounts for a 0.4% reduction in selling, general and
administrative expense as a percentage of net revenues for the three months
ended June 30, 1997 compared to the three months ended June 30, 1996.
Depreciation and amortization increased 15.1% to $7.4 million or 5.1% of
net revenues for the three months ended June 30, 1997 from $6.4 million or 5.3%
of net revenues for the corresponding 1996 period as the growth in net revenues
outpaced the increase in these non-cash charges.
Income from operations increased $2.9 million or 16.7% to $20.2 million for
the three months ended June 30, 1997 from $17.3 million for the corresponding
1996 period. As a percentage of net revenues, income from operations decreased
slightly to 13.9% for the three months ended June 30, 1997 from 14.3% for the
corresponding 1996 period as a result of the increase in cost of revenue.
Other expense, net, for three months ended June 30, 1997 was $1.6 million,
consistent with the corresponding 1996 period. An increase in interest expense
of $0.6 million, relating
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principally to 1996 acquisition activity, higher levels of capital spending and
a general increase in working capital, was offset by foreign exchange
transaction gains of $0.5 million reported during the three months ended June
30, 1997 as compared to foreign exchange transaction losses of $0.1 million
during the corresponding 1996 period.
Covance's effective tax rate for the three months ended June 30, 1997
decreased to 42.7% from 43.6% for the corresponding 1996 period. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
period to period as the geographic distribution of its pre-tax earnings changes.
Net income increased $1.7 million or 19.1% to $10.5 million for the three
months ended June 30, 1997 from $8.8 million for the corresponding 1996 period.
Six Months Ended June 30, 1997 Compared with Six Months Ended June 30, 1996.
Net revenues increased 22.1% to $281.1 million for the six months ended
June 30, 1997 from $230.2 million for the corresponding 1996 period. Excluding
the impact of 1996 acquisitions, growth in net revenues was 17.7%. Net revenues
from Covance's combined clinical lines of business, excluding both the health
economics and Swiss packaging businesses acquired in 1996 and the impact on net
revenues of foreign exchange rate differences during the two six month periods,
grew in excess of 20%, benefiting from the continuing trend in outsourcing of
clinical development activities. Net revenues from Covance's combined
non-clinical lines of business grew nearly 15%.
Cost of revenue increased 24.3% to $186.0 million for the six months ended
June 30, 1997 from $149.6 million for the corresponding 1996 period as a result
of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, increased to 66.2% for the six months ended June 30, 1997 from 65.0%
for the corresponding 1996 period. This increase is primarily attributable to
Covance's biomanufacturing business. During the first eleven months of 1996, all
costs incurred by Covance's biomanufacturing business were of an administrative
nature as the facility was being prepared for revenue producing operations
(which began in December 1996). Now that the biomanufacturing business has begun
generating revenue, many expenses have shifted from administrative to cost of
revenue.
Overall, selling, general and administrative expense, which consists
primarily of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and allocable expenses (facility
charges and information technology costs), increased 17.1% to $43.2 million for
the six months ended June 30, 1997 from $36.9 million for the corresponding 1996
period. As a percentage of net revenues, selling, general and administrative
expense decreased to 15.4% for the six months ended June 30, 1997 from 16.0% for
the corresponding 1996 period. The decrease in selling, general and
administrative expense as a percentage of net revenues is a result of two
factors. First, the shift in expenses in Covance's biomanufacturing business, as
discussed above, accounts for a 0.4% reduction in selling, general and
administrative expense as a percentage of net revenues for the six months ended
June 30, 1997 compared to the six months ended June 30, 1996. Second, as a
wholly-owned business of Corning, certain administrative activities were
historically performed on Covance's behalf by Corning. Charges incurred for
these services totaled $3.4 million in 1996, of which $1.8 million or 0.8% of
net revenues was charged by
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Corning during the six months ended June 30, 1996. While these charges are no
longer incurred as a result of Covance's spin-off from Corning, they have been
substantially replaced by internal costs as additional resources continue to be
added to perform the services previously provided by Corning as well as to
perform functions new to Covance as a separate publicly traded company.
Depreciation and amortization increased 18.3% to $14.5 million or 5.2% of
net revenues for the six months ended June 30, 1997 from $12.3 million or 5.3%
of net revenues for the corresponding 1996 period as the growth in net revenues
outpaced the increase in these non-cash charges.
Income from operations increased $6.0 million or 19.1% to $37.4 million for
the six months ended June 30, 1997 from $31.4 million for the corresponding 1996
period. As a percentage of net revenues, income from operations decreased to
13.3% for the six months ended June 30, 1997 from 13.6% for the corresponding
1996 period as a result of the increase in cost of revenue.
Other expense, net, increased $1.3 million to $4.1 million for the six
months ended June 30, 1997 from $2.8 million for the corresponding 1996 period.
This increase is attributable to an increase in interest expense of $1.5
million, relating principally to 1996 acquisition activity, higher levels of
capital spending and a general increase in working capital.
Covance's effective tax rate for the six months ended June 30, 1997
decreased to 42.4% from 43.6% for the corresponding 1996 period. Since Covance
operates on a global basis, its effective tax rate is subject to variation from
period to period as the geographic distribution of its pre-tax earnings changes.
Net income increased $3.0 million or 18.6% to $19.1 million for the six
months ended June 30, 1997 from $16.1 million for the corresponding 1996 period.
Liquidity and Capital Resources
Covance's primary cash needs on both a short and long-term basis are for
capital expenditures, expansion of services, possible future acquisitions,
geographic expansion, working capital and other general corporate purposes.
Management believes that its long-term revolving credit facility will provide it
with sufficient financial flexibility and liquidity on both a short and a
long-term basis to fund, as required, capital expenditures, potential future
acquisitions and other longer-term growth opportunities. At June 30, 1997, there
was $145.0 million of outstanding borrowings under Covance's long-term revolving
credit facility, with a remaining availability of $105.0 million.
As of June 30, 1997, Covance Biotechnology Services Inc. ("Covance
Biotechnology") had $3.0 million in long-term debt outstanding with the North
Carolina Biotechnology Center. This debt matures in December 1999 and is
guaranteed by Covance. In addition, Covance Biotechnology has a $10.0 million
short-term revolving credit facility with a bank, of which $9.1 million of
borrowings were outstanding as of June 30, 1997. This short-term revolving
credit facility carries interest at a rate substantially equivalent to the rate
in effect on Covance's borrowings under its long-term credit facility and is
guaranteed by Covance.
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During the six months ended June 30, 1997, Covance's operations provided
net cash of $28.8 million compared to $15.0 million for the corresponding 1996
period. Cash flows from net earnings adjusted for non-cash activity provided
$35.4 million for the six months ended June 30, 1997, up $5.6 million or 18.6%
from the corresponding 1996 amount of $29.9 million. The change in net operating
assets used $6.6 million in cash during the six months ended June 30, 1997,
primarily as a result of an increase in unbilled receivables, while this net
change used $14.9 million in cash during the first six months of 1996, primarily
due to an increase in accounts and unbilled receivables.
Working capital was $64.2 million at June 30, 1997, a reduction of $1.8
million from December 31, 1996. Aggregate accounts receivable and unbilled
services at June 30, 1997 of $142.0 million, were up $9.0 million or 6.7% from
the December 31, 1996 level of $133.0 million. Covance's ratio of current assets
to current liabilities was 1.39 at June 30, 1997 and 1.43 at December 31, 1996.
Investing activities for the six months ended June 30, 1997 used $22.3
million compared to $26.9 million for the corresponding 1996 period, as the 1996
period included $14.9 million in acquisition spending. Capital spending for the
first six months of 1997 totaled $22.4 million, primarily for outfitting of new
facilities, purchase of new equipment, maintenance and upgrade of existing
equipment and computer equipment and software for newly hired employees,
compared to $12.2 million for the corresponding 1996 period.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share ("SFAS 128"), which simplifies and supersedes
existing standards found in APB Opinion No. 15. This Statement specifies the
computation, presentation and disclosure requirements for earnings per share for
entities with publicly held common stock. SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share, and
for entities with a complex capital structure, requires the additional
presentation of diluted earnings per share on the face of the income statement.
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of shares outstanding during the
period. The computation of diluted earnings per share is similar to the
computation of basic earnings per share, except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued. This
Statement shall be effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted; however 1997 interim period earnings per share amounts will be
restated to reflect the adoption of SFAS 128, as of the beginning of the year,
in accordance with the requirements of this Statement.
Pursuant to SEC Staff Accounting Bulletin No. 74, Covance has computed
basic and diluted earnings per share on a pro forma basis for the three months
ended June 30, 1997 to both be $0.18 per share, and for the six months ended
June 30, 1997 to be $0.34 and $0.33 per share, respectively. In computing
diluted earnings per share, the denominator for the three and six months ended
June 30, 1997 was increased by approximately 77,000 shares and 135,000 shares,
respectively, representing the dilution of stock options outstanding during each
period ended June 30, 1997.
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Foreign Currency
Contracts between Covance's foreign subsidiaries and its clients are
frequently denominated in currencies other than the applicable subsidiary's
local currency. Accordingly, payments received for services rendered under such
contracts are denominated in a currency different than the currency used for the
payment of the subsidiary's expenses. Therefore, the subsidiary's net revenues,
expenses and earnings are affected by fluctuations in exchange rates. In
addition, Covance's consolidated financial statements are denominated in U.S.
dollars and, accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the reported amount of such
subsidiary's financial results in U.S. dollars for purposes of reporting
Covance's consolidated financial results. Translation adjustments are reported
as a separate section of stockholder's equity. To date, such adjustments have
not been material to Covance's financial statements.
Taxes
Since Covance conducts operations on a global basis, Covance's effective
tax rate has and will continue to depend upon the geographic distribution of its
pretax earnings among locations with varying tax rates. Covance's profits are
further impacted by changes in the tax rates of the various jurisdictions. In
particular, as the geographic mix of Covance's pre-tax earnings among various
tax jurisdictions changes, Covance's effective tax rate may vary from period to
period.
13
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(1) Exhibit 27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
none
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COVANCE INC.
Dated: July 31, 1997 By: /s/ Christopher A. Kuebler
---------------------------
Christopher A. Kuebler
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Christopher A. Kuebler
- --------------------------
Christopher A. Kuebler Chairman of the Board, President July 31, 1997
and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- --------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President July 31, 1997
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- --------------------------
Michael Giannetto Vice President and Controller July 31, 1997
(Principal Accounting Officer)
</TABLE>
15
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
27 Financial Data Schedule (for SEC use only)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Covance consolidated financial statements for the six months ended June 30, 1997
and is qualified in its entirety by reference to such financial statements
</LEGEND>
<CIK> 0001023131
<NAME> Covance Inc.
<MULTIPLIER> 1
<CURRENCY> $US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 27,097,000
<SECURITIES> 0
<RECEIVABLES> 141,979,000
<ALLOWANCES> 0
<INVENTORY> 17,300,000
<CURRENT-ASSETS> 227,159,000
<PP&E> 321,058,000
<DEPRECIATION> 147,083,000
<TOTAL-ASSETS> 462,195,000
<CURRENT-LIABILITIES> 162,977,000
<BONDS> 0
0
0
<COMMON> 572,000
<OTHER-SE> 127,676,000
<TOTAL-LIABILITY-AND-EQUITY> 462,145,000
<SALES> 0
<TOTAL-REVENUES> 281,115,000
<CGS> 185,979,000
<TOTAL-COSTS> 243,754,000
<OTHER-EXPENSES> (51,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,188,000
<INCOME-PRETAX> 33,224,000
<INCOME-TAX> 14,093,000
<INCOME-CONTINUING> 19,146,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,096,000
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0
</TABLE>
