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 September 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 October 20, 1997, the Registrant had 57,391,434 shares of Common Stock
outstanding.
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Covance Inc.
Form 10-Q For the Quarterly Period Ended September 30, 1997
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--September 30, 1997 and
December 31, 1996 ....................................... 3
Consolidated Statements of Income--Three and Nine Months ended
September 30, 1997 and 1996.............................. 4
Consolidated Statements of Cash Flows--Nine Months ended
September 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
2
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Part I. Financial Information
Item 1. Financial Statements (Unaudited)
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) September 30, December 31,
1997 1996
____ ____
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents...................... $ 17,072 $ 25,416
Accounts receivable, net....................... 102,429 93,700
Unbilled services.............................. 44,389 39,313
Inventory...................................... 17,547 16,410
Deferred income taxes.......................... 15,700 17,529
Prepaid expenses and other assets.............. 27,944 25,526
________ ________
Total Current Assets......................... 225,081 217,894
Property and equipment, net...................... 179,203 167,809
Goodwill, net.................................... 51,552 53,271
Other assets..................................... 11,093 12,073
________ ________
Total Assets................................. $466,929 $451,047
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable............................... $ 20,106 $ 26,652
Accrued payroll and benefits................... 36,103 28,212
Accrued expenses and other liabilities......... 32,325 35,840
Unearned revenue............................... 56,161 57,794
Short-term debt................................ 10,000 --
Income taxes payable........................... 9,682 3,450
________ ________
Total Current Liabilities.................... 164,377 151,948
Long-term debt................................... 138,000 163,000
Deferred income taxes............................ 10,581 9,957
Other liabilities................................ 12,836 15,438
________ ________
Total Liabilities............................ 325,794 340,343
________ ________
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock - Par value $0.01 per share;
140,000,000 shares authorized;
57,391,434 and 57,063,644 shares issued
and outstanding at September 30, 1997
and December 31, 1996, respectively...... 574 571
Paid-in capital................................ 54,125 48,970
Retained earnings.............................. 88,015 58,010
Cumulative translation adjustment.............. (1,579) 3,153
________ _______
Total Stockholders' Equity................... 141,135 110,704
________ _______
Total Liabilities and Stockholders' Equity. $466,929 $451,047
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
__________________ __________________
(Dollars in thousands, except 1997 1996 1997 1996
per share data) ____ ____ ____ ____
<S> <C> <C> <C> <C>
Net revenues................... $ 151,464 $ 127,179 $ 432,579 $ 357,406
Cost and expenses
Cost of revenue............ 99,120 83,204 285,099 232,828
Selling, general and
administrative expenses.... 23,452 20,627 66,698 57,573
Depreciation and
amortization............... 7,990 5,846 22,519 18,130
________ ________ ________ _________
Total.................. 130,562 109,677 374,316 308,531
________ ________ ________ _________
Income from operations......... 20,902 17,502 58,263 48,875
________ ________ ________ _________
Other expense, net
Interest expense, net...... 2,187 1,871 6,375 4,536
Other income............... (60) (321) (111) (212)
________ ________ ________ _________
Other expense, net..... 2,127 1,550 6,264 4,324
________ ________ ________ _________
Income before taxes and equity
investee earnings.......... 18,775 15,952 51,999 44,551
Taxes on income................ 8,058 6,931 22,151 19,411
Equity investee gain........... (142) (53) (157) (68)
________ ________ ________ _________
Net income..................... $ 10,859 $ 9,074 $ 30,005 $ 25,208
========= ======== ======== =========
Earnings per share............. $ 0.19 $ 0.16 $ 0.52 $ 0.44
Weighted average shares
outstanding................ 57,342,130 57,063,644 57,177,192 57,063,644
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30
______________________________
(Dollars in thousands) 1997 1996
______ ______
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $30,005 $25,208
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization........................... 22,519 18,130
Stock issued under employee benefit plan................ 2,942 --
Deferred income tax provision........................... 2,453 241
Related party charges................................... -- 1,552
Other................................................... 117 162
Changes in operating assets and liabilities,
net of effects of acquisitions
Accounts receivable..................................... (8,729) (14,987)
Unbilled services....................................... (5,076) (22,365)
Inventory............................................... (1,137) (714)
Accounts payable........................................ (6,546) (177)
Accrued liabilities..................................... 4,376 12,084
Unearned revenue........................................ (1,633) 2,932
Income taxes payable.................................... 6,232 1,777
Other assets and liabilities, net....................... (6,299) (8,922)
_______ _______
Net cash provided by operating activities................... 39,224 14,921
_______ _______
Cash flows from investing activities
Capital expenditures..................... .............. (34,883) (19,977)
Acquisition of businesses, net of cash acquired......... -- (14,890)
Other, net.............................................. 99 458
_______ _______
Net cash used in investing activities....................... (34,784) (34,409)
_______ _______
Cash flows from financing activities
Repayments of long-term debt............................ (25,000) --
Proceeds from short-term debt........................... 10,000 --
Stock issued under employee equity participation plan .. 2,216 --
Due to Corning Incorporated and affiliates.............. -- 13,439
Acquisition loan from Corning Incorporated.............. -- 14,890
Dividends paid to Corning............................... -- (3,358)
_______ _______
Net cash provided by (used in) financing activities......... (12,784) 24,971
_______ _______
Net change in cash and cash equivalents..................... (8,344) 5,483
Cash and cash equivalents, beginning of period.............. 25,416 8,068
_______ _______
Cash and cash equivalents, end of period.................... $17,072 $ 13,551
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 1997 and 1996
totaled $6.8 million and $4.2 million, respectively. Cash paid for income taxes
for the nine months ended September 30, 1997 and 1996 totaled $11.6 million and
$14.1 million, respectively.
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 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
7
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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.
Results of Operations
Three Months Ended September 30, 1997 Compared with Three Months Ended
September 30, 1996.
Net revenues increased 19.1% to $151.5 million for the three months ended
September 30, 1997 from $127.2 million for the corresponding 1996 period.
Excluding the impact of the 1996 Swiss packaging acquisition, growth in net
revenues was 17.6%. Changes in foreign
8
<PAGE>
exchange rates negatively affected net revenues by approximately $2.4
million for the three months ended September 30, 1997 as compared to the
corresponding 1996 period. Excluding the Swiss packaging business acquired in
1996 and the impact of foreign exchange rate differences, net revenues from
Covance's combined clinical lines of business grew in excess of 20%, 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 10%.
Cost of revenue increased 19.1% to $99.1 million for the three months ended
September 30, 1997 from $83.2 million for the corresponding 1996 period as a
result of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, was consistent at 65.4% for both three month periods.
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 13.7% to $23.5 million for
the three months ended September 30, 1997 from $20.6 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 September
30, 1997 from 16.2% for the corresponding 1996 period as the growth in net
revenues outpaced the increase in selling, general and administrative expense.
Depreciation and amortization increased 36.7% to $8.0 million or 5.3% of net
revenues for the three months ended September 30, 1997 from $5.8 million or 4.6%
of net revenues for the corresponding 1996 period as the growth in these
non-cash charges outpaced the increase in net revenues.
Income from operations increased $3.4 million or 19.4% to $20.9 million for
the three months ended September 30, 1997 from $17.5 million for the
corresponding 1996 period. As a percentage of net revenues, income from
operations remained consistent at 13.8% for both three month periods.
Other expense, net, for the three months ended September 30, 1997 was $2.1
million, as compared to $1.5 million in the corresponding 1996 period. This $0.6
million increase is a result of an increase in interest expense of $0.3 million,
and a reduction in foreign exchange transaction gains of $0.3 million for the
three months ended September 30, 1997 as compared to the corresponding 1996
period.
Covance's effective tax rate for the three months ended September 30, 1997
decreased to 42.9% from 43.4% 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 $1.8 million or 19.7% to $10.9 million for the three
months ended September 30, 1997 from $9.1 million for the corresponding 1996
period.
Nine Months Ended September 30, 1997 Compared with Nine Months Ended
September 30, 1996.
Net revenues increased 21.0% to $432.6 million for the nine months ended
September 30, 1997 from $357.4 million for the corresponding 1996 period.
Excluding the impact of 1996 acquisitions, growth in net revenues was 17.9%. Net
revenues from Covance's
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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 nine 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 22.5% to $285.1 million for the nine months ended
September 30, 1997 from $232.8 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 65.9% for the nine months ended September 30, 1997 from
65.1% 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 15.8% to $66.7 million for
the nine months ended September 30, 1997 from $57.6 million for the
corresponding 1996 period. As a percentage of net revenues, selling, general and
administrative expense decreased to 15.4% for the nine months ended September
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 a result
of two factors. First, the shift in expenses in Covance's biomanufacturing
business, as discussed above, accounts for a 0.5% reduction in selling, general
and administrative expense as a percentage of net revenues for the nine months
ended September 30, 1997 compared to the nine months ended September 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 $2.6 million or 0.6% of
net revenues was charged by Corning during the nine months ended September 30,
1996. While these charges are no longer incurred as a result of Covance's
spin-off from Corning, they have been substantially, but not entirely, 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 24.2% to $22.5 million or 5.2% of net
revenues for the nine months ended September 30, 1997 from $18.1 million or 5.1%
of net revenues for the corresponding 1996 period as the growth in these
non-cash charges outpaced the increase in net revenues.
Income from operations increased $9.4 million or 19.2% to $58.3 million for
the nine months ended September 30, 1997 from $48.9 million for the
corresponding 1996 period. As a percentage of net revenues, income from
operations decreased to 13.5% for the nine months ended September 30, 1997 from
13.7% for the corresponding 1996 period as a result of the increase in cost of
revenue.
Other expense, net, increased $1.9 million to $6.2 million for the nine
months ended September 30, 1997 from $4.3 million for the corresponding 1996
period. This increase is primarily attributable to an increase in interest
expense of $1.8 million, relating principally to 1996 acquisition activity,
higher levels of capital spending and a general increase in working capital.
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Covance's effective tax rate for the nine months ended September 30, 1997
decreased to 42.6% 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 $4.8 million or 19.0% to $30.0 million for the nine
months ended September 30, 1997 from $25.2 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 September 30, 1997,
there was $135.0 million of outstanding borrowings under Covance's long-term
revolving credit facility, with a remaining availability of $115.0 million.
As of September 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 $10.0 million of
borrowings were outstanding as of September 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.
In October 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss
Francs from a bank. This loan bears interest at a fixed rate of 2.9% per annum
and matures in three years. In connection with the loan, Covance provided a
letter of credit in favor of the lender which may be drawn upon in event of
default. This letter of credit carries a variable cost which is presently 0.375%
per annum. These funds were used to repay certain cross-currency intercompany
obligations and to fund capital expenditures.
During the nine months ended September 30, 1997, Covance's operations
provided net cash of $39.2 million compared to $14.9 million for the
corresponding 1996 period. Cash flows from net earnings adjusted for non-cash
activity provided $58.0 million for the nine months ended September 30, 1997, up
$12.7 million or 28.1% from the corresponding 1996 amount of $45.3 million. The
change in net operating assets used $18.8 million in cash during the nine months
ended September 30, 1997, primarily as a result of an increase in accounts and
unbilled receivables, while this net change used $30.4 million in cash during
the first nine months of 1996, also primarily due to an increase in accounts and
unbilled receivables.
Working capital was $60.7 million at September 30, 1997, a reduction of $5.2
million from December 31, 1996. Aggregate accounts receivable and unbilled
services at September 30, 1997 of $146.8 million, were up $13.8 million or 10.4%
from the December 31, 1996 level of $133.0 million. Covance's ratio of current
assets to current liabilities was 1.37 at September 30, 1997 and 1.43 at
December 31, 1996.
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Investing activities for the nine months ended September 30, 1997 used $34.8
million compared to $34.4 million for the corresponding 1996 period. Capital
spending for the first nine months of 1997 totaled $34.9 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 $20.0 million for the corresponding 1996 period.
In February 1997, the Financial Accounting Standards Board (FASB) 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 September 30, 1997 to both be $0.19 per share, and for the nine months
ended September 30, 1997 to both be $0.52 per share. In computing diluted
earnings per share, the denominator for the three and nine months ended
September 30, 1997 was increased by approximately 404,000 shares and 483,000
shares, respectively, representing the dilution of stock options outstanding
during each period ended September 30, 1997.
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.
12
<PAGE>
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: November 3, 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 November 3, 1997
and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- ---------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President November 3, 1997
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ---------------------
Michael Giannetto Vice President and Controller November 3, 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 nine months ended September 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> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 17,072,000
<SECURITIES> 0
<RECEIVABLES> 146,818,000
<ALLOWANCES> 0
<INVENTORY> 17,547,000
<CURRENT-ASSETS> 225,081,000
<PP&E> 346,838,000
<DEPRECIATION> 167,635,000
<TOTAL-ASSETS> 466,929,000
<CURRENT-LIABILITIES> 164,377,000
<BONDS> 0
0
0
<COMMON> 574,000
<OTHER-SE> 140,561,000
<TOTAL-LIABILITY-AND-EQUITY> 466,929,000
<SALES> 0
<TOTAL-REVENUES> 432,579,000
<CGS> 285,099,000
<TOTAL-COSTS> 374,316,000
<OTHER-EXPENSES> (111,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,375,000
<INCOME-PRETAX> 51,999,000
<INCOME-TAX> 22,151,000
<INCOME-CONTINUING> 30,005,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,005,000
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
</TABLE>
