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, 1998
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) 452-4440
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, 1998, the Registrant had 58,027,813 shares of Common Stock
outstanding.
<PAGE>
Covance Inc.
Form 10-Q For the Quarterly Period Ended June 30, 1998
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1998
and December 31, 1997 .................................................... 3
Consolidated Statements of Income--Three and
Six Months ended June 30, 1998 and 1997 .................................. 4
Consolidated Statements of Cash Flows--Six Months
ended June 30, 1998 and 1997 ............................................. 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 ................................... 12
Signature Page .............................................................. 13
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, December 31,
1998 1997
--------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ........................ $ 11,231 $ 28,027
Accounts receivable, net ......................... 128,533 104,789
Unbilled services ................................ 49,076 40,980
Inventory ........................................ 21,379 18,088
Deferred income taxes ............................ 11,051 10,474
Prepaid expenses and other assets ................ 30,628 28,120
--------- --------
Total Current Assets .......................... 251,898 230,478
Property and equipment, net .......................... 200,203 193,129
Goodwill, net ........................................ 49,832 50,979
Other assets ......................................... 7,362 9,428
--------- --------
Total Assets .................................. $ 509,295 $484,014
========= ========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ................................. $ 19,905 $ 24,344
Accrued payroll and benefits ..................... 37,071 39,647
Accrued expenses and other liabilities ........... 31,564 30,702
Unearned revenue ................................. 55,502 62,099
Short-term debt .................................. 10,000 10,000
Income taxes payable ............................. 8,698 4,198
--------- --------
Total Current Liabilities ..................... 162,740 170,990
Long-term debt ....................................... 136,910 132,423
Deferred income taxes ................................ 12,326 10,758
Other liabilities .................................... 12,028 12,786
--------- --------
Total Liabilities ............................. 324,004 326,957
--------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock - Par value $0.01 per share;
140,000,000 shares authorized; 57,984,557 and
57,678,977 shares issued and outstanding
at June 30, 1998 and December 31, 1997,
respectively ..................................... 580 577
Paid-in capital .................................. 65,303 58,276
Retained earnings ................................ 121,084 97,764
Cumulative translation adjustment ................ (1,676) 440
--------- --------
Total Stockholders' Equity .................... 185,291 157,057
--------- --------
Total Liabilities and Stockholders' Equity .... $ 509,295 $484,014
========= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues ....................................... $182,089 $145,392 $350,598 $281,115
Cost and expenses:
Cost of revenue ................................ 119,338 95,154 232,066 185,979
Selling, general and administrative expense .... 29,426 22,595 56,339 43,246
Depreciation and amortization .................. 9,023 7,421 17,577 14,529
---------- ---------- ---------- ----------
Total ...................................... 157,787 125,170 305,982 243,754
---------- ---------- ---------- ----------
Income from operations ............................. 24,302 20,222 44,616 37,361
---------- ---------- ---------- ----------
Other expense, net:
Interest expense, net .......................... 1,808 2,173 3,503 4,188
Other expense (income) ......................... 74 (525) 187 (51)
---------- ---------- ---------- ----------
Other expense, net ......................... 1,882 1,648 3,690 4,137
---------- ---------- ---------- ----------
Income before taxes and equity investee results .... 22,420 18,574 40,926 33,224
Taxes on income .................................... 9,388 7,940 17,248 14,093
Equity investee loss (gain) ........................ 164 115 358 (15)
---------- ---------- ---------- ----------
Net income ......................................... $12,868 $10,519 $23,320 $19,146
========== ========== ========== ==========
Basic earnings per share ........................... $0.22 $0.18 $0.40 $0.34
Weighted average shares outstanding - basic ........ 57,953,563 57,125,803 57,864,438 57,094,723
Diluted earnings per share ......................... $0.22 $0.18 $0.40 $0.33
Weighted average shares outstanding - diluted ...... 58,457,280 57,202,694 58,290,610 57,229,411
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------
(Dollars in thousands) 1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................. $ 23,320 $ 19,146
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ...................... 17,577 14,529
Stock issued under employee benefit and
stock compensation plans ......................... 3,321 --
Deferred income tax provision ...................... 991 1,722
Other .............................................. 405 35
Changes in operating assets and liabilities:
Accounts receivable .............................. (23,744) (314)
Unbilled services ................................ (8,096) (8,652)
Inventory ........................................ (3,291) (890)
Accounts payable ................................. (4,439) (5,279)
Accrued liabilities .............................. (1,714) 2,945
Unearned revenue ................................. (6,597) (4,393)
Income taxes payable ............................. 4,500 8,706
Other assets and liabilities, net ................ (3,153) 1,263
-------- --------
Net cash (used in) provided by operating activities .... (920) 28,818
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (23,523) (22,354)
Other, net ......................................... 54 85
-------- --------
Net cash used in investing activities .................. (23,469) (22,269)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt ....................... -- (15,000)
Proceeds from long-term debt ....................... 5,000 --
Proceeds from short-term debt ...................... -- 9,050
Stock issued under employee stock purchase and
stock option plans ............................... 2,593 1,082
-------- --------
Net cash provided by (used in) financing activities .... 7,593 (4,868)
-------- --------
Net change in cash and cash equivalents ................ (16,796) 1,681
Cash and cash equivalents, beginning of period ......... 28,027 25,416
-------- --------
Cash and cash equivalents, end of period ............... $ 11,231 $ 27,097
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1998
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, 1997, 1996 and 1995 included in the Annual
Report on Form 10-K for the fiscal year ended December 31, 1997. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be reported for the year ending December 31, 1998.
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 has been calculated in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings Per Share. In computing
diluted earnings per share for the three months ended June 30, 1998 and 1997,
the denominator was increased by 503,717 shares and 76,891 shares, respectively,
and for the six months ended June 30, 1998 and 1997, the denominator was
increased by 426,172 and 134,688 shares, respectively; representing the dilution
of stock options outstanding at June 30, 1998 and 1997 with exercise prices less
than the average market price of Covance's Common Stock during each respective
period.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 130, Reporting Comprehensive Income ("SFAS 130"). This Statement
establishes standards for reporting and display of comprehensive income and its
components in the financial statements. Initial application of this Statement is
required for interim periods of fiscal years beginning after December 15, 1997;
however, interim period disclosure is limited to reporting a total for
comprehensive income. In accordance with SFAS 130, Covance has determined total
comprehensive income, net of tax, to be $12.8 million and $11.7 million for the
three months ended June 30, 1998 and 1997, respectively; and $22.1 million and
$17.4 million for the six months ended June 30, 1998 and 1997, respectively.
Covance's total comprehensive income represents net income plus the after-tax
effect of the change in the cumulative translation adjustment equity account for
the periods presented.
3. Supplemental Cash Flow Information
Cash paid for interest for both the six months ended June 30, 1998 and
1997, totaled $4.4 million. Cash paid for income taxes for the six months ended
June 30, 1998 and 1997, totaled $13.1 million and $3.0 million, respectively.
6
<PAGE>
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 Covance's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.
Overview
Covance is a leading contract research organization ("CRO") providing a
wide range of integrated product development services on a worldwide basis to
the pharmaceutical, biotechnology and medical device industries. In addition,
and to a lesser extent, Covance also provides services such as health economics
and outcomes for managed care organizations, hospitals and other health care
providers and laboratory testing services to the chemical, agrochemical and food
industries. The foregoing services can be broadly classified into two lines of
business: early development services (preclinical, early clinical and
biomanufacturing) and late-stage development services (clinical, central
laboratory, pharmaceutical packaging, periapproval and health economics and
outcomes). Covance believes it is one of the largest biopharmaceutical CROs,
based on 1997 annual net revenues, and one of a few that is capable of providing
comprehensive global product development services. Covance offers its clients
high quality services designed to reduce product development time, enabling them
to introduce their products into the marketplace faster and, thus, maximize the
period of market exclusivity and monetary return on their research and
development investments. Additionally, Covance's comprehensive services and
broad experience provides clients with a variable cost alternative to fixed cost
internal development capabilities.
The operations that constitute Covance today were acquired by Corning
Incorporated ("Corning"), starting in 1987, as part of a strategy to create a
global, integrated and full service product development service company. In
keeping with this strategy, during 1996, Covance acquired two new operations. 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., a leading health economics and outcomes company, in
a transaction accounted for as a purchase business combination. In October 1996,
Covance expanded its pharmaceutical packaging capabilities to Europe with the
purchase of Swiss-based CRS Pacamed AG, in a transaction accounted for as a
purchase business combination. In addition, Covance acquired a 91,000 square
foot facility in Horsham, United Kingdom, which is being used to provide, among
other things, pharmaceutical packaging services in Europe.
Historically, a majority of Covance's net revenues have been earned under
contracts which generally range in duration from a few months to two years.
Revenue from these contracts is generally recognized under either the percentage
of completion method of accounting or as services are rendered or products are
delivered. 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 a portion of the contract fee is paid at the time the
trial is initiated, with performance-based installments payable over the
contract duration as milestones are achieved. Covance routinely subcontracts
with independent physician investigators in connection with either single or
multi-site clinical trials. Investigator fees are not reflected in net revenues
or expenses since such fees are granted by customers on a "pass-through 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, payment of 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 revenue 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 and are expected to fluctuate from one period
to another (generally within a range of up to 200 basis points 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.
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 drug development trials,
termination of drug development trials, acquisitions and exchange rate
fluctuations. Delays and terminations of studies or trials are often the result
of actions
7
<PAGE>
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 drug development trials may cause significant
variations in quarterly operating results.
Results of Operations
Three Months Ended June 30, 1998 Compared with Three Months Ended June 30, 1997.
Net revenues increased 25.2% to $182.1 million for the three months ended
June 30, 1998 from $145.4 million for the corresponding 1997 period. Excluding
the impact on net revenues of foreign exchange rate differences between both
periods, growth in net revenues was 25.6%. Net revenues from Covance's
late-stage development services grew approximately 31%, benefiting from the
continuing trend in outsourcing of clinical development activities, while net
revenues from Covance's early development services grew approximately 18%.
Cost of revenue increased 25.4% to $119.3 million for the three months
ended June 30, 1998 from $95.2 million for the corresponding 1997 period as a
result of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, increased slightly to 65.5% for the three months ended June 30, 1998
from 65.4% for the corresponding 1997 period.
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 30.2% to $29.4 million for the three
months ended June 30, 1998 from $22.6 million for the corresponding 1997 period.
As a percentage of net revenues, selling, general and administrative expense
increased to 16.2% for the three months ended June 30, 1998 from 15.5% for the
corresponding 1997 period. The increase in selling, general and administrative
expense of 30.2% is attributable to a number of factors, including higher
recruitment expenses, as more employees were hired during the 1998 three month
period compared to the corresponding 1997 period, and higher sales and marketing
expenses, as Covance has further strengthened its global sales force and
centralized its marketing efforts since the second quarter of 1997.
Depreciation and amortization increased 21.6% to $9.0 million or 5.0% of
net revenues for the three months ended June 30, 1998 from $7.4 million or 5.1%
of net revenues for the corresponding 1997 period as the growth in net revenues
slightly outpaced the increase in these non-cash charges.
Income from operations increased $4.1 million or 20.2% to $24.3 million for
the three months ended June 30, 1998 from $20.2 million for the corresponding
1997 period. As a percentage of net revenues, income from operations decreased
to 13.3% for the three months ended June 30, 1998 from 13.9% for the
corresponding 1997 period primarily as a result of the increase in selling,
general and administrative expense.
Other expense, net, increased $0.2 million or 14.2% to $1.8 million for the
three months ended June 30, 1998, from $1.6 million for the corresponding 1997
period. This increase is a result of foreign exchange transaction losses of $0.1
million reported during the three months ended June 30, 1998, as compared to
foreign exchange transaction gains of $0.5 million during the 1997 three month
period, partially offset by a reduction in interest expense of $0.4 million,
relating to Covance's lower level of debt for the three months ended June 30,
1998 as compared to the corresponding 1997 period.
Covance's effective tax rate for the three months ended June 30, 1998
decreased to 41.9% from 42.7% for the corresponding 1997 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 $2.4 million or 22.3% to $12.9 million for the three
months ended June 30, 1998 from $10.5 million for the corresponding 1997 period.
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997.
Net revenues increased 24.7% to $350.6 million for the six months ended
June 30, 1998 from $281.1 million for the corresponding 1997 period. Excluding
the impact on net revenues of foreign exchange rate differences between both
periods, growth in net revenues was 25.5%. Net revenues from Covance's
late-stage development services grew approximately 29%,
8
<PAGE>
benefiting from the continuing trend in outsourcing of clinical development
activities, while net revenues from Covance's early development services grew
approximately 20%.
Cost of revenue increased 24.8% to $232.1 million for the six months ended
June 30, 1998 from $186.0 million for the corresponding 1997 period as a result
of the increase in net revenues. Cost of revenue, as a percentage of net
revenues, remained consistent at 66.2% for both six month periods.
Selling, general and administrative expense increased 30.3% to $56.3
million for the six months ended June 30, 1998 from $43.2 million for the
corresponding 1997 period. As a percentage of net revenues, selling, general and
administrative expense increased to 16.1% for the six months ended June 30, 1998
from 15.4% for the corresponding 1997 period. The increase in selling, general
and administrative expense of 30.3% is attributable to a number of factors,
including higher recruitment expenses, as more employees were hired during the
1998 six month period compared to the corresponding 1997 period, and higher
sales and marketing expenses, as Covance has further strengthened its global
sales force and centralized its marketing efforts since the first half of 1997.
Depreciation and amortization increased 21.0% to $17.6 million or 5.0% of
net revenues for the six months ended June 30, 1998 from $14.5 million or 5.2%
of net revenues for the corresponding 1997 period as the growth in net revenues
outpaced the increase in these non-cash charges.
Income from operations increased $7.3 million or 19.4% to $44.6 million for
the six months ended June 30, 1998 from $37.4 million for the corresponding 1997
period. As a percentage of net revenues, income from operations decreased to
12.7% for the six months ended June 30, 1998 from 13.3% for the corresponding
1997 period primarily as a result of the increase in selling, general and
administrative expense.
Other expense, net, decreased $0.4 million or 10.8% to $3.7 million for the
six months ended June 30, 1998 from $4.1 million for the corresponding 1997
period, primarily as a result of a reduction in interest expense.
Covance's effective tax rate for the six months ended June 30, 1998
decreased to 42.1% from 42.4% for the corresponding 1997 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 $4.2 million or 21.8% to $23.3 million for the six
months ended June 30, 1998 from $19.1 million for the corresponding 1997 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
Covance with sufficient financial flexibility and ready access to cash on both a
short-term and a long-term basis to fund, as required, capital expenditures,
potential future acquisitions and other longer-term growth opportunities. At
June 30, 1998, there was $125.0 million of outstanding borrowings and $11.3
million of outstanding letters of credit, with a remaining availability of
$113.7 million under Covance's long-term revolving credit facility.
At June 30, 1998, 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 June 30, 1998. 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.
During the six months ended June 30, 1998, Covance's operations used net
cash of $0.9 million compared to $28.8 million provided by operations for the
corresponding 1997 period. Cash flows from net earnings adjusted for non-cash
activity
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provided $45.6 million for the six months ended June 30, 1998, up $10.2 million
or 28.7% from the corresponding 1997 period. The change in net operating assets
used $46.5 million in cash during the six months ended June 30, 1998, primarily
as a result of an increase in accounts receivable and unbilled services coupled
with a reduction in unearned revenue, while this net change used only $6.6
million during the first six months of 1997.
Working capital was $89.2 million at June 30, 1998, an increase of $29.7
million from December 31, 1997. Aggregate accounts receivable and unbilled
services at June 30, 1998 of $177.6 million were up $31.8 million or 21.8% from
the December 31, 1997 level of $145.8 million. Covance's ratio of current assets
to current liabilities was 1.55 at June 30, 1998 and 1.35 at December 31, 1997.
Investing activities for the six months ended June 30, 1998 used $23.5
million compared to $22.3 million for the corresponding 1997 period. Capital
spending for the first six months of 1998 totaled $23.5 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 $22.4 million for the corresponding 1997 period.
Foreign Currency
Since Covance operates on a global basis, it is exposed to various foreign
currency risks. Two specific risks arise from the nature of the contracts
Covance executes with its customers since from time to time contracts are
denominated in a currency different than the particular Covance subsidiary's
local currency. This contract currency denomination issue is generally
applicable only to a portion of the contracts executed by Covance's foreign
subsidiaries providing clinical and periapproval services. The first risk occurs
as revenue recognized for services rendered is denominated in a currency
different from the currency in which the subsidiary's expenses are incurred. As
a result, the subsidiary's net revenues and resultant earnings can be affected
by fluctuations in exchange rates. While some contracts provide either that
currency fluctuations from the rates in effect at the time the contract is
executed are the responsibility of the customer and others provide that currency
fluctuations from the rates in effect at the time the contract is executed up to
a specified threshold (generally plus or minus a few percentage points) are
absorbed by Covance while fluctuations in excess of the threshold are the
customer's responsibility, most contracts do not specifically address
responsibility for currency fluctuations. Historically, fluctuations in exchange
rates from those in effect at the time contracts were executed have not had a
material effect upon Covance's consolidated financial results.
The second risk results from the passage of time between the invoicing of
customers under these contracts and the ultimate collection of customer payments
against such invoices. Because the contract is denominated in a currency other
than the subsidiary's local currency, Covance recognizes a receivable at the
time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice is prepared
and payment from the customer is received will result in Covance receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. This difference is recognized by Covance as a foreign currency
transaction gain or loss, as applicable, and is reported in other expense
(income) in Covance's Consolidated Statements of Income.
Finally, Covance's consolidated financial statements are denominated in
U.S. dollars. Accordingly, changes in exchange rates between the applicable
foreign currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting
Covance's consolidated financial results. The process by which each foreign
subsidiary's financial results are translated into U.S. dollars is as follows:
income statement accounts are translated at average exchange rates for the
period; balance sheet asset and liability accounts are translated using end of
period exchange rates; and equity accounts are translated at historical rates.
Translation of the balance sheet in this manner affects the stockholders' equity
account, referred to as the cumulative translation adjustment account. This
account exists only in the foreign subsidiary's U.S. dollar balance sheet and is
necessary to keep the foreign balance sheet stated in U.S. dollars in balance.
To date such cumulative translation adjustments have not been material to
Covance's consolidated financial position.
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.
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Inflation
While most of Covance's net revenues are earned under contracts, the
long-term contracts (those in excess of one year) generally include an inflation
or cost of living adjustment for the portion of the services to be performed
beyond one year from the contract date. As a result, Covance believes that the
effects of inflation generally do not have a material adverse effect on its
operations or financial condition.
Year 2000
Information systems are an integral part of the services and products the
Company provides. The Company has formed a group, led by its Year 2000 Project
Director, to assess the Year 2000 issue from an internal, supplier and customer
perspective. Presently, there are approximately 19 full-time equivalents
dedicated to the Year 2000 project. Covance's Year 2000 plan will have risk
assessment, evaluation and remediation schedules finalized during 1998. For
business critical systems, remediation, validation and implementation is already
underway. This plan is being executed under the guidance of Covance's senior
management and Board of Directors, who receive periodic progress reports from
the group. Although the Company believes at this time that neither the costs nor
expenses of the Year 2000 issue will be material to the Company, the ultimate
costs and expenses are currently unknown and such costs or the consequences of
failure to correct any Year 2000 issues could have a material impact on the
Company's financial condition, business or operations.
New Accounting Pronouncements
In June 1997, the FASB issued Statement No. 131, Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 shall be effective for financial
statements for fiscal years beginning after December 15, 1997 (calendar year
1998 for Covance). Financial statement disclosures for prior periods are
required to be restated. Covance is in the process of evaluating the disclosure
requirements. SFAS 131, by its nature, will not impact Covance's consolidated
results of operations, financial position or cash flows.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accountants issued Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use ("SOP 98-1"). SOP 98-1 provides guidance for the
accounting treatment of various costs typically incurred during the development
or purchase of computer software for internal use. SOP 98-1 shall be effective
for fiscal periods beginning after December 15, 1998 (calendar year 1999 for
Covance). The impact on Covance's consolidated results of operations, financial
position and cash flows of the application of SOP 98-1 is currently being
evaluated.
In April 1998, the AcSEC issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 provides guidance on the
financial reporting of start-up and organization costs; requiring such costs be
expensed as incurred. SOP 98-5 shall be effective for fiscal periods beginning
after December 15, 1998 (calendar year 1999 for Covance). Application of SOP
98-5 is not expected to have a material impact on Covance's consolidated results
of operations, financial position or cash flows.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities and requires all derivatives to be recorded
on the balance sheet at fair value. SFAS 133 is effective for years beginning
after June 15, 1999 (calendar year 2000 for Covance). Adoption of SFAS 133 is
not expected to have a material impact on Covance's consolidated results of
operations, financial position or cash flows.
11
<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
12
<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, 1998 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.
Signature Title Date
/s/ Christopher A. Kuebler
- ---------------------------
Christopher A. Kuebler Chairman of the Board, President July 31, 1998
and Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Harwood, Jr.
- ---------------------------
Charles C. Harwood, Jr. Corporate Senior Vice President July 31, 1998
and Chief Financial Officer
(Principal Financial Officer)
/s/ Michael Giannetto
- ---------------------------
Michael Giannetto Corporate Vice President July 31, 1998
and Controller
(Principal Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
Exhibit Description
- -------------------
27 Financial Data Schedule (for SEC use only)
14
<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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,231,000
<SECURITIES> 0
<RECEIVABLES> 177,609,000
<ALLOWANCES> 0
<INVENTORY> 21,379,000
<CURRENT-ASSETS> 251,898,000
<PP&E> 376,186,000
<DEPRECIATION> 175,983,000
<TOTAL-ASSETS> 509,295,000
<CURRENT-LIABILITIES> 162,740,000
<BONDS> 0
0
0
<COMMON> 580,000
<OTHER-SE> 184,711,000
<TOTAL-LIABILITY-AND-EQUITY> 509,295,000
<SALES> 0
<TOTAL-REVENUES> 350,598,000
<CGS> 232,066,000
<TOTAL-COSTS> 305,982,000
<OTHER-EXPENSES> 187,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,503,000
<INCOME-PRETAX> 40,926,000
<INCOME-TAX> 17,248,000
<INCOME-CONTINUING> 23,320,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,320,000
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.40
</TABLE>
