Covance
Covance Reports Second Quarter Revenue of $475M and EPS of $0.49; Updates Full-Year Financial Targets

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PRINCETON, N.J., July 28, 2010 /PRNewswire via COMTEX/ -- Covance Inc. (NYSE: CVD) today reported earnings per diluted share for its second quarter ended June 30, 2010 of $0.49, including $0.09 of facility rationalization and other cost reduction actions during the second quarter, versus $0.60 in the first quarter of 2010 and $0.67 in the second quarter of 2009.

"On a consolidated basis, second quarter net revenues grew 2.0% year-on-year and operating margin was 8.9%. Operating margins, excluding the second quarter cost reduction actions of $7.7 million, was 10.6% in the quarter," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 4.2% year-on-year and increased sequentially by $3 million. Early Development operating margin was 10.8% or 14.0% excluding the second quarter cost actions, a 280 basis point sequential increase. In Late-Stage Development, revenues were flat year-on-year due to the previously announced delay of three large Phase III clinical studies and operating margin of 21.2% met our forecast. Of these previously delayed studies, one trial commenced in the second quarter, one was reduced in size and launched in July, and the third is still expected to begin enrollment in 2011. In central laboratory services, revenue and operating income increased sequentially on increased volume, despite a continued shift in mix to more automated tests and to kits received from geographies where transportation expense and related revenue are lower.

"On the commercial front, adjusted net orders (inclusive of the previously mentioned reduced study and other cancellations) in the second quarter were $590 million, representing an adjusted book-to-bill ratio of 1.24 to 1 and a 14% increase over the second quarter of 2009. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill was 1.3 to 1. With regard to building new strategic relationships, we are continuing to advance discussions with several large clients.

"While we were pleased with the second quarter improvement in early development revenues and profitability, our most recent forecast for the third quarter indicates sequentially flat revenue for the segment, with lower demand and profitability for our toxicology services and research products. In Late-Stage Development, we now expect central laboratory results in the third quarter to be roughly in-line with second quarter levels with similar kit volumes, due to typical seasonal patterns, and the continued impact of mix. As a result, we now expect earnings per share to be approximately $0.50 in the third quarter of 2010, including approximately $0.02 of costs related to previously announced site closures. For the full-year, we are lowering our 2010 revenue growth target to the 2% to 4% range and our earnings per share target to $2.10 to $2.30 (using June 30, 2010 exchange rates), including $0.11 per share in costs resulting from facility rationalizations and other cost reduction actions and excluding benefits from any potential strategic transactions. Our current earnings forecast is above the midpoint of this range."

Consolidated Results

    ($ in millions except EPS) 2Q10   2Q09  Change    1H10   1H09    Change
    -------------------------- ----   ----  ------    ----   ----    ------
    Total Revenues             $500.7 $489.2         $1,005.7 $957.7
    Less: Reimbursable Out-
     of-Pockets                 $25.5  $23.2            $48.6  $50.4
    Net Revenues               $475.2 $466.0    2.0%   $957.1 $907.3     5.5%
    Operating Income            $42.5  $60.0 (29.1)%    $95.4 $115.9  (17.7)%
    Operating Margin %           8.9%  12.9%            10.0%  12.8%
    Net Income                  $31.7  $43.0 (26.3)%    $70.8  $83.3  (15.0)%
    Diluted EPS                 $0.49  $0.67 (27.3)%    $1.09  $1.30  (16.4)%
    -----------                 -----  ----- ------     -----  -----  ------



Operating Segment Results

Early Development

    ($ in millions) 2Q10    2Q09    Change    1H10     1H09    Change
                    ----    ----    ------    ----     ----    ------
    Net Revenues     $208.2  $199.8      4.2%   $413.2  $392.3      5.3%
    Operating
     Income          $22.5*   $27.1   (16.9)%   $45.4*   $54.2   (16.3)%
    Margin %        10.8%*    13.6%            11.0%*    13.8%
    --------         ------    ----             ------    ----


    *includes one-time cost actions of $6.7 million


The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, research products, and discovery services. Early Development net revenues for the second quarter of 2010 were $208.2 million compared to $205.0 million in the first quarter of 2010 and $199.8 million in the second quarter of 2009. Revenues increased sequentially for the third consecutive quarter on improved performances in chemistry and discovery services. In the quarter, foreign exchange positively impacted year-on-year revenue growth by 90 basis points, but sequentially negatively impacted revenue by approximately $3 million.

Operating income for the second quarter of 2010 declined 16.9% year-over-year to $22.5 million, compared to $27.1 million in the second quarter of last year. Operating margin in the second quarter was 10.8%, which included facility rationalization and other cost reduction actions totaling $6.7 million. Excluding these cost actions, operating margins for the second quarter of 2010 were 14.0%, a sequential improvement of 280 basis points and up 40 basis points from the second quarter of last year. Early Development operating margins in the third quarter are expected to be in the 11% to 12% range primarily due to lower demand and profitability in toxicology.

Late-Stage Development

    ($ in millions) 2Q10    2Q09    Change    1H10    1H09    Change
                    ----    ----    ------    ----    ----    ------
    Net Revenues     $267.0  $266.3      0.3%  $543.9  $515.0      5.6%
    Operating
     Income           $56.5   $65.5   (13.7)%  $122.7  $121.8      0.7%
    Margin %          21.2%   24.6%             22.6%   23.7%



The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services). Late-Stage Development net revenues for the second quarter of 2010 grew 0.3% to $267.0 million compared to $266.3 million in the second quarter of 2009. Sequentially, revenues declined $9.9 million due to approximately $5.5 million in foreign exchange headwind and to the impact of the three Phase III clinical delays. Foreign exchange positively impacted year-on-year revenue growth in the quarter by 30 basis points. We now anticipate full-year 2010 Late-Stage Development revenue growth to be approximately flat year-on-year.

Operating income for the second quarter of 2010 declined 13.7% to $56.5 million compared to $65.5 million in the second quarter of the prior year due to lower clinical development profitability resulting from the three Phase III clinical trial delays. Operating margins of 21.2% for the second quarter of 2010 were down 270 basis points as compared to 23.9% in the first quarter of this year and versus 24.6% in the second quarter of last year. Operating margin is expected to remain in the 21% range in the third quarter due to the typical seasonal impact across the segment, the current mix of tests and kits received in central laboratory services, and the impact of the three large clinical trial delays. We expect to see margin expansion in the fourth quarter as revenue ramps.

Corporate Information

The Company's backlog at June 30, 2010 grew 3.6% year-over-year to $4.83 billion compared to $4.66 billion at June 30, 2009 and $4.79 billion at March 31, 2010. Foreign exchange negatively impacted sequential backlog growth by $31 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $590 million in the second quarter of 2010.

Corporate expenses totaled $36.5 million in the second quarter of 2010 compared to $36.3 million last quarter and $32.6 million in the second quarter of last year. In 2010, corporate expenses are expected to be approximately 7% of revenue.

Cash and cash equivalents at June 30, 2010 were $291 million, an increase of $23 million from the $268 million at March 31, 2010 and up $87 million from the $204 million at June 30, 2009. The company remains debt free.

Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2010 was $24 million, consisting of operating cash flow of $61 million less capital expenditures of $37 million. Free cash flow year to date was $14 million, consisting of operating cash flow of $81 million less capital expenditures of $67 million. In 2010, we expect free cash flow to be approximately $100 million, net of capital expenditures of approximately $160 million. The free cash flow target for 2010 assumes net Days Sales Outstanding (DSO) at 43 days.

Net Days Sales Outstanding (DSO) were 47 days at June 30, 2010 compared to 42 days at March 31, 2010 and 41 days at June 30, 2009.

The effective tax rate was 24.9% in the second quarter. We expect our effective tax rate to be approximately 25% for 2010.

The Company's investor conference call will be webcast on July 29 at 9:00 am ET. Management's commentary and presentation slides will be available through www.covance.com.

Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with annual revenues greater than $1.8 billion, global operations in more than 30 countries, and more than 10,000 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at http://www.covance.com/.

Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, fluctuations in currency exchange rates, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.

Financial Exhibits Follow

                           COVANCE INC.

                  CONSOLIDATED INCOME STATEMENTS

     FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

           (Dollars in thousands, except per share data)

                            (UNAUDITED)

                                                Three Months Ended June
                                                          30
                                              ------------------------
                                                   2010            2009
                                                   ----            ----

    Net revenues                               $475,171        $466,049
    Reimbursable out-of-pocket expenses          25,548          23,226
         Total revenues                         500,719         489,275
                                                -------         -------

    Costs and expenses:
      Cost of revenue                           331,360         313,210
      Reimbursable out-of-pocket expenses        25,548          23,226
      Selling, general and administrative        75,045          69,569
      Depreciation and amortization              26,256          23,273
            Total costs and expenses            458,209         429,278
                                                -------         -------

    Income from operations                       42,510          59,997

    Other (income) expense, net:
      Interest (income) expense, net                (77)            160
      Foreign exchange transaction loss, net        761           1,241
      Gain on sale of business                        -            (655)
            Other expense, net                      684             746  (a)
                                                    ---             ---

    Income before taxes and equity investee
     earnings                                    41,826          59,251  (a)

    Taxes on income                              10,415          16,051  (a)

    Equity investee earnings (loss)                 254            (210)

    Net income                                  $31,665         $42,990  (a)
                                                =======         =======

    Basic earnings per share                      $0.50           $0.67  (a)

    Weighted average shares outstanding -
     basic                                   63,620,300      63,823,792

    Diluted earnings per share                    $0.49           $0.67  (a)

    Weighted average shares outstanding -
     diluted                                 65,027,452      64,193,664



                                                Six Months Ended June 30
                                                ------------------------
                                                   2010             2009
                                                   ----             ----

    Net revenues                               $957,095         $907,285
    Reimbursable out-of-pocket expenses          48,643           50,447
         Total revenues                       1,005,738          957,732
                                              ---------          -------

    Costs and expenses:
      Cost of revenue                           663,876          614,935
      Reimbursable out-of-pocket expenses        48,643           50,447
      Selling, general and administrative       146,845          133,523
      Depreciation and amortization              51,000           42,887
            Total costs and expenses            910,364          841,792
                                                -------          -------

    Income from operations                       95,374          115,940

    Other (income) expense, net:
      Interest (income) expense, net               (142)              77
      Foreign exchange transaction loss, net      1,914              795
      Gain on sale of business                        -             (655)
            Other expense, net                    1,772              217  (a)
                                                  -----              ---

    Income before taxes and equity investee
     earnings                                    93,602          115,723  (a)

    Taxes on income                              23,469           32,400  (a)

    Equity investee earnings (loss)                 673              (38)

    Net income                                  $70,806          $83,285  (a)
                                                =======          =======

    Basic earnings per share                      $1.11            $1.31  (a)

    Weighted average shares outstanding -
     basic                                   63,531,999       63,705,105

    Diluted earnings per share                    $1.09            $1.30  (a)

    Weighted average shares outstanding -
     diluted                                 65,058,693       64,024,143



    (a) Includes the impact of a $655 gain on sale of Cardiac Safety
    Services ($426 net of tax) during the second quarter of 2009.


    Excluding the impact of the gain on sale
     of business:
    ----------------------------------------

    Income before taxes and equity investee
     earnings                                         $41,826         $58,596

    Taxes on income                                   $10,415         $15,822

    Net income                                        $31,665         $42,564

    Basic earnings per share                            $0.50           $0.67

    Diluted earnings per share                          $0.49           $0.66



    Excluding the impact of the gain on sale
     of business:
    ----------------------------------------

    Income before taxes and equity investee
     earnings                                        $93,602         $115,068

    Taxes on income                                  $23,469          $32,171

    Net income                                       $70,806          $82,859

    Basic earnings per share                           $1.11            $1.30

    Diluted earnings per share                         $1.09            $1.29


                               COVANCE INC.

                        CONSOLIDATED BALANCE SHEETS

                    JUNE 30, 2010 and DECEMBER 31, 2009

                          (Dollars in thousands)

                                                June 30    December 31
                                                     2010         2009
                                                     ----         ----
                                              (UNAUDITED)
    ASSETS
    Current Assets:
      Cash & cash equivalents                    $290,845     $289,469
      Accounts receivable, net                    281,106      285,119
      Unbilled services                           114,109       97,279
      Inventory                                    77,624       80,926
      Deferred income taxes                        34,706       31,512
      Prepaid expenses and other current
       assets                                      94,170       93,367
                                                   ------       ------
          Total Current Assets                    892,560      877,672

    Property and equipment, net                   925,822      921,995
    Goodwill, net                                 127,653      127,653
    Other assets                                   47,053       47,624
                                                   ------       ------
          Total Assets                         $1,993,088   $1,974,944
                                               ==========   ==========

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
      Accounts payable                            $35,693      $36,834
      Accrued payroll and benefits                 81,126      111,365
      Accrued expenses and other current
       liabilities                                 83,986       73,383
      Unearned revenue                            152,073      166,890
      Income taxes payable                         17,714       14,272
                                                   ------       ------
          Total Current Liabilities               370,592      402,744

    Deferred income taxes                          96,265       98,945
    Other liabilities                              58,470       62,251
                                                   ------       ------
          Total Liabilities                       525,327      563,940
                                                  -------      -------

    Stockholders' Equity:
      Common stock                                    771          764
      Paid-in capital                             614,025      587,995
      Retained earnings                         1,376,257    1,305,451
      Accumulated other comprehensive loss        (40,084)      (5,281)
      Treasury stock                             (483,208)    (477,925)
          Total Stockholders' Equity            1,467,761    1,411,004
                                                ---------    ---------
          Total Liabilities and Stockholders'
           Equity                              $1,993,088   $1,974,944
                                               ==========   ==========


                                 COVANCE INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

                            (Dollars in thousands)

                                  (UNAUDITED)

                                                          Six Months Ended
                                                              June 30
                                                          ----------------

                                                          2010          2009
                                                          ----          ----
    Cash flows from operating activities:
      Net income                                       $70,806       $83,285
      Adjustments to reconcile net income to net cash
       provided by
        operating activities:
        Depreciation and amortization                   51,000        42,887
        Non-cash compensation expense associated with
         employee benefit
           and stock compensation plans                 16,215        13,238
        Deferred income tax benefit                     (5,752)       (1,387)
        Gain on sale of business                             -          (655)
        Loss on sale of property and equipment             345           264
        Equity investee (earnings) loss                   (673)           38
        Changes in operating assets and liabilities,
         net of business
           acquired:
           Accounts receivable                           4,013      (51,478)
           Unbilled services                           (16,830)        8,468
           Inventory                                     3,302        (7,756)
           Accounts payable                             (1,141)     (10,040)
           Accrued liabilities                         (19,636)     (32,000)
           Unearned revenue                            (14,817)       11,111
           Income taxes payable                          3,994        15,694
           Other assets and liabilities, net            (9,454)     (13,033)
    Net cash provided by operating activities           81,372        58,636
                                                        ------        ------

    Cash flows from investing activities:
      Capital expenditures                             (67,461)     (70,911)
      Acquisition of business, net of cash acquired          -      (18,620)
      Proceeds from sale of business                         -           655
      Other, net                                            50            15
    Net cash used in investing activities              (67,411)     (88,861)
                                                       -------       -------

    Cash flows from financing activities:
      Stock issued under employee stock purchase and
       option plans                                      9,270         5,189
      Purchase of treasury stock                        (5,283)       (2,316)
      Net borrowings under revolving credit facility         -         8,000
      Payment of debt assumed upon acquisition of
       business                                              -        (5,431)
    Net cash provided by financing activities            3,987         5,442
                                                         -----         -----
    Effect of exchange rate changes on cash            (16,572)        7,800
                                                       -------         -----
    Net change in cash and cash equivalents              1,376      (16,983)

    Cash and cash equivalents, beginning of period     289,469       221,334
                                                       -------       -------

    Cash and cash equivalents, end of period          $290,845      $204,351
                                                      ========      ========


                                 COVANCE INC.

           Reconciliation of 2Q10 As Reported to Pro Forma Amounts

                            (Dollars in thousands)


                                                 Less:
                                                Facility
                                            Rationalization
                                               and Other
                                 2Q2010     Cost Reduction    2Q2010
                              As Reported       Actions      Pro Forma
                              -----------       -------      ---------
    Consolidated
    ------------

    Net Revenue                   $475,171               $-    $475,171

    Operating Income               $42,510           $7,734     $50,244

    Operating Margin                   8.9%             1.6%       10.6%



    Early Development Segment
    -------------------------

    Net Revenue                   $208,192               $-    $208,192

    Operating Income               $22,495           $6,736     $29,231

    Operating Margin                  10.8%             3.2%       14.0%



    Late-Stage Development
     Segment
    ----------------------

    Net Revenue                   $266,979               $-    $266,979

    Operating Income               $56,513             $194     $56,707

    Operating Margin                  21.2%             0.1%       21.2%



    Corporate
    ---------

    Expense                       $(36,498)            $804    $(35,694)

    % of Net Revenue                  -7.7%             0.2%       -7.5%


SOURCE Covance Inc.