Covance
Covance Reports Second Quarter Revenue of $518 Million, GAAP EPS of $0.61, and Pro Forma EPS of $0.66

Download presentation.

PRINCETON, N.J., July 27, 2011 /PRNewswire via COMTEX/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its second quarter ended June 30, 2011 of $0.61 per diluted share. Included in second quarter results is $0.05 per diluted share in costs from the previously-announced restructuring actions. Excluding these costs, earnings per diluted share were $0.66 in the quarter.

"On a consolidated basis, second quarter net revenues grew 9.1% year-on-year and pro forma operating margin (when excluding $4.6 million of restructuring costs), expanded 80 basis points sequentially to 10.3%," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 11.4% year-on-year to $231.8 million. Revenues were up sequentially in toxicology, analytical chemistry, clinical pharmacology, and discovery support, driving a $7.8 million increase in revenues and a 240 basis point increase in pro forma operating margin from last quarter to 14.2%. In Late-Stage Development, revenues grew 7.3% year-on-year and 3.0% sequentially driven by the continued strong performance in clinical development coupled with the weakening of the US dollar, which more than offset the impact of continued project delays and cancellations in central laboratories. Pro forma operating margin in the segment was 20.0%.

"On the commercial front, adjusted net orders in the second quarter were $614 million, representing an adjusted book-to-bill of 1.18 to 1 led by continued strong orders across all phases of clinical development. Looking forward, we are encouraged by the increasing demand for our early development services, including toxicology, as well as the continued robust pipeline of clinical development proposals. In order to fully capitalize on the market opportunities we are seeing, several dozen incremental sales and marketing professionals were hired globally in the first half of this year.

"Covance now expects full-year revenue growth in the mid-to-high single digit range and pro forma earnings to be in the range of $2.60 to $2.80 per diluted share, excluding costs associated with previously announced restructuring activities. This range assumes no new strategic alliances with clients and foreign exchange rates remain at June 30, 2011 levels. In the third quarter, we are expecting a continued sequential increase in net revenues and pro forma earnings per share of approximately $0.70."

Consolidated Results


($ in millions except EPS)

2Q11

2Q10

Change

YTD11

YTD10

Change

Total Revenues

$547.7

$500.7


$1,075.2

$1,005.7


Less: Reimbursable Out-of-Pockets

$29.5

$25.5


$55.0

$ 48.6


Net Revenues

$518.2

$475.2

9.1%

$1,020.2

$ 957.1

6.6%

Operating Income

$48.8

$42.5

14.7%

$90.7

$ 95.4

(4.9%)

Operating Margin

9.4%

8.9%


8.9%

10.0%


Net Income

$37.6

$31.7

18.9%

$70.4

$70.8

(0.6%)

Diluted EPS

$0.61

$ 0.49

26.3%

$1.15

$1.09

5.9%

2011 Restructuring Costs*

($4.6)



($10.4)



Operating Income, excluding 2011 items*

$53.3



$101.1



Operating Margin, ex 2011 items*

10.3%



9.9%



Net Income, ex 2011 items*

$40.6



$77.1



Diluted EPS, ex 2011 items*

$0.66



$1.26




* See attached pro forma income statement for reconciliation of 2011 GAAP to pro forma amounts.


Operating Segment Results

Early Development


($ in millions)

2Q11

2Q10

Change

YTD11

YTD10

Change

Net Revenues

$231.8

$208.2

11.4%

$455.9

$413.2

10.3%

GAAP Operating Income

$ 30.9

$ 22.5

37.4%

$ 54.5

$ 45.4

20.0%

GAAP Operating Margin %

13.3%

10.8%


12.0%

11.0%


2011 Restructuring Costs

($2.0)



($4.9)



2010 Cost Actions


($6.7)



($6.7)


Pro Forma Operating Income

$32.9

$ 29.2

12.6%

$59.4

$ 52.1

13.9%

Pro Forma OM%

14.2%

14.0%


13.0%

12.6%



The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the second quarter of 2011 grew 11.4% year-on-year to $231.8 million, driven by the results from our new Alnwick, UK and Porcheville, France sites, foreign exchange tailwind of 230 basis points, and stronger results in clinical pharmacology, which more than offset a decline in revenue from the wind-down of our Vienna, Virginia toxicology facility. Sequentially, revenues increased $7.8 million on broad-based revenue growth.

GAAP operating income for the second quarter of 2011 was $30.9 million, and included $2.0 million in costs associated with our restructuring actions, while GAAP operating income for the second quarter of 2010 was $22.5 million, which included $6.7 million in cost actions. Pro forma operating income, excluding these costs, was $32.9 million in the current quarter, compared to $26.5 million last quarter and $29.2 million in the second quarter of last year. Pro forma operating margins, excluding restructuring costs, were 14.2% for the second quarter, compared to 11.8% last quarter and 14.0% in the second quarter of 2010. Sequentially, profitability improvement was broad-based across the segment.

Late-Stage Development


($ in millions)

2Q11

2Q10

Change

YTD11

YTD10

Change

Net Revenues

$ 286.4

$267.0

7.3%

$564.3

$543.9

3.8%

GAAP Operating Income

$56.5

$ 56.5

0.0%

$111.8

$122.7

(8.9%)

GAAP Operating Margin %

19.7%

21.2%


19.8%

22.6%


2011 Restructuring Costs

($0.7)



($1.7)



Pro Forma Operating Income

$57.3

$ 56.5

1.3%

$113.4

$122.7

(7.6%)

Pro Forma OM%

20.0%

21.2%


20.1%

22.6%



The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services. Net revenues for the second quarter of 2011 grew 7.3% year-on-year and 3.0% sequentially to $286.4 million; growth over both periods was primarily driven by the continued strong performance in clinical development coupled with the weakening of the US dollar.

GAAP operating income for the second quarter was $56.5 million and included $0.7 million in costs associated with our restructuring actions. Pro forma operating income, excluding these costs, was $57.3 million, compared to $56.2 million last quarter and $56.5 million in the second quarter of the prior year. Pro forma operating margins were 20.0% for the second quarter of 2011 compared to 20.2% last quarter and 21.2% in the second quarter of last year. The year-on-year profitability decline was due to lower revenues and operating income in central laboratory services.

Corporate Information

The Company's backlog at June 30, 2011 grew 29.4% year-over-year to $6.25 billion compared to $4.83 billion at June 30, 2010 and $6.29 billion at March 31, 2011. Foreign exchange positively impacted sequential backlog growth by approximately $100 million. Negatively impacting backlog was the removal of $141 million remaining from a contractual minimum volume (CMV) commitment for early development services which is being replaced with a broader, non-CMV relationship with the same client. The CMV contract, which was initiated in 2006, was due to expire at the end of 2015. The client has now committed to place a number of studies in excess of the remaining value of the CMV contract for services spanning both early development and late-stage development. The studies under the new arrangement are expected to be included in future orders as the individual project study documentation is prepared, and are expected to generate revenue of at least $170 million over the next four years.

Corporate expenses totaled $38.7 million in the second quarter of 2011 (including $1.8 million in restructuring costs) compared to $36.9 million last quarter (including $2.0 million in restructuring costs) and $36.5 million in the second quarter of last year (including $0.8 million in cost actions). We expect corporate expenses as a percent of revenue, excluding restructuring costs, to trend lower during 2011 as we realize more of the savings from the ongoing restructuring actions.

Cash and cash equivalents at June 30, 2011 were $406 million compared to $368 million at March 31, 2011 and $291 million at June 30, 2010. Covance repaid $37.5 million in debt during the quarter and now has $92.5 million in debt outstanding, originating from borrowings related to the fourth quarter accelerated share repurchase.

Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2011 was $59 million, consisting of operating cash flow of $89 million less capital expenditures of $30 million. Free cash flow year-to-date was $38 million, consisting of operating cash flow of $89 million less capital expenditures of $51 million.

Net Days Sales Outstanding (DSO) were 38 days at June 30, 2011 compared to 37 days at March 31, 2011 and 47 days at June 30, 2010.

The Company's investor conference call will be webcast on July 28 at 9:00 am ET. Management's commentary and presentation slides will be available through http://www.covance.com/.

Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with annual revenues greater than $1.9 billion, global operations in more than 30 countries, and more than 10,500 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 or delay of large studies, 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, testing mix and geographic mix of kit receipts in central laboratories, 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, 2011 AND 2010

(Dollars in thousands, except per share data)

(UNAUDITED)












Three Months Ended June 30


Six Months Ended June 30



2011


2010


2011


2010








Net revenues


$ 518,220


$ 475,171


$ 1,020,206


$ 957,095

Reimbursable out-of-pocket expenses


29,507


25,548


54,979


48,643

Total revenues


547,727


500,719


1,075,185


1,005,738










Costs and expenses:









Cost of revenue


358,332


331,360


711,852


663,876

Reimbursable out-of-pocket expenses


29,507


25,548


54,979


48,643

Selling, general and administrative


85,297


75,045


166,000


146,845

Depreciation and amortization


25,836


26,256


51,699


51,000

Total costs and expenses


498,972

(a)

458,209


984,530

(b)

910,364










Income from operations


48,755

(a)

42,510


90,655

(b)

95,374










Other expense, net:









Interest expense (income), net


579


(77)


1,297


(142)

Foreign exchange transaction loss, net


307


761


115


1,914

Other expense, net


886


684


1,412


1,772










Income before taxes and equity investee earnings


47,869

(a)

41,826


89,243

(b)

93,602










Taxes on income


9,987

(a)

10,415


18,621

(b)

23,469










Equity investee (loss) earnings


(240)


254


(242)


673










Net income


$ 37,642

(a)

$ 31,665


$ 70,380

(b)

$ 70,806










Basic earnings per share


$ 0.63

(a)

$ 0.50


$ 1.18

(b)

$ 1.11










Weighted average shares outstanding - basic


59,636,973


63,620,300


59,546,773


63,531,999










Diluted earnings per share


$ 0.61

(a)

$ 0.49


$ 1.15

(b)

$ 1.09










Weighted average shares outstanding - diluted


61,226,477


65,027,452


61,105,838


65,058,693




























(a) Includes $4,564 in restructuring costs ($2,937 net of tax) during the three months ended June 30, 2011.

(b) Includes $10,432 in restructuring costs ($6,714 net of tax) during the six months ended June 30, 2011.

COVANCE INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2011 and DECEMBER 31, 2010

(Dollars in thousands)










June 30


December 31




2011


2010




(UNAUDITED)



ASSETS





Current Assets:






Cash & cash equivalents


$ 406,207


$ 377,223


Accounts receivable, net


297,704


261,160


Unbilled services


107,677


90,729


Inventory


88,999


82,924


Deferred income taxes


38,397


35,648


Prepaid expenses and other current assets


104,556


98,127


Total Current Assets


1,043,540


945,811







Property and equipment, net


857,857


843,983

Goodwill, net


127,653


127,653

Other assets


52,496


48,095


Total Assets


$ 2,081,546


$ 1,965,542







LIABILITIES and STOCKHOLDERS' EQUITY





Current Liabilities:






Accounts payable


$ 44,690


$ 34,079


Accrued payroll and benefits


105,776


107,572


Accrued expenses and other current liabilities


117,029


97,395


Unearned revenue


188,328


186,301


Short-term debt and current portion of long-term debt


10,000


45,000


Income taxes payable


10,485


28,827


Total Current Liabilities


476,308


499,174







Long-term debt


82,500


87,500

Deferred income taxes


29,881


30,531

Other liabilities


69,988


68,516


Total Liabilities


658,677


685,721







Stockholders' Equity:






Common stock


780


774


Paid-in capital


666,427


639,341


Retained earnings


1,444,085


1,373,705


Accumulated other comprehensive income


53,370


277


Treasury stock


(741,793)


(734,276)


Total Stockholders' Equity


1,422,869


1,279,821


Total Liabilities and Stockholders' Equity


$ 2,081,546


$ 1,965,542

COVANCE INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

(Dollars in thousands)

(UNAUDITED)








Six Months Ended June 30






2011


2010

Cash flows from operating activities:





Net income


$ 70,380


$ 70,806

Adjustments to reconcile net income to net cash provided by





operating activities:





Depreciation and amortization


51,699


51,000

Non-cash compensation expense associated with employee benefit





and stock compensation plans


18,939


16,215

Deferred income tax benefit


(3,828)


(5,752)

Loss on disposal of property and equipment


344


345

Equity investee loss (earnings)


242


(673)

Changes in operating assets and liabilities:





Accounts receivable


(36,544)


4,013

Unbilled services


(16,948)


(16,830)

Inventory


(6,075)


3,302

Accounts payable


10,611


(1,141)

Accrued liabilities


17,838


(19,636)

Unearned revenue


2,027


(14,817)

Income taxes payable


(17,811)


3,994

Other assets and liabilities, net


(2,142)


(9,454)

Net cash provided by operating activities


88,732


81,372






Cash flows from investing activities:





Capital expenditures


(50,548)


(67,461)

Other, net


106


50

Net cash used in investing activities


(50,442)


(67,411)






Cash flows from financing activities:





Net repayments under revolving credit facility


(35,000)


-

Repayments under long-term debt


(5,000)


-

Stock issued under employee stock purchase and option plans


7,622


9,270

Purchase of treasury stock


(7,517)


(5,283)

Net cash (used in) provided by financing activities


(39,895)


3,987

Effect of exchange rate changes on cash


30,589


(16,572)

Net change in cash and cash equivalents


28,984


1,376






Cash and cash equivalents, beginning of period


377,223


289,469






Cash and cash equivalents, end of period


$ 406,207


$ 290,845

COVANCE INC.

GAAP to Pro Forma Reconciliation

Q2 2011

(Dollars in thousands, except per share data)

(UNAUDITED)










Adjustments




GAAP


Restructuring Activities (1)


Pro Forma







Net revenues

$ 518,220




$ 518,220

Reimbursable out-of-pocket expenses

29,507




29,507

Total revenues

547,727


-


547,727







Costs and expenses:






Cost of revenue

358,332




358,332

Reimbursable out-of-pocket expenses

29,507




29,507

Selling, general and administrative

85,297


(4,159)


81,138

Depreciation and amortization

25,836


(405)


25,431

Total costs and expenses

498,972


(4,564)


494,408







Income from operations

48,755


4,564


53,319







Other expense, net:






Interest expense (income), net

579




579

Foreign exchange transaction loss, net

307




307

Other expense, net

886


-


886







Income before taxes and equity investee earnings

47,869


4,564


52,433







Taxes on income

9,987


1,627


11,614







Equity investee (loss) earnings

(240)




(240)







Net income

$ 37,642


$ 2,937


$ 40,579







Basic earnings per share

$ 0.63


$ 0.05


$ 0.68







Weighted average shares outstanding - basic

59,636,973


59,636,973


59,636,973







Diluted earnings per share

$ 0.61


$ 0.05


$ 0.66







Weighted average shares outstanding - diluted

61,226,477


61,226,477


61,226,477













(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.

COVANCE INC.

GAAP to Pro Forma Reconciliation

YTD Q2 2011

(Dollars in thousands, except per share data)

(UNAUDITED)










Adjustments




GAAP


Restructuring Activities (1)


Pro Forma







Net revenues

$ 1,020,206




$ 1,020,206

Reimbursable out-of-pocket expenses

54,979




54,979

Total revenues

1,075,185


-


1,075,185







Costs and expenses:






Cost of revenue

711,852




711,852

Reimbursable out-of-pocket expenses

54,979




54,979

Selling, general and administrative

166,000


(9,622)


156,378

Depreciation and amortization

51,699


(810)


50,889

Total costs and expenses

984,530


(10,432)


974,098







Income from operations

90,655


10,432


101,087







Other expense, net:






Interest expense (income), net

1,297




1,297

Foreign exchange transaction loss, net

115




115

Other expense, net

1,412


-


1,412







Income before taxes and equity investee earnings

89,243


10,432


99,675







Taxes on income

18,621


3,718


22,339







Equity investee (loss) earnings

(242)




(242)







Net income

$ 70,380


$ 6,714


$ 77,094







Basic earnings per share

$ 1.18


$ 0.11


$ 1.29







Weighted average shares outstanding - basic

59,546,773


59,546,773


59,546,773







Diluted earnings per share

$ 1.15


$ 0.11


$ 1.26







Weighted average shares outstanding - diluted

61,105,838


61,105,838


61,105,838













(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.

SOURCE Covance Inc.