Covance
Covance Reports Third Quarter Revenue of $543 Million, GAAP EPS of $0.67, and Pro Forma EPS of $0.71

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PRINCETON, N.J., Nov. 2, 2011 /PRNewswire via COMTEX/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its third quarter ended September 30, 2011 of $0.67 per diluted share. Included in third quarter results is approximately $0.06 per diluted share in costs from the previously-announced restructuring actions, partially offset by a gain of approximately $0.01 from favorable income tax developments in the quarter. Excluding these items, earnings per diluted share were $0.71 in the quarter.

"On a consolidated basis, third quarter net revenues grew 13.9% year-on-year and pro forma operating margin (when excluding the $5.3 million of restructuring costs), expanded 10 basis points sequentially to 10.4%," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 16.3% year-on-year and 3.6% sequentially to $240 million and pro forma operating margin increased to 14.6% versus 10.7% a year ago and 14.2% last quarter. We forecast another quarter of sequential growth in both revenue and operating margin for our early development services in the fourth quarter. In Late-Stage Development, revenues grew 12.0% year-on-year and 5.8% sequentially driven by the continued strong performance in our clinical development services as well as the impact from foreign exchange. As forecasted, pro forma operating margin in the segment declined slightly to 19.3%, reflecting seasonal patterns as well as the impact from significant hiring in clinical development, which had year-on-year revenue growth of 18% through the first nine months of 2011.

"On the commercial front, adjusted net orders in the third quarter were $597 million, representing an adjusted book-to-bill of 1.1. We were particularly pleased to see a significant improvement in orders in our central laboratory, which reported its highest adjusted net order quarter in over a year, as well as continued improvement in orders for our toxicology services.

"Covance now expects full-year revenue growth in the high single-digit range and pro forma earnings to be approximately $2.70 per diluted share, excluding costs associated with restructuring activities and assuming foreign exchange rates remain at September 30, 2011 levels."

Consolidated Results


($ in millions except EPS)

3Q11

3Q10

Change

2011 YTD

2010 YTD

Change

Total Revenues

$578.9

$ 513.3


$1,654.1

$1,519.0


Less: Reimbursable Out-of-Pockets

$35.6

$ 36.3


$90.6

$ 84.9


Net Revenues

$543.3

$ 477.0

13.9%

$1,563.5

$1,434.1

9.0%

Operating Income (Loss)

$51.0

($76.7)

-

$141.7

$ 18.6

660.4%

Net Income (Loss)

$40.7

($30.9)

-

$111.0

$ 39.9

178.5%

Earnings (Loss) Per Share

$0.67

($0.49)

-

$1.82

$ 0.61

196.6%

2011 Restructuring Costs*

($5.3)

-


($15.7)

-


2010 Impairment Charge*

-

($119.2)


-

($119.2)


Favorable Income Tax items*

$0.7

$10.4


$0.7

$10.4


Operating Income, excluding items*

$56.3

$ 42.5

32.5%

$157.4

$137.9

14.2%

Operating Margin %, ex items*

10.4%

8.9%


10.1%

9.6%


Net Income, excluding items*

$43.4

$32.6

32.8%

$120.5

$103.4

16.4%

Diluted EPS, excluding items*

$ 0.71

$ 0.50

41.8%

$1.97

$1.59

24.0%


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

Operating Segment Results

Early Development


($ in millions)

3Q11

3Q10

Change

2011 YTD

2010 YTD

Change

Net Revenues

$240.2

$206.5

16.3%

$696.1

$619.7

12.3%

GAAP Operating Income (Loss)

$33.2

($98.5)

-

$87.7

($53.1)

-

GAAP Operating Margin %

13.8%

(47.7%)


12.6%

(8.6%)


2011 Restructuring Costs

($1.9)

-


($6.7)

-


2010 Impairment Charge

-

($119.2)


-

($119.2)


2010 Cost Actions

-

($1.3)


-

($ 8.0)


Pro Forma Operating Income

$35.0

$ 22.0

59.0%

$94.4

$74.1

27.3%

Pro Forma OM%

14.6%

10.7%


13.6%

12.0%



The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the third quarter of 2011 grew 16.3% year-on-year to $240.2 million, driven by the results from our new Alnwick, UK and Porcheville, France sites. In addition, analytical chemistry, North American toxicology, and clinical pharmacology each experienced strong year-on-year growth. Foreign exchange provided 140 basis points of year-on-year revenue growth. Sequentially, revenues increased $8.4 million primarily on growth from clinical pharmacology, discovery support services, and research products.

GAAP operating income for the third quarter of 2011 was $33.2 million, and included $1.9 million in costs associated with our restructuring actions. Pro forma operating income, excluding restructuring costs, was $35.0 million in the current quarter, compared to $32.9 million last quarter and $22.0 million in the third quarter of last year. Pro forma operating margins, excluding restructuring costs in both periods as well as the asset impairment charge in 2010, were 14.6% for the third quarter, compared to 14.2% last quarter and 10.7% in the third quarter of 2010.

Late-Stage Development


($ in millions)

3Q11

3Q10

Change

2011 YTD

2010 YTD

Change

Net Revenues

$303.0

$270.5

12.0%

$867.4

$814.4

6.5%

GAAP Operating Income

$56.3

$ 55.2

2.1%

$168.1

$177.9

(5.5%)

GAAP Operating Margin %

18.6%

20.4%


19.4%

21.8%


2011 Restructuring Costs

($2.1)

-


($3.7)

-


Pro Forma Operating Income

$58.4

$ 55.2

5.8%

$171.8

$177.9

(3.4%)

Pro Forma OM%

19.3%

20.4%


19.8%

21.8%



The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services. Net revenues for the third quarter of 2011 grew 12.0% year-on-year and 5.8% sequentially to $303.0 million. Growth over both periods was primarily driven by the continued strong performance in clinical development coupled with a weaker US dollar. Foreign exchange provided 800 basis points of year-on-year revenue growth.

GAAP operating income for the third quarter was $56.3 million and included $2.1 million in costs associated with our restructuring actions. Pro forma operating income, excluding these costs, was $58.4 million, compared to $57.3 million last quarter and $55.2 million in the third quarter of the prior year. Pro forma operating margins, excluding these costs, were 19.3% for the third quarter of 2011 compared to 20.0% last quarter and 20.4% in the third quarter of last year. The sequential decline in profitability was primarily due to normal seasonal factors coupled with a significant increase in staffing levels in clinical development, which more than offset a small increase in central laboratory profitability. Operating margin is expected to slightly decline in the fourth quarter due to a shift in revenue mix and continued hiring in clinical development.

Corporate Information

The Company's backlog at September 30, 2011 grew 1.0% year-over-year to $6.08 billion compared to $6.02 billion at September 30, 2010 and $6.25 billion at June 30, 2011. Foreign exchange negatively impacted sequential backlog growth by $133 million.

Corporate expenses totaled $38.4 million in the third quarter of 2011 (including $1.4 million in restructuring costs) compared to $38.7 million last quarter (including $1.8 million in restructuring costs) and $33.4 million in the third quarter of last year.

Cash and cash equivalents at September 30, 2011 were $400 million compared to $406 million at June 30, 2011 and $389 million at September 30, 2010. Covance repaid $2.5 million in debt during the quarter and now has $90.0 million in debt outstanding, originating from borrowings related to the fourth quarter 2010 accelerated share repurchase.

Free cash flow (defined as operating cash flow less capital expenditures) for the third quarter of 2011 was $16 million, consisting of operating cash flow of $52 million less capital expenditures of $36 million. Free cash flow year-to-date was $55 million, consisting of operating cash flow of $141 million less capital expenditures of $86 million. Due to continued investment in new IT systems and infrastructure to enhance service delivery and value for our clients, we expect quarterly capital spending at or above current levels going forward.

Net Days Sales Outstanding (DSO) were 38 days at September 30, 2011 compared to 38 days at June 30, 2011 and 45 days at September 30, 2010.

The Company's investor conference call will be webcast on November 3 at 9:00 am EDT. 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 $2 billion, global operations in more than 30 countries, and more than 11,000 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 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 NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010








(Dollars in thousands, except per share data)












(UNAUDITED)














Three Months Ended September 30


Nine Months Ended September 30




2011


2010


2011


2010










Net revenues


$ 543,254


$ 477,022


$ 1,563,460


$ 1,434,117


Reimbursable out-of-pocket expenses


35,622


36,258


90,601


84,901


Total revenues


578,876


513,280


1,654,061


1,519,018












Costs and expenses:










Cost of revenue


383,347


337,698


1,095,199


1,001,574


Reimbursable out-of-pocket expenses


35,622


36,258


90,601


84,901


Selling, general and administrative


81,292


70,731


247,292


217,576


Depreciation and amortization


27,592


26,105


79,291


77,105


Asset impairment charges


-


119,229


-


119,229


Total costs and expenses


527,853

(a)

590,021

(c)

1,512,383

(b)

1,500,385

(c)











Income (loss) from operations


51,023

(a)

(76,741)

(c)

141,678

(b)

18,633

(c)











Other expense, net:










Interest expense (income), net


343


(236)


1,640


(378)


Foreign exchange transaction loss, net


777


681


892


2,595


Other expense, net


1,120


445


2,532


2,217












Income (loss) before taxes and equity investee earnings


49,903

(a)

(77,186)

(c)

139,146

(b)

16,416

(c)











Tax expense (benefit)


9,781

(a)

(46,003)

(c)

28,402

(b)

(22,534)

(c)











Equity investee earnings


547


253


305


926












Net income (loss)


$ 40,669

(a)

$ (30,930)

(c)

$ 111,049

(b)

$ 39,876

(c)











Basic earnings (loss) per share


$ 0.68

(a)

$ (0.49)

(c)

$ 1.86

(b)

$ 0.63

(c)











Weighted average shares outstanding - basic


59,695,336


63,739,910


59,596,294


63,601,302












Diluted earnings (loss) per share


$ 0.67

(a)

$ (0.49)

(c)

$ 1.82

(b)

$ 0.61

(c)











Weighted average shares outstanding - diluted


60,926,604


63,739,910


61,093,960


65,069,901
































(a) Includes $5,270 in restructuring costs ($3,392 net of tax) and favorable income tax items totaling $700 during the three months ended September 30, 2011.

(b) Includes $15,702 in restructuring costs ($10,106 net of tax) and favorable income tax items totaling $700 during the nine months ended September 30, 2011.

(c) Includes $119,229 in asset impairment charges ($73,922 net of tax) and favorable income tax items totaling $10,352 during the three and nine months


ended September 30, 2010.


COVANCE INC.





CONSOLIDATED BALANCE SHEETS





SEPTEMBER 30, 2011 and DECEMBER 31, 2010









(Dollars in thousands)



















September 30


December 31





2011


2010





(UNAUDITED)




ASSETS






Current Assets:







Cash & cash equivalents


$ 399,695


$ 377,223



Accounts receivable, net


284,769


261,160



Unbilled services


122,330


90,729



Inventory


82,085


82,924



Deferred income taxes


40,318


35,648



Prepaid expenses and other current assets


129,537


98,127



Total Current Assets


1,058,734


945,811









Property and equipment, net


856,778


843,983


Goodwill, net


127,779


127,653


Other assets


51,625


48,095



Total Assets


$ 2,094,916


$ 1,965,542









LIABILITIES and STOCKHOLDERS' EQUITY






Current Liabilities:







Accounts payable


$ 40,280


$ 34,079



Accrued payroll and benefits


125,084


107,572



Accrued expenses and other current liabilities


111,510


97,395



Unearned revenue


181,613


186,301



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


90,000


45,000



Income taxes payable


14,167


28,827



Total Current Liabilities


562,654


499,174









Long-term debt


-


87,500


Deferred income taxes


25,818


30,531


Other liabilities


70,449


68,516



Total Liabilities


658,921


685,721









Stockholders' Equity:







Common stock


780


774



Paid-in capital


677,777


639,341



Retained earnings


1,484,754


1,373,705



Accumulated other comprehensive income


14,691


277



Treasury stock


(742,007)


(734,276)



Total Stockholders' Equity


1,435,995


1,279,821



Total Liabilities and Stockholders' Equity


$ 2,094,916


$ 1,965,542
















COVANCE INC.




CONSOLIDATED STATEMENTS OF CASH FLOWS




FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010




(Dollars in thousands)








(UNAUDITED)










Nine Months Ended September 30








2011


2010


Cash flows from operating activities:






Net income


$ 111,049


$ 39,876


Adjustments to reconcile net income to net cash provided by






operating activities:






Depreciation and amortization


79,291


77,105


Asset impairment charges


-


119,229


Non-cash compensation expense associated with employee benefit






and stock compensation plans


29,305


24,815


Deferred income tax benefit


(9,680)


(53,185)


Loss on disposal of property and equipment


431


961


Equity investee earnings


(305)


(926)


Changes in operating assets and liabilities, net of business






acquired:






Accounts receivable


(23,396)


3,442


Unbilled services


(31,601)


(6,381)


Inventory


839


(1,388)


Accounts payable


6,184


(1,439)


Accrued liabilities


31,505


(3,577)


Unearned revenue


(4,688)


(17,394)


Income taxes payable


(13,988)


362


Other assets and liabilities, net


(33,992)


7,658


Net cash provided by operating activities


140,954


189,158








Cash flows from investing activities:






Capital expenditures


(86,289)


(100,488)


Acquisition of business


(411)


-


Other, net


201


73


Net cash used in investing activities


(86,499)


(100,415)








Cash flows from financing activities:






Net borrowings under revolving credit facility


55,000


-


Repayments under long-term debt


(97,500)


-


Stock issued under employee stock purchase and option plans


8,465


12,640


Purchase of treasury stock


(7,731)


(5,601)


Net cash (used in) provided by financing activities


(41,766)


7,039


Effect of exchange rate changes on cash


9,783


3,773


Net change in cash and cash equivalents


22,472


99,555








Cash and cash equivalents, beginning of period


377,223


289,469








Cash and cash equivalents, end of period


$ 399,695


$ 389,024






































COVANCE INC.








GAAP to Pro Forma Reconciliation








Q3 2011








(Dollars in thousands, except per share data)









(UNAUDITED)












Adjustments




GAAP


Restructuring
Activities (1)


Income Tax
Items (2)


Pro Forma









Net revenues

$ 543,254






$ 543,254

Reimbursable out-of-pocket expenses

35,622






35,622

Total revenues

578,876


-


-


578,876









Costs and expenses:








Cost of revenue

383,347






383,347

Reimbursable out-of-pocket expenses

35,622






35,622

Selling, general and administrative

81,292


(4,216)




77,076

Depreciation and amortization

27,592


(1,054)




26,538

Total costs and expenses

527,853


(5,270)


-


522,583









Income (loss) from operations

51,023


5,270




56,293









Other expense, net:








Interest expense (income), net

343






343

Foreign exchange transaction loss, net

777






777

Other expense, net

1,120


-


-


1,120









Income (loss) before taxes and equity investee earnings

49,903


5,270




55,173









Tax expense (benefit)

9,781


1,878


700


12,359









Equity investee earnings

547






547









Net income (loss)

$ 40,669


$ 3,392


$ (700)


$ 43,361









Basic earnings (loss) per share

$ 0.68


$ 0.06


$ (0.01)


$ 0.73









Weighted average shares outstanding - basic

59,695,336


59,695,336


59,695,336


59,695,336









Diluted earnings (loss) per share

$ 0.67


$ 0.06


$ (0.01)


$ 0.71









Weighted average shares outstanding - diluted

60,926,604


60,926,604


60,926,604


60,926,604

















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

(2) Represents favorable resolutions of income tax matters.

COVANCE INC.












GAAP to Pro Forma Reconciliation












Q3 2010












(Dollars in thousands, except per share data)













(UNAUDITED)
















Adjustments





GAAP


Asset Impairment


Income Tax
Items (1)


Inclusion of Common Stock Equivalents
in Diluted EPS Computation(2)


Pro Forma













Net revenues

$ 477,022








$ 477,022


Reimbursable out-of-pocket expenses

36,258








36,258


Total revenues

513,280


-


-


-


513,280













Costs and expenses:











Cost of revenue

337,698








337,698


Reimbursable out-of-pocket expenses

36,258








36,258


Selling, general and administrative

70,731








70,731


Depreciation and amortization

26,105








26,105


Asset impairment charges

119,229


(119,229)






-


Total costs and expenses

590,021


(119,229)


-


-


470,792













(Loss) income from operations

(76,741)


119,229


-


-


42,488













Other expense (income), net:











Interest (income) expense, net

(236)








(236)


Foreign exchange transaction loss (gain), net

681








681


Other expense (income), net

445


-


-


-


445













(Loss) income before taxes and equity investee earnings

(77,186)


119,229


-


-


42,043













Tax (benefit) expense

(46,003)


45,307


10,352


-


9,656













Equity investee earnings

253








253













Net (loss) income

$ (30,930)


$ 73,922


$ (10,352)


$ -


$ 32,640













Basic (loss) earnings per share

$ (0.49)


$ 1.16


$ (0.16)




$ 0.51













Weighted average shares outstanding - basic

63,739,910


63,739,910


63,739,910




63,739,910













Diluted (loss) earnings per share

$ (0.49)


$ 1.16


$ (0.16)


$ (0.01)


$ 0.50













Weighted average shares outstanding - diluted

63,739,910


63,739,910


63,739,910


1,270,798

(2)

65,010,708

(2)























(1) Represents favorable resolutions of income tax matters.

(2) Reflects inclusion of impact of common stock equivalents in computation of diluted earnings per share as GAAP loss transitions to Pro Forma income.

COVANCE INC.








GAAP to Pro Forma Reconciliation








YTD Q3 2011








(Dollars in thousands, except per share data)









(UNAUDITED)












Adjustments




GAAP


Restructuring
Activities (1)


Income Tax
Items (2)


Pro Forma









Net revenues

$ 1,563,460






$ 1,563,460

Reimbursable out-of-pocket expenses

90,601






90,601

Total revenues

1,654,061


-


-


1,654,061









Costs and expenses:








Cost of revenue

1,095,199






1,095,199

Reimbursable out-of-pocket expenses

90,601






90,601

Selling, general and administrative

247,292


(13,838)




233,454

Depreciation and amortization

79,291


(1,864)




77,427

Total costs and expenses

1,512,383


(15,702)


-


1,496,681









Income (loss) from operations

141,678


15,702




157,380









Other expense, net:








Interest expense (income), net

1,640






1,640

Foreign exchange transaction loss, net

892






892

Other expense, net

2,532


-


-


2,532









Income (loss) before taxes and equity investee earnings

139,146


15,702




154,848









Tax expense (benefit)

28,402


5,596


700


34,698









Equity investee earnings

305






305









Net income (loss)

$ 111,049


$ 10,106


$ (700)


$ 120,455









Basic earnings (loss) per share

$ 1.86


$ 0.17


$ (0.01)


$ 2.02









Weighted average shares outstanding - basic

59,596,294


59,596,294


59,596,294


59,596,294









Diluted earnings (loss) per share

$ 1.82


$ 0.17


$ (0.01)


$ 1.97









Weighted average shares outstanding - diluted

61,093,960


61,093,960


61,093,960


61,093,960

















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

(2) Represents favorable resolutions of income tax matters.

COVANCE INC.








GAAP to Pro Forma Reconciliation








YTD Q3 2010








(Dollars in thousands, except per share data)









(UNAUDITED)












Adjustments




GAAP


Asset Impairment


Income Tax
Items (1)


Pro Forma









Net revenues

$ 1,434,117






$ 1,434,117

Reimbursable out-of-pocket expenses

84,901






84,901

Total revenues

1,519,018


-


-


1,519,018









Costs and expenses:








Cost of revenue

1,001,574






1,001,574

Reimbursable out-of-pocket expenses

84,901






84,901

Selling, general and administrative

217,576






217,576

Depreciation and amortization

77,105






77,105

Asset impairment charges

119,229


(119,229)




-

Total costs and expenses

1,500,385


(119,229)


-


1,381,156









(Loss) income from operations

18,633


119,229


-


137,862









Other expense (income), net:








Interest (income) expense, net

(378)






(378)

Foreign exchange transaction loss (gain), net

2,595






2,595

Other expense (income), net

2,217


-


-


2,217









(Loss) income before taxes and equity investee earnings

16,416


119,229


-


135,645









Tax (benefit) expense

(22,534)


45,307


10,352


33,125









Equity investee earnings

926






926









Net (loss) income

$ 39,876


$ 73,922


$ (10,352)


$ 103,446









Basic (loss) earnings per share

$ 0.63


$ 1.16


$ (0.16)


$ 1.63









Weighted average shares outstanding - basic

63,601,302


63,601,302


63,601,302


63,601,302









Diluted (loss) earnings per share

$ 0.61


$ 1.14


$ (0.16)


$ 1.59









Weighted average shares outstanding - diluted

65,069,901


65,069,901


65,069,901


65,069,901

















(1) Represents favorable resolutions of income tax matters.

SOURCE Covance Inc.