2014

Covance Reports First Quarter Revenue of $502M, GAAP EPS of $0.54, and Pro Forma EPS of $0.60

PRINCETON, N.J., May 4, 2011 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its first quarter ended March 31, 2011 of $0.54 per diluted share.  Included in first quarter results is $0.06 per diluted share in costs from the previously-announced restructuring actions. Excluding these costs, earnings per diluted share were $0.60 in the quarter.  

"Covance began 2011 with revenue growth of 4.2% to $502 million, operating margin (after excluding $5.9 million in costs from the previously-announced restructuring actions) of 9.5%, and pro forma EPS of $0.60, which was above the high-end of our targeted earnings range for the quarter," said Joe Herring, Chairman and Chief Executive Officer.  "Early Development revenues grew by 9.3% year-on-year and pro forma operating margin increased 60 basis points from the first quarter of last year to 11.8%.  Toxicology performance improved for the second consecutive quarter, and this positive trend continued in April.  In Late-Stage Development, revenue grew 2.6% sequentially and 0.4% year-on-year, as strong performance in clinical development was partially offset by lower revenues in central laboratories. Pro forma operating margin in the segment was 20.2%.  

"On the commercial front, adjusted net orders in the first quarter were $564 million, representing an adjusted book-to-bill of 1.12 to 1.  As evidence of our success in strategic partnering, nearly 20% of our revenue in the first quarter was earned from contractual minimum volume (CMV) commitments. Looking forward, we are encouraged by the increasing demand for our toxicology services, as well as a robust pipeline of clinical development proposals.

"Covance continues to expect single-digit percentage revenue growth and pro forma earnings per share to be in the range of $2.50 to $2.90 per diluted share, excluding costs associated with ongoing restructuring activities.  This range assumes no new strategic alliances with clients and foreign exchange rates remain at March 31, 2011 levels. In the second quarter, we are expecting a continued sequential increase in net revenues and pro forma earnings per share to be approximately $0.65."

Consolidated Results


($ in millions except EPS)

1Q11

1Q10

Change

Total Revenues

$527.5

$ 505.0


Less: Reimbursable Out-of-Pockets  

$25.5

$ 23.1


Net Revenues

$502.0

$ 481.9

4.2%

Operating Income

$41.9

$  52.9

(20.7%)

  Operating Margin

8.3%

11.0%


Net Income

$32.7

$ 39.1

(16.4%)

Diluted EPS

$0.54

$ 0.60

(10.9%)

Restructuring Costs*

($5.9)

-


Operating Income, excluding items*

$47.8

$52.9

(9.6%)

 Operating Margin, ex items*

9.5%

11.0%


Net Income, excluding items*

$36.5

$ 39.1

(6.7%)

Diluted EPS, excluding items*

$0.60

$ 0.60

(0.7%)

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



Operating Segment Results

Early Development


($ in millions)

   1Q11

 1Q10

Change

Net Revenues

$224.0

$205.0

9.3%

Operating Income

$23.6

$ 22.9

2.9%

Operating Margin %

10.5%

11.2%


Restructuring Costs

($2.9)

-


Pro Forma Operating Income

$26.5

$ 22.9

15.6%

Pro Forma OM%

11.8%

11.2%





The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, discovery support, and research products.  Net revenues in the first quarter of 2011 grew 9.3% year-on-year to $224.0 million driven by the addition of the Alnwick, UK and Porcheville, France sites, as well as growth in North American toxicology (excluding Vienna, Virginia), chemistry, and discovery support services. Sequentially, revenues increased $3.4 million driven primarily by inclusion of three full months of results from our Alnwick and Porcheville sites, as well as improvement in our toxicology services, partially offset by the wind-down of Vienna and lower revenues in discovery support services.  

Operating income for the first quarter was $23.6 million and included $2.9 million in costs associated with our restructuring actions. Operating income, excluding these costs, was $26.5 million, compared to $26.6 million last quarter and $22.9 million in the first quarter of last year. Operating margins for the first quarter, excluding restructuring costs, were 11.8% compared to 12.0% last quarter and 11.2% in the first quarter of 2010. Sequentially, improved profitability in toxicology was offset by higher operating losses associated with the wind-down of our Vienna operations and transition to Greenfield, higher incentive compensation accruals, and lower levels of operating income in chemistry and discovery support services.  

Late-Stage Development


($ in millions)

1Q11

1Q10

Change

Net Revenues

$ 278.0

$276.9

0.4%

Operating Income

$55.2

$  66.2

(16.6%)

Operating Margin %

19.9%

23.9%


Restructuring Costs

($1.0)

-


Pro Forma Operating Income

$56.2

$  66.2

(15.2%)

Pro Forma OM%

20.2%

23.9%





The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services.  Net revenues for the first quarter of 2011 grew 0.4% year-on-year to $278.0 million and increased $7.0 million sequentially as growth in clinical development services was partially offset by a revenue decline in central laboratories.    

Operating income for the first quarter was $55.2 million and included $1.0 million in costs associated with our restructuring actions. Operating income, excluding these costs, was $56.2 million, compared to $54.7 million last quarter and $66.2 million in the first quarter of the prior year. Pro forma operating margins were 20.2% for the first quarter of 2011 compared to 20.2% last quarter and 23.9% in the first quarter of last year. The year-on-year profitability decline was due primarily to lower revenues and operating income in central labs.

Corporate Information

The Company's backlog at March 31, 2011 grew 31.3% year-over-year to $6.29 billion compared to $4.79 billion at March 31, 2010 and $6.19 billion at year-end.  Foreign exchange positively impacted sequential backlog growth by approximately $127 million.  Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $564 million in the first quarter of 2011.

Corporate expenses totaled $36.9 million in the first quarter of 2011 (including $2.0 million in restructuring costs) compared to $39.9 million last quarter (including $5.8 million in restructuring costs) and $36.3 million in the first quarter of last year.  We expect corporate expenses as a percent of revenue, excluding restructuring costs, to trend lower during 2011 as more of the savings from the ongoing restructuring actions are realized.

Cash and cash equivalents at March 31, 2011 were $368 million compared to $377 million at December 31, 2010 and $268 million at March 31, 2010.  The Company has $130 million in debt outstanding resulting from borrowings related to the fourth quarter accelerated share repurchase.

Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2011 was a negative $21 million, consisting of operating cash flow of negative $1 million (which includes the payment of 2010 annual bonuses) less capital expenditures of $20 million.  

Net DSO were 37 days at March 31, 2011 compared to 31 days at December 31, 2010 and 42 days at March 31, 2010.  

The Company's investor conference call will be webcast on May 5 at 9:00 am EDT.  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 $1.9 billion, global operations in more than 25 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 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 MONTHS ENDED MARCH 31, 2011 AND 2010


(Dollars in thousands, except per share data)






(UNAUDITED)








Three Months Ended March 31



2011


2010









Net revenues


$    501,986


$    481,924

Reimbursable out-of-pocket expenses


25,472


23,095

    Total revenues


527,458


505,019






Costs and expenses:





 Cost of revenue


353,520


332,516

 Reimbursable out-of-pocket expenses


25,472


23,095

 Selling, general and administrative


80,703


71,800

 Depreciation and amortization


25,863


24,744

       Total costs and expenses


485,558

(a)

452,155






Income from operations


41,900

(a)

52,864






Other expense, net:





 Interest expense (income), net


718


(65)

 Foreign exchange transaction (gain) loss, net


(192)


1,153

       Other expense, net


526


1,088






Income before taxes and equity investee earnings


41,374

(a)

51,776






Taxes on income


8,634

(a)

13,054






Equity investee (loss) earnings


(2)


419






Net income


$      32,738

(a)

$      39,141






Basic earnings per share


$          0.55

(a)

$          0.62






Weighted average shares outstanding - basic


59,456,573


63,443,698






Diluted earnings per share


$          0.54

(a)

$          0.60






Weighted average shares outstanding - diluted


60,940,981


64,933,313






(a) Includes $5,868 in restructuring costs ($3,777 net of tax) during the three months ended March 31, 2011.
















Excluding the impact of restructuring charges:










Income before taxes and equity investee earnings


$      47,242


$      51,776






Taxes on income


$      10,725


$      13,054






Net income


$      36,515


$      39,141






Basic earnings per share


$          0.61


$          0.62






Diluted earnings per share


$          0.60


$          0.60



COVANCE INC.



CONSOLIDATED BALANCE SHEETS



MARCH 31, 2011 and DECEMBER 31, 2010







(Dollars in thousands)
















March 31


December 31




2011


2010




(UNAUDITED)



ASSETS





Current Assets:






Cash & cash equivalents


$      368,007


$       377,223


Accounts receivable, net


295,476


261,160


Unbilled services


103,461


90,729


Inventory


83,199


82,924


Deferred income taxes


36,859


35,648


Prepaid expenses and other current assets


103,132


98,127


   Total Current Assets


990,134


945,811







Property and equipment, net


848,973


843,983

Goodwill, net


127,653


127,653

Other assets


53,264


48,095


   Total Assets


$   2,020,024


$    1,965,542







LIABILITIES and STOCKHOLDERS' EQUITY





Current Liabilities:






Accounts payable


$        24,803


$         34,079


Accrued payroll and benefits


89,379


107,572


Accrued expenses and other current liabilities


104,054


97,395


Unearned revenue


195,744


186,301


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


45,000


45,000


Income taxes payable


21,489


28,827


   Total Current Liabilities


480,469


499,174







Long-term debt


85,000


87,500

Deferred income taxes


31,310


30,531

Other liabilities


71,019


68,516


   Total Liabilities


667,798


685,721







Stockholders' Equity:






Common stock


779


774


Paid-in capital


652,800


639,341


Retained earnings


1,406,443


1,373,705


Accumulated other comprehensive income


33,722


277


Treasury stock


(741,518)


(734,276)


   Total Stockholders' Equity


1,352,226


1,279,821


   Total Liabilities and Stockholders'  Equity


$   2,020,024


$    1,965,542









COVANCE INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Dollars in thousands)


(UNAUDITED)








Three Months Ended March 31






2011


2010

Cash flows from operating activities:





 Net income


$   32,738


$   39,141

 Adjustments to reconcile net income to net cash (used in) provided by





   operating activities:





   Depreciation and amortization


25,863


24,744

   Non-cash compensation expense associated with employee benefit





      and stock compensation plans


9,106


7,501

   Deferred income tax benefit


(1,010)


(3,233)

   Loss on disposal of property and equipment


130


104

   Equity investee loss (earnings)


2


(419)

   Changes in operating assets and liabilities:





      Accounts receivable


(34,316)


19,293

      Unbilled services


(12,732)


(18,135)

      Inventory


(275)


3,104

      Accounts payable


(9,276)


(10,409)

      Accrued liabilities


(11,534)


(30,208)

      Unearned revenue


9,443


(7,229)

      Income taxes payable


(7,065)


6,393

      Other assets and liabilities, net


(1,894)


(10,247)

Net cash (used in) provided by operating activities


(820)


20,400






Cash flows from investing activities:





 Capital expenditures


(20,107)


(30,394)

 Other, net


48


48

Net cash used in investing activities


(20,059)


(30,346)






Cash flows from financing activities:





 Repayments under long-term debt


(2,500)


-

 Stock issued under employee stock purchase and option plans


4,085


5,032

 Purchase of treasury stock


(7,242)


(4,997)

Net cash (used in) provided by financing activities


(5,657)


35

Effect of exchange rate changes on cash


17,320


(11,148)

Net change in cash and cash equivalents


(9,216)


(21,059)






Cash and cash equivalents, beginning of period


377,223


289,469






Cash and cash equivalents, end of period


$ 368,007


$ 268,410



COVANCE INC.






GAAP to Pro Forma Reconciliation






Q1 2011






(Dollars in thousands, except per share data)







(UNAUDITED)










Adjustments




GAAP


First Quarter
Restructuring
Activities (1)


Pro Forma







Net revenues

$    501,986




$    501,986

Reimbursable out-of-pocket expenses

25,472




25,472

    Total revenues

527,458


-


527,458







Costs and expenses:






 Cost of revenue

353,520




353,520

 Reimbursable out-of-pocket expenses

25,472




25,472

 Selling, general and administrative

80,703


(5,463)


75,240

 Depreciation and amortization

25,863


(405)


25,458

       Total costs and expenses

485,558


(5,868)


479,690







Income from operations

41,900


5,868


47,768







Other expense, net:






 Interest expense (income), net

718




718

 Foreign exchange transaction (gain) loss, net

(192)




(192)

       Other expense, net

526


-


526







Income before taxes and equity investee earnings

41,374


5,868


47,242







Taxes on income

8,634


2,091


10,725







Equity investee (loss) earnings

(2)




(2)







Net income

$      32,738


$             3,777


$      36,515







Basic earnings per share

$          0.55


$               0.06


$          0.61







Weighted average shares outstanding - basic

59,456,573


59,456,573


59,456,573







Diluted earnings per share

$          0.54


$               0.06


$          0.60







Weighted average shares outstanding - diluted

60,940,981


60,940,981


60,940,981













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



SOURCE Covance Inc.



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