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

Nov 02, 2011, 16:05 ET from Covance Inc.

PRINCETON, N.J., Nov. 2, 2011 /PRNewswire/ -- 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 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 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.



RELATED LINKS

http://www.covance.com