ERT Reports Third Quarter 2011 Operating Results

PHILADELPHIA, Oct. 27, 2011 /PRNewswire/ -- eResearchTechnology, Inc. (ERT), (Nasdaq: ERT) a global technology-driven provider of services and customizable medical devices to biopharmaceutical and healthcare organizations and the market leader for centralized cardiac safety and respiratory efficacy services in drug development, announced today results for the third quarter ended September 30, 2011.  Unless otherwise noted, all comparative numbers refer to changes from the same period a year ago.  The financial results include the results related to CareFusion Research Services (RS and now included as part of our German operations) commencing from its date of acquisition on May 28, 2010.  

This press release contains financial measures prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and non-GAAP measures adjusted to exclude the impact of the amortization of the acquired intangibles and other assets and acquisition and other costs related to the RS acquisition and related income tax effects.  A reconciliation of these GAAP and non-GAAP measures is found in the attached "Reconciliation of GAAP to Non-GAAP Information."

Financial Highlights for the Third Quarter of 2011

• New bookings were $78.4 million in the third quarter of 2011 compared to $70.9 million for the second quarter of 2011 and $59.1 million a year ago.  
• The gross book-to-bill ratio was 1.6 in the third quarter of 2011 compared to 1.7 in the second quarter of 2011 and 1.3 a year ago.  
• Backlog was $343.8 million as of September 30, 2011 compared to $333.2 million as of June 30, 2011 and $303.1 million a year ago.  The annualized cancellation rate was 14.6% in the third quarter of 2011 compared to 13.4% in the second quarter of 2011 and 14.6% a year ago.  
• Net revenues were $48.1 million for the third quarter of 2011 compared to $42.8 million for the second quarter of 2011 and $45.1 million a year ago.  Revenues from our German operations were $24.1 million in the third quarter of 2011, compared to $20.3 million in the second quarter of 2011 and $21.5 million a year ago.
• GAAP gross margin percentage was 41.5% in the third quarter of 2011 compared to 37.4% for the second quarter of 2011 and 44.5% a year ago.  Non-GAAP gross margin percentage was 45.5% in the third quarter of 2011 compared to 42.0% for the second quarter of 2011 and 50.0% a year ago.  Our gross profit margin in the second quarter of 2011 was unusually low due to increased costs in our German operations to support the start of new respiratory studies, negative manufacturing variances and a $0.5 million non-cash adjustment to the carrying value of returned rental equipment.  Gross margins are down from a year ago due to the increased mix of lower margin respiratory revenue.  
• GAAP operating income margin percentage was 10.9% in the third quarter of 2011 compared to 6.0% for the second quarter of 2011 and 14.6% a year ago.  Non-GAAP operating income margin percentage was 14.9% in the third quarter of 2011 compared to 10.6% for the second quarter of 2011 and 21.3% a year ago.
• GAAP net income was $4.3 million, or $0.09 per diluted share, in the third quarter of 2011 compared to $1.8 million, or $0.04 per diluted share, in the second quarter of 2011 and $3.2 million, or $0.06 per diluted share, a year ago.  Non-GAAP net income was $5.6 million, or $0.11 per diluted share, in the third quarter of 2011 compared to $3.0 million, or $0.06 per diluted share, in the second quarter of 2011 and $5.4 million, or $0.11 per diluted share, a year ago.  The impact of foreign exchange rate movements on GAAP and non-GAAP diluted net income per share was a positive $0.01 in the third quarter of 2011 and a negative of $0.03 a year ago.
• Cash flow from operations was $9.2 million in the third quarter of 2011, compared to $8.7 million in the second quarter of 2011 and $6.4 million a year ago.
• Cash and short-term investments totaled $29.6 million at September 30, 2011 compared to $31.7 million on June 30, 2011.  ERT had $21.0 million in long-term debt as of September 30, 2011 and June 30, 2011.
• Capital expenditures were $10.2 million for the third quarter of 2011, up sequentially from $7.5 million in the second quarter of 2011 and were comprised of $4.4 million of capitalized software and $5.8 million of equipment which primarily included additions to our rental equipment pool of ECG, respiratory and ePRO equipment to support new studies.  

Financial highlights for the first nine months of 2011

• New bookings were $221.0 million in the first nine months of 2011 compared to $153.3 million for the first nine months of 2010.  
• Net revenues were $132.6 million for the first nine months of 2011 compared to $96.1 million in the comparable period a year ago.  Revenues from our German operations were $63.3 million for the first nine months of 2011 and $27.2 million from the period of acquisition to September 30, 2010.
• GAAP gross margin percentage was 41.0% in the first nine months of 2011 compared to 49.6% for the comparable period a year ago.  Non-GAAP gross margin percentage was 45.4% in the first nine months of 2011 compared to 53.0% for the comparable period a year ago.
• GAAP operating income margin percentage was 9.9% in the first nine months of 2011 compared to 10.8% in the comparable period a year ago.  Non-GAAP operating income margin percentage was 14.3% in the first nine months of 2011 compared to 19.6% for the comparable period a year ago.   
• GAAP net income was $9.2 million, or $0.19 per diluted share, in the first nine months of 2011 compared to $5.8 million, or $0.12 per diluted share, in the comparable period a year ago.  Non-GAAP net income was $13.1 million, or $0.27 per diluted share, in the first nine months of 2011 compared to $12.3 million, or $0.25 per diluted share, in the comparable period a year ago.  
• Cash flow from operations was $22.9 million in the first nine months of 2011 compared to $18.8 million in the comparable period a year ago.

"We are pleased with the third quarter results which included both record revenues and bookings." commented Dr. Jeffrey Litwin, President and Chief Executive Officer of ERT.  "This quarter marks the third consecutive quarter that bookings exceeded $70 million.  The bookings this quarter were driven by continued strength in electronic Patient Reported Outcome (ePRO) and very strong cardiac safety activity.  While the revenues came in at the higher end of our expectations and our gross profit margins improved sequentially, our profitability was impacted by a mix shift from higher margin cardiac safety revenue to lower margin respiratory revenue and increased costs for bonus provisions and expansion of our facility in Germany to accommodate higher growth which resulted in achieving EPS at the lower end of our expectations."  

"We continue to see interest in the unique solutions we can provide to our clients," continued Dr. Litwin, "and this is translating to record bookings at a time where overall research and development  spending is relatively flat.  We will continue to invest in the products that differentiate us from the competition.  We expect our fourth quarter results to be fairly similar to the third quarter, resulting in higher second half 2011 revenues and bookings as compared to the first half of the year.  The growth in our respiratory business has required us to incur higher spending in cost of goods, operating expense and capital expenditures than we had originally planned.  We are, however, seeing the results of our efforts in our revenue growth and we expect our profit margins to improve over the course of 2012 as the strategic initiatives we put in place today take hold, our Germany operations reach a steady state of profitability and we launch our fully-integrated EXPERT 3 platform.

2011 Guidance

ERT expects net revenues of between $179 million and $182 million for 2011.  ERT expects GAAP diluted net income per share to be between $0.25 and $0.28 for 2011 and non-GAAP diluted net income per share to be between $0.35 and $0.38 for the same period.  EPS guidance has been reduced to reflect a mix shift from higher margin cardiac safety revenue to lower margin respiratory revenue, a steady state level of operating expenses and limited impact of foreign exchange (which had a positive impact of $0.01 per diluted share on our third quarter 2011 results).

For the fourth quarter ending December 31, 2011, we expect revenues to be between $46 million and $49 million, GAAP diluted net income per share to be between $0.06 and $0.09 and non-GAAP diluted net income per share to be between $0.08 and $0.11.

Use of Non-GAAP Financial Measures

In addition to GAAP financial measures, ERT uses certain non-GAAP financial measures that exclude charges related to the amortization of the RS acquired intangible and other assets and acquisition and other costs which are related to the RS acquisition, and also their related income tax effects.  ERT believes that these non-GAAP measures are useful to investors because this supplemental information facilitates comparisons of its operations from period to period and to the performance of other companies within its industry and assists in gaining a better understanding of its operating results and future prospects.  ERT views amortization of acquired intangible and other assets related to the RS acquisition, which includes such items as the amortization of acquired customer backlog and technology, as items determined at the time of the acquisition.  While ERT reviews the underlying value of these intangibles regularly for impairment, the amortization is an expense typically not affected by operations during any particular period and does not contribute to the operational performance in any particular period.  ERT regards acquisition and other costs related to its recent acquisition as a cost that does not recur on a regular basis.  

ERT's non-GAAP effective tax rates differ from its GAAP effective tax rates because of 1) the exclusion of the amortization of acquired intangible and other assets and acquisition and other costs related to its acquisition of RS and 2) the income tax effect due to the difference between the GAAP and non-GAAP effective tax rate applied against the GAAP pre-tax income, primarily as a result of the acquisition costs incurred in 2010 not being deductible for income tax purposes.  ERT excludes the impact of these discrete tax items from its non-GAAP income tax provision because it believes they are not indicative of the effective income tax rate of its ongoing business operations.

Management uses these non-GAAP financial measures, in addition to the measures prepared in accordance with GAAP, as the basis for measuring ERT's operating performance, financial and operating decision-making, developing budgets and comparing such performance to that of prior periods for the same reasons stated above.  These non-GAAP financial measures are not meant to be considered superior to or a substitute for comparable financial measures prepared in accordance with GAAP.  There are also limitations on the non-GAAP measures, including: 1) these non-GAAP measures do not have standardized meanings and may not be comparable to similar non-GAAP measures used by other companies, 2) acquisition and other costs related to ERT's 2010 acquisition of RS represent actual cash expenditures that are excluded from ERT's non-GAAP measures and 3) although amortization of acquired intangible and other assets does not directly impact ERT's current cash position, such expense is amortized over their expected economic lives and does represent the declining value of the assets acquired, but this expense is excluded from ERT's non-GAAP measures.  ERT adjusts for these limitations by relying on these non-GAAP measures only as a supplement to its GAAP results.

Conference Call

Dr. Litwin and Mr. Keith Schneck, the Company's Chief Financial Officer, will hold a conference call to discuss these results.  The conference call will take place at 5:00 PM EDT on October 27, 2011.  For the conference call, interested participants should dial 1-800-860-2442 when calling within the United States or 1-412-858-4600 when calling internationally.  There will be a playback available as well.  To listen to the playback, please call 1-877-344-7529 when calling within the United States or 1-412-317-0088 when calling internationally.  Conference code for playback is 10005603.

This call is being webcast by MultiVu and can be accessed at ERT's website at www.ert.com.  The webcast may also be accessed via the direct link at http://www.videonewswire.com/event.asp?id=82965.  The webcast can be accessed for up to one year on either site.  

About eResearchTechnology, Inc.

ERT (www.ert.com) is a global technology-driven provider of clinical services and customizable medical devices to biopharmaceutical and healthcare organizations.  It is the market leader for centralized cardiac safety and respiratory efficacy services in drug development and also collects, analyzes and distributes electronic patient reported outcomes (ePRO) in multiple modalities across all phases of clinical research.

This release may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views as to future events and financial performance with respect to our operations.  These statements can be identified by the fact that they do not relate strictly to historical or current facts.  They use words such as "aim," "anticipate," "are confident," "estimate," "expect," "will be," "will continue," "will likely result," "project," "intend," "plan," "believe," "look to" and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance.  

These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.  Factors that might cause such a difference include: unfavorable economic conditions; our ability to obtain new contracts and accurately estimate net revenues, our positive outlook for future bookings, variability in size, scope and duration of projects and internal issues at the sponsoring client; our ability to successfully integrate the RS or any future acquisitions; competitive factors in the market for our centralized services; changes in the bio-pharmaceutical and healthcare industries to which we sell our solutions; technological development; and market demand.  There is no guarantee that the amounts in our backlog will ever convert to revenue.  Should the economic conditions deteriorate, the cancellation rates that we have historically experienced could increase.  Further information on potential factors that could affect the Company's financial results can be found in ERT's Reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission.  Guidance is based on management's good faith expectations given current market conditions but that continued or further deterioration of general economic conditions, in addition to other factors cited elsewhere, could result in ERT not achieving the revenue and net income per diluted share guidance provided.

Forward-looking statements speak only as of the date made.  We undertake no obligation to update any forward-looking statements, including prior forward-looking statements, to reflect the events or circumstances arising after the date as of which they were made.  As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements included in this release or that may be made in our filings with the Securities and Exchange Commission or elsewhere from time to time by, or on behalf of, us.

SOURCE ERT