Covance Reports Second Quarter Revenue of $475M and EPS of $0.49; Updates Full-Year Financial Targets

PRINCETON, N.J., July 28 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings per diluted share for its second quarter ended June 30, 2010 of $0.49, including $0.09 of facility rationalization and other cost reduction actions during the second quarter, versus $0.60 in the first quarter of 2010 and $0.67 in the second quarter of 2009.

"On a consolidated basis, second quarter net revenues grew 2.0% year-on-year and operating margin was 8.9%.  Operating margins, excluding the second quarter cost reduction actions of $7.7 million, was 10.6% in the quarter," said Joe Herring, Chairman and Chief Executive Officer.  "In Early Development, revenues grew 4.2% year-on-year and increased sequentially by $3 million. Early Development operating margin was 10.8% or 14.0% excluding the second quarter cost actions, a 280 basis point sequential increase.  In Late-Stage Development, revenues were flat year-on-year due to the previously announced delay of three large Phase III clinical studies and operating margin of 21.2% met our forecast.  Of these previously delayed studies, one trial commenced in the second quarter, one was reduced in size and launched in July, and the third is still expected to begin enrollment in 2011.  In central laboratory services, revenue and operating income increased sequentially on increased volume, despite a continued shift in mix to more automated tests and to kits received from geographies where transportation expense and related revenue are lower.

"On the commercial front, adjusted net orders (inclusive of the previously mentioned reduced study and other cancellations) in the second quarter were $590 million, representing an adjusted book-to-bill ratio of 1.24 to 1 and a 14% increase over the second quarter of 2009. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill was 1.3 to 1. With regard to building new strategic relationships, we are continuing to advance discussions with several large clients.  

"While we were pleased with the second quarter improvement in early development revenues and profitability, our most recent forecast for the third quarter indicates sequentially flat revenue for the segment, with lower demand and profitability for our toxicology services and research products.  In Late-Stage Development, we now expect central laboratory results in the third quarter to be roughly in-line with second quarter levels with similar kit volumes, due to typical seasonal patterns, and the continued impact of mix.  As a result, we now expect earnings per share to be approximately $0.50 in the third quarter of 2010, including approximately $0.02 of costs related to previously announced site closures.  For the full-year, we are lowering our 2010 revenue growth target to the 2% to 4% range and our earnings per share target to $2.10 to $2.30 (using June 30, 2010 exchange rates), including $0.11 per share in costs resulting from facility rationalizations and other cost reduction actions and excluding benefits from any potential strategic transactions.  Our current earnings forecast is above the midpoint of this range."

Consolidated Results

Operating Segment Results

Early Development

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, research products, and discovery services.  Early Development net revenues for the second quarter of 2010 were $208.2 million compared to $205.0 million in the first quarter of 2010 and $199.8 million in the second quarter of 2009.  Revenues increased sequentially for the third consecutive quarter on improved performances in chemistry and discovery services.  In the quarter, foreign exchange positively impacted year-on-year revenue growth by 90 basis points, but sequentially negatively impacted revenue by approximately $3 million.  

Operating income for the second quarter of 2010 declined 16.9% year-over-year to $22.5 million, compared to $27.1 million in the second quarter of last year. Operating margin in the second quarter was 10.8%, which included facility rationalization and other cost reduction actions totaling $6.7 million. Excluding these cost actions, operating margins for the second quarter of 2010 were 14.0%, a sequential improvement of 280 basis points and up 40 basis points from the second quarter of last year.  Early Development operating margins in the third quarter are expected to be in the 11% to 12% range primarily due to lower demand and profitability in toxicology.

Late-Stage Development

The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services).  Late-Stage Development net revenues for the second quarter of 2010 grew 0.3% to $267.0 million compared to $266.3 million in the second quarter of 2009.  Sequentially, revenues declined $9.9 million due to approximately $5.5 million in foreign exchange headwind and to the impact of the three Phase III clinical delays. Foreign exchange positively impacted year-on-year revenue growth in the quarter by 30 basis points.  We now anticipate full-year 2010 Late-Stage Development revenue growth to be approximately flat year-on-year.  

Operating income for the second quarter of 2010 declined 13.7% to $56.5 million compared to $65.5 million in the second quarter of the prior year due to lower clinical development profitability resulting from the three Phase III clinical trial delays.  Operating margins of 21.2% for the second quarter of 2010 were down 270 basis points as compared to 23.9% in the first quarter of this year and versus 24.6% in the second quarter of last year. Operating margin is expected to remain in the 21% range in the third quarter due to the typical seasonal impact across the segment, the current mix of tests and kits received in central laboratory services, and the impact of the three large clinical trial delays.  We expect to see margin expansion in the fourth quarter as revenue ramps.

Corporate Information

The Company's backlog at June 30, 2010 grew 3.6% year-over-year to $4.83 billion compared to $4.66 billion at June 30, 2009 and $4.79 billion at March 31, 2010. Foreign exchange negatively impacted sequential backlog growth by $31 million.  Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $590 million in the second quarter of 2010.

Corporate expenses totaled $36.5 million in the second quarter of 2010 compared to $36.3 million last quarter and $32.6 million in the second quarter of last year.  In 2010, corporate expenses are expected to be approximately 7% of revenue.

Cash and cash equivalents at June 30, 2010 were $291 million, an increase of $23 million from the $268 million at March 31, 2010 and up $87 million from the $204 million at June 30, 2009. The company remains debt free.  

Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2010 was $24 million, consisting of operating cash flow of $61 million less capital expenditures of $37 million. Free cash flow year to date was $14 million, consisting of operating cash flow of $81 million less capital expenditures of $67 million.   In 2010, we expect free cash flow to be approximately $100 million, net of capital expenditures of approximately $160 million.  The free cash flow target for 2010 assumes net Days Sales Outstanding (DSO) at 43 days.

Net Days Sales Outstanding (DSO) were 47 days at June 30, 2010 compared to 42 days at March 31, 2010 and 41 days at June 30, 2009.

The effective tax rate was 24.9% in the second quarter.  We expect our effective tax rate to be approximately 25% for 2010.

The Company's investor conference call will be webcast on July 29 at 9:00 am ET. 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 $1.8 billion, global operations in more than 30 countries, and more than 10,000 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 of large contracts, 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, 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

SOURCE Covance Inc.