Covance Reports First Quarter Net Revenue Growth Of 5.7% To $531M, EPS Of $0.60, And Adjusted Net Orders Of $704M

Covance Reports First Quarter Net Revenue Growth Of 5.7% To $531M, EPS Of $0.60, And Adjusted Net Orders Of $704M

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- Announces Restructuring Actions to Improve Early Development Profitability -

PRINCETON, N.J., May 2, 2012 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported financial results for its first quarter ended March 31, 2012, including net revenue growth of 5.7% to $531 million, operating margin of 8.7%, earnings of $0.60 per diluted share, and adjusted net orders of $704 million.

"In the first quarter, performance in our Early Development segment was significantly below our expectation,  which was offset by significantly better than expected performance in our Late-Stage Development services, enabling us to meet our first quarter financial targets on a consolidated basis," said Joe Herring, Chairman and Chief Executive Officer.  "Continued strong commercial performance drove a 25% year-on-year increase in adjusted net orders and an adjusted book-to-bill of 1.33 to 1. In addition, our strategic information technology projects are progressing according to the plan we outlined on our fourth quarter call.

"In terms of segment performance in the quarter, Late-Stage Development revenues grew 14.8% year-on-year, led by over 25% revenue growth in clinical development and 4% growth in central laboratories. Earnings from this stronger than expected revenue growth more than offset increased spending related to Late-Stage strategic information technology projects, resulting in a 270 basis point sequential increase in operating margins to 22.7%. Record adjusted net orders in central laboratory and clinical development give us increased confidence in our positive outlook for Late-Stage Development, which accounted for 60% of our revenue in the quarter.

"In Early Development, much lower than expected volumes in toxicology and discovery support services led to a revenue decline of 5.5% year-on-year while operating margins were 5.3%, versus our low double-digit operating margin expectation as we entered the quarter.  Performance was impacted by very soft results in January and February. However, we experienced a recovery in March, with segment revenues increasing 12% over the run rate from the first two months of the quarter and margins increased to 8.5%. In toxicology and discovery support services, results were impacted by a very slow start to the year from our larger clients. Toxicology orders were light during the first two months of the quarter, but rebounded strongly in March, ultimately exceeding our expectations for the full quarter.  We expect a sequential increase in revenue and operating margins for the segment in the second quarter as higher volumes in toxicology and discovery support should more than offset an expected decline in clinical pharmacology results.

"Furthermore, we are announcing additional restructuring actions in Early Development to better align capacity to preclinical market demand and further improve profitability going forward. These actions include closing our Chandler, Arizona facility, as well as a further reduction in our Early Development cost structure.  These actions are expected to result in annualized profit improvement (excluding associated costs and charges) of at least $20 million, of which approximately one-third is expected to be realized in 2012, and toxicology room capacity in North America near 2007 levels. We are also evaluating other cost actions, some of which are contingent on pending decisions regarding several large commercial opportunities under discussion.  Even as we reduce our footprint, our Early Development services remain an important differentiator for Covance and are a key component of our integrated drug development alliances.

"In the second quarter of 2012, we expect mid-single-digit year-on-year revenue growth and an increase in net revenues from the first quarter level in both segments. Accordingly, we expect second quarter earnings per share (excluding costs associated with our new actions) to be several cents above the first quarter level. For the full year, we continue to forecast mid-single-digit year-on-year revenue growth and diluted earnings per share in the range of $2.50 to $2.80 (excluding costs associated with our new actions and assuming foreign exchange rates remain at March 31 levels) as stronger performance in Late-Stage Development services offsets weaker performance for our Early Development services."

($ in millions except EPS)

1Q12

1Q11*

Change

Total Revenues

$573.9

$527.5

 

Less: Reimbursable Out-of-Pockets 

$43.1

$25.5

 

Net Revenues

$530.8

$502.0

5.7%

Operating Income

$46.1

$41.9

10.1%

   Operating Margin

8.7%

8.3%

 

Net Income

$35.7

$32.7

9.0%

Diluted EPS

$0.60

$0.54

12.3%

Restructuring Costs*

-

($5.9)

 

Operating Income, excluding items*

$46.1

$47.8

(3.4%)

  Operating Margin, ex items*

8.7%

9.5%

 

Net Income, excluding items*

$35.7

$36.5

(2.3%)

Diluted EPS, excluding items*

$0.60

$0.60

0.7%

                   *  See attached pro forma income statement for reconciliation of 2011 GAAP to pro forma amounts.

Operating Segment Results

Early Development

($ in millions)

    1Q12

  1Q11

Change

Net Revenues

$211.7

$224.0

(5.5%)

Operating Income

$11.3

$23.6

(52.0%)

Operating Margin

5.3%

10.5%

 

Restructuring Costs

-

($2.9)

 

Pro Forma Operating Income

$11.3

$26.5

(57.3%)

Pro Forma Operating Margin

5.3%

11.8%

 

The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support services, and research products.  Net revenues in the first quarter of 2012 declined by 5.5% year-on-year to $211.7 million, as a decline in revenues in both of our North American and European toxicology services as well as our discovery support services more than offset year-on-year growth in all other services. Sequentially, revenues declined $22.8 million driven primarily by a sharp drop in volumes across our global toxicology and discovery support services, as demand from a number of our large clients was well below expectations in the quarter. Revenue in clinical pharmacology, while up year-on-year, was down sequentially on a higher than expected level of study delays and cancellations.

Operating income for the first quarter was $11.3 million, which was down significantly on both a year-on-year and sequential basis. Operating margins for the first quarter were 5.3% compared to pro forma operating margins of 13.9% last quarter and 11.8% in the first quarter of 2011. The decline in profitability both on a year-on-year and a sequential basis was driven primarily by the lower revenue levels in our toxicology and discovery support services as well as weakness in clinical pharmacology services.

Late-Stage Development             

($ in millions)

1Q12

1Q11

Change

Net Revenues

$319.2

$278.0

14.8%

Operating Income

$72.4

$55.2

31.1%

Operating Margin

22.7%

19.9%

 

Restructuring Costs

-

($1.0)

 

Pro Forma Operating Income

$72.4

$56.2

29.0%

Pro Forma Operating Margin

22.7%

20.2%

 

The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services.  Net revenues for the first quarter of 2012 grew 14.8% year-on-year to $319.2 million and increased $21.2 million sequentially driven by significant growth in clinical development services. Revenue in our central laboratory services increased year-on-year and sequentially in both reported dollars and on a constant currency basis, marking the third consecutive quarter revenues have increased on a constant currency basis.

Operating income for the first quarter grew 29.0% year-on-year to $72.4 million compared to pro forma operating income of $59.5 million last quarter and $56.2 million in the first quarter of the prior year. Operating margins were 22.7% for the first quarter of 2012 compared to pro forma operating margins of 20.0% last quarter and 20.2% in the first quarter of last year. The year-on-year increase in profitability was driven by both clinical development and central laboratories, while the sequential increase was primarily driven by strength in clinical development.

Corporate Information

The Company's backlog at March 31, 2012 was $6.28 billion compared to $6.14 billion at December 31, 2011 and $6.29 billion at March 31, 2011. Foreign exchange positively impacted sequential backlog growth by $48 million.

Corporate expenses totaled $37.6 million in the first quarter of 2012 compared to $37.0 million last quarter (including $2.7 million in restructuring costs) and $36.9 million in the first quarter of last year (including $2.0 million in restructuring costs).

Cash and cash equivalents at March 31, 2012 were $440 million compared to $389 million at December 31, 2011 and $368 million at March 31, 2011.  The Company has $340 million in debt outstanding resulting primarily from borrowings related to share repurchases of $277 million made during the first quarter.

Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2012 was $15 million, consisting of operating cash flow of $45 million (which includes the payment of 2011 annual bonuses) less capital expenditures of $30 million.

Net DSO was an exceptionally low 29 days at March 31, 2012 compared with 38 days at December 31, 2011 and 37 days at March 31, 2011.

The Company's investor conference call will be webcast on May 3 at 10:00 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 11,500 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, the realization of savings from the announced restructuring action in the Company's Early Development segment, the cost and pace of completion of our information technology projects and the realization of benefits therefrom,  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, 2012 AND 2011

 
           

(Dollars in thousands, except per share data)

 
           

(UNAUDITED)

 
           
   

Three Months Ended March 31

 
   

2012

 

2011

 
       

Net revenues

 

$       530,841

 

$        501,986

 

Reimbursable out-of-pocket expenses

 

43,067

 

25,472

 

     Total revenues

 

573,908

 

527,458

 
           

Costs and expenses:

         

  Cost of revenue

 

376,460

 

353,520

 

  Reimbursable out-of-pocket expenses

 

43,067

 

25,472

 

  Selling, general and administrative

 

81,029

 

80,703

 

  Depreciation and amortization

 

27,230

 

25,863

 

        Total costs and expenses

 

527,786

 

485,558

(a)

           

Income from operations

 

46,122

 

41,900

(a)

           

Other expense, net:

         

  Interest expense, net

 

493

 

718

 

  Foreign exchange transaction loss (gain), net

 

228

 

(192)

 

        Other expense, net

 

721

 

526

 
           

Income before taxes and equity investee earnings

 

45,401

 

41,374

(a)

           

Taxes on income

 

9,807

 

8,634

(a)

           

Equity investee earnings (loss)

 

98

 

(2)

 
           

Net income

 

$         35,692

 

$           32,738

(a)

           

Basic earnings per share

 

$             0.62

 

$               0.55

(a)

           

Weighted average shares outstanding - basic

 

57,745,855

 

59,456,573

 
           

Diluted earnings per share

 

$             0.60

 

$               0.54

(a)

           

Weighted average shares outstanding - diluted

 

59,229,881

 

60,940,981

 
           
           

(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 from operations

 

$         46,122

 

$           47,768

 
           

Taxes on income

 

$           9,807

 

$           10,725

 
           

Net income 

 

$         35,692

 

$           36,515

 
           

Basic earnings per share

 

$             0.62

 

$               0.61

 
           

Diluted earnings per share

 

$             0.60

 

$               0.60

 

 

COVANCE INC.

           

CONSOLIDATED BALANCE SHEETS

           

MARCH 31, 2012 and DECEMBER 31, 2011

           

(Dollars in thousands)

           
           
     

March 31

 

December 31

     

2012

 

2011

     

(UNAUDITED)

   

ASSETS

       

Current Assets:

       
 

Cash & cash equivalents

 

$       439,756

 

$       389,103

 

Accounts receivable, net

 

312,466

 

312,127

 

Unbilled services

 

121,315

 

114,095

 

Inventory

 

67,668

 

74,698

 

Deferred income taxes

 

47,879

 

52,078

 

Prepaid expenses and other current assets

 

163,160

 

144,809

 

    Total Current Assets

 

1,152,244

 

1,086,910

           

Property and equipment, net

 

857,782

 

849,551

Goodwill

 

127,779

 

127,779

Other assets

 

60,531

 

43,768

 

    Total Assets

 

$   2,198,336

 

$   2,108,008

           

LIABILITIES and STOCKHOLDERS' EQUITY

       

Current Liabilities:

       
 

Accounts payable

 

$         36,066

 

$         36,393

 

Accrued payroll and benefits

 

86,269

 

142,229

 

Accrued expenses and other current liabilities

 

117,766

 

119,308

 

Unearned revenue

 

261,827

 

202,210

 

Short-term debt 

 

340,000

 

30,000

 

Income taxes payable

 

8,720

 

6,889

 

    Total Current Liabilities

 

850,648

 

537,029

           

Deferred income taxes

 

36,758

 

42,295

Other liabilities

 

72,242

 

70,889

 

    Total Liabilities

 

959,648

 

650,213

           

Stockholders' Equity:

       
 

Common stock

 

787

 

781

 

Paid-in capital

 

702,339

 

689,584

 

Retained earnings

 

1,541,586

 

1,505,894

 

Accumulated other comprehensive income

 

21,042

 

4,622

 

Treasury stock

 

(1,027,066)

 

(743,086)

 

    Total Stockholders' Equity

 

1,238,688

 

1,457,795

 

    Total Liabilities and Stockholders'  Equity

 

$   2,198,336

 

$   2,108,008

           

 

COVANCE INC.

         

CONSOLIDATED STATEMENTS OF CASH FLOWS

         

FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

         

(Dollars in thousands)

         

(UNAUDITED)

         
   

Three Months Ended March 31

         
   

2012

 

2011

Cash flows from operating activities:

       

  Net income

 

$           35,692

 

$           32,738

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

       

    operating activities:

       

    Depreciation and amortization

 

27,230

 

25,863

    Non-cash compensation expense associated with employee benefit

       

       and stock compensation plans

 

10,447

 

9,106

    Deferred income tax benefit

 

(2,409)

 

(1,010)

    Loss on disposal of property and equipment

 

68

 

130

    Equity investee (earnings) loss

 

(98)

 

2

    Changes in operating assets and liabilities:

       

       Accounts receivable

 

(339)

 

(34,316)

       Unbilled services

 

(7,220)

 

(12,732)

       Inventory

 

7,030

 

(275)

       Accounts payable

 

(327)

 

(9,276)

       Accrued liabilities

 

(57,502)

 

(11,534)

       Unearned revenue

 

59,617

 

9,443

       Income taxes payable

 

2,051

 

(7,065)

       Other assets and liabilities, net

 

(28,806)

 

(1,894)

Net cash provided by (used in) operating activities

 

45,434

 

(820)

         

Cash flows from investing activities:

       

  Capital expenditures

 

(29,873)

 

(20,107)

  Other, net

 

114

 

48

Net cash used in investing activities

 

(29,759)

 

(20,059)

         

Cash flows from financing activities:

       

  Net borrowings under revolving credit facility

 

310,000

 

-

  Repayments under long-term debt

 

-

 

(2,500)

  Stock issued under employee stock purchase and option plans

 

2,094

 

4,085

  Purchase of treasury stock

 

(283,980)

 

(7,242)

Net cash provided by (used in) financing activities

 

28,114

 

(5,657)

Effect of exchange rate changes on cash

 

6,864

 

17,320

Net change in cash and cash equivalents

 

50,653

 

(9,216)

         

Cash and cash equivalents, beginning of period

 

389,103

 

377,223

         

Cash and cash equivalents, end of period

 

$         439,756

 

$         368,007

         

 

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, streamlining operations and 

      other cost reduction actions.

         
           

SOURCE Covance Inc.

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