Covance Reports First Quarter Net Revenue Growth Of 6.9% To $620 Million, Pro Forma EPS Growth Of 20.1% To $0.90 And Adjusted Net Orders Of $710 Million

PRINCETON, N.J. -- Covance Inc. (NYSE: CVD) today reported results for its first quarter ended March 31, 2014. Net revenue was $620 million, representing 6.9% growth from the first quarter of 2013. On a GAAP basis, the company reported earnings of $0.88 per diluted share in the first quarter. Excluding a gain on the sale of our Seattle genomics laboratory of $1.6 million and charges associated with restructuring and other cost reduction actions totaling $4.1 million, the company reported earnings per diluted share of $0.90, up 20.1% over the first quarter of 2013.

"Covance's first quarter of 2014 featured a higher level of new toxicology orders and continued operational success in our clinical and central laboratory service offerings. Our 20% year-on-year increase in pro forma EPS was driven by 7% revenue growth and expanded pro forma operating margins of 11.5%," said Joe Herring, Chairman and Chief Executive Officer. "Adjusted net orders in the first quarter were $710 million, representing an adjusted net book-to-bill of 1.15 to 1. Net orders remained strong in central laboratories and grew significantly in toxicology and clinical pharmacology, offsetting lower-than-expected net orders in clinical development.

"Late-Stage Development first quarter revenues grew 7.8% year-on-year to $402 million. Central laboratories and clinical development grew 11% and 6%, respectively, which more than offset a decline in our market access services. Late-Stage Development operating margin expanded to 23.2%.

"Early Development results were in-line with our expectation with revenue increasing 5.3% year-on-year to $218 million with pro forma operating margin of 9.7%. Sequentially, growth in clinical pharmacology, research products, and nutritional chemistry was more than offset by the sale of our Seattle genomics laboratory and seasonal declines in toxicology and discovery support. Early Development second quarter revenue and operating margin are expected to increase considerably from the seasonally weak first quarter level.

"Looking ahead, we expect increases of a few cents in earnings per share each quarter as we progress throughout the year. We are narrowing our 2014 financial expectations to revenue growth of 6% to 9% and pro forma diluted earnings per share of $3.70 to $3.95 (excluding the gain on sale, costs associated with our on-going restructuring activities and assuming foreign exchange rates remain at March 31, 2014 levels)."

 

Consolidated Results

($ in millions except EPS)

1Q14

1Q13

Change

Total Revenues

$666.3

$634.3

 

Less: Reimbursable Out-of-Pockets 

$46.2

$54.1

 

Net Revenues

$620.1

$580.2

6.9%

Operating Income

$66.9

$48.3

38.6%

   Operating Margin

10.8%

8.3%

 

Net Income

$50.8

$48.2

5.5%

Diluted Earnings per Share

$0.88

$0.86

2.5%

Restructuring costs

($4.1)

($6.2)

 

Operating Income, excluding items*

$71.0

$54.4

30.5%

  Operating Margin, excluding items*

11.5%

9.4%

 

Gain on Sale of Business/Investment

$1.6

$15.7

 

Net Income, excluding items*

$52.4

$42.3

23.8%

Diluted EPS, excluding items*

$0.90

$0.75

20.1%

* See attached pro forma income statements for reconciliation of 2014 and 2013 GAAP to pro forma amounts.

Operating Segment Results

Early Development

($ in millions)

1Q14

1Q13

Change

Net Revenues

$218.2

$207.3

5.3%

Operating Income

$19.5

$16.6

17.6%

Operating Margin

8.9%

8.0%

 

Restructuring costs

($1.6)

($3.6)

 

Operating Income, excluding items

$21.1

$20.1

5.0%

Operating Margin, excluding items

9.7%

9.7%

 

The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products.  Net revenues in the first quarter of 2014 increased 5.3% year-on-year to $218.2 million, as growth in clinical pharmacology and toxicology more than offset a decline in discovery support and the impact of the sale of our Seattlegenomics laboratory. In the quarter, foreign exchange favorably impacted revenue growth by 180 basis points. Sequentially, revenue declined by $10.0 million from the fourth quarter as sequential growth in clinical pharmacology and research products were more than offset by the impact of the sale of our Seattle genomics laboratory and seasonality in toxicology and discovery support.

GAAP operating income in the first quarter of 2014 was $19.5 million, and included $1.6 million in costs associated with our on-going restructuring actions versus operating income of $16.6 million in the first quarter of 2013, which included charges associated with restructuring and other cost reduction actions of $3.6 million.  Pro forma operating income, excluding these costs, was $21.1 million in the first quarter of this year, a 5.0% increase from the first quarter of 2013. Pro forma operating margins were 9.7% in the first quarter of both this year and last year, versus 12.1% in the fourth quarter of 2013.  The sequential decline in pro forma operating margin resulted from seasonal headwinds in toxicology and discovery support, which more than offset increases in our chemistry services.  

Late-Stage Development        

($ in millions)

1Q14

1Q13

Change

Net Revenues

$401.8

$372.9

7.8%

Operating Income

$93.1

$82.9

12.2%

Operating Margin

23.2%

22.2%

 

Restructuring Costs

($0.2)

($1.9)

 

Operating Income, excluding items

$93.3

$84.8

10.0%

Operating Margin, excluding items

23.2%

22.8%

 

The Late-Stage Development segment includes central laboratory, Phase IIb-IV clinical development, and market access services.  Net revenues for the first quarter of 2014 grew 7.8% year-on-year to $401.8 million, a sequential increase of $7.0 million from the fourth quarter level. In the quarter, foreign exchange favorably impacted revenue growth by 160 basis points. Year-over-year growth was driven by 10.9% growth in central laboratories and 5.7% growth in clinical development, which more than offset a decline in our market access services. Sequentially, although all three service areas increased, growth was driven by clinical development services.

Operating income for the first quarter was $93.1 million on a GAAP basis and included $0.2 million in costs associated with our on-going restructuring actions.  On a pro forma basis, operating income was $93.3 million, up 10.0% year-over-year and $3.8 million sequentially from the $89.5 million delivered last quarter. Pro forma operating margins expanded to 23.2% for the first quarter of 2014, up from 22.7% last quarter and 22.8% in the first quarter of 2013. The year-on-year and sequential increases in profitability were driven by clinical development.  IT operating expenses were up year-over-year, but down sequentially due to project timing.

Corporate Information

The company reported first quarter adjusted net orders of $710 million. Backlog at March 31, 2014 was $6.90 billion compared to $6.92 billion at December 31, 2013 and $6.61 billion at March 31, 2013. Backlog was negatively impacted in the quarter by the sale of our Seattle genomics laboratory and was partially offset by a $37 million foreign exchange tailwind. 

Corporate expenses totaled $45.6 million in the first quarter of 2014 (including $2.3 million in restructuring costs) down from$56.2 million last quarter (including $3.8 million in restructuring costs) and $51.3 million (including $0.7 million in restructuring costs) in the first quarter of 2013. The prior year and prior quarter both reflected significantly higher spending on the corporate component of our strategic IT initiatives and higher incentive compensation expenses related to the stronger-than-expected business performance in 2013. The current quarter reflects incremental savings from the company's on-going efforts to streamline its corporate and functional support organizations and the previously disclosed shift of informatics expenses which were previously reflected in corporate expense and are now reflected in the Late-Stage Development segment.

Cash, cash equivalents, and short-term investments at March 31, 2014 were $660 million compared to $729 million atDecember 31, 2013 and $430 million at March 31, 2013.  Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2014 was a negative $106 million, consisting of operating cash flow of a negative $71 million (reflecting the payment of 2013 annual bonuses, the remittance of a client VAT payment of $28 million received in the fourth quarter of 2013 to the tax authorities coupled with a 4 day increase in DSO) less capital expenditures of $35 million.  Debt outstanding remains at $250 million. 

Net Days Sales Outstanding (DSO) were 38 days at March 31, 2014 compared to 34 days at December 31, 2013 and 41 days at March 31, 2013.

The pro forma effective tax rate in the first quarter was 23.2% and is expected to be approximately 24% for the full year 2014.

The Company's investor conference call will be webcast on May 2 at 9:00 am ET.  Management's commentary and presentation slides will be available through www.covance.com

Covance, the world's most comprehensive drug development company and a leader in nutritional analysis, is dedicated to advancing healthcare and delivering Solutions Made Real™.  The company, headquartered in Princeton, New Jersey, has annual revenues greater than $2.4 billion and more than 12,500 employees located in over 60 countries. Information on Covance's solutions, 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, the realization of savings from the Company's announced restructuring actions, 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, 2014 AND 2013

 
           

(Dollars in thousands, except per share data)

 
           

(UNAUDITED)

 
           
   

Three Months Ended March 31

 
   

2014

 

2013

 
       

Net revenues

 

$           620,052

 

$            580,199

 

Reimbursable out-of-pocket expenses

 

46,236

 

54,136

 

     Total revenues

 

666,288

 

634,335

 
           

Costs and expenses:

         

  Cost of revenue

 

432,553

 

411,344

 

  Reimbursable out-of-pocket expenses

 

46,236

 

54,136

 

  Selling, general and administrative

 

87,282

 

89,219

 

  Depreciation and amortization

 

33,329

 

31,385

 

        Total costs and expenses

 

599,400

(a)

586,084

(b)

           

Income from operations

 

66,888

(a)

48,251

(b)

           

Other expense (income), net:

         

  Interest expense, net

 

2,448

 

871

 

  Foreign exchange transaction loss, net

 

402

 

335

 

  Gain on sale of business

 

(1,648)

 

-

 

  Gain on sale of investment

 

-

 

(15,693)

 

        Other expense (income), net

 

1,202

(a)

(14,487)

(b)

           

Income before taxes

 

65,686

(a)

62,738

(b)

           

Taxes on income

 

14,870

(a)

14,572

(b)

           

Net income

 

$              50,816

(a)

$               48,166

(b)

           

Basic earnings per share

 

$                  0.91

(a)

$                   0.89

(b)

           

Weighted average shares outstanding - basic

 

55,681,285

 

54,207,032

 
           

Diluted earnings per share

 

$                  0.88

(a)

$                   0.86

(b)

           

Weighted average shares outstanding - diluted

 

57,989,826

 

56,307,034

 
           

(a) Three months ended March 31, 2014 includes, as applicable, $4,138 in charges associated with restructuring 

 

      and other cost reduction actions ($2,587 net of tax) and $1,648 gain on sale of certain assets of Genomics

 

      Laboratory ($1,033 net of tax).

         

(b) Three months ended March 31, 2013 includes, as applicable, $6,170 in restructuring costs ($4,347 net of tax), 

 

      and $15,693 gain on sale of investment in BioClinica, Inc. ($10,194 net of tax).

     
           
           

Excluding the impact of charges associated with restructuring and other cost reduction

 

actions, gain on sale of business and gain on sale of investment, as applicable:

   
           

Income from operations

 

$              71,026

 

$              54,421

 
           

Taxes on income

 

$              15,806

 

$              10,896

 
           

Net income 

 

$              52,370

 

$              42,319

 
           

Basic earnings per share

 

$                  0.94

 

$                  0.78

 
           

Diluted earnings per share

 

$                  0.90

 

$                  0.75

 

 

COVANCE INC.

           

CONSOLIDATED BALANCE SHEETS

           

MARCH 31, 2014 and DECEMBER 31, 2013

           

(Dollars in thousands)

           
           
     

March 31

 

December 31

     

2014

 

2013

     

(UNAUDITED)

   

ASSETS

       

Current Assets:

       
 

Cash & cash equivalents

 

$        546,593

 

$       617,686

 

Short-term investments

 

113,546

 

111,359

 

Accounts receivable, net

 

337,381

 

331,815

 

Unbilled services

 

159,092

 

141,707

 

Inventory

 

48,839

 

48,257

 

Deferred income taxes

 

52,575

 

51,543

 

Prepaid expenses and other current assets

 

232,343

 

201,621

 

    Total Current Assets

 

1,490,369

 

1,503,988

           

Property and equipment, net

 

919,009

 

913,612

Goodwill

 

108,522

 

109,820

Other assets

 

31,369

 

29,168

 

    Total Assets

 

$     2,549,269

 

$   2,556,588

           

LIABILITIES and STOCKHOLDERS' EQUITY

       

Current Liabilities:

       
 

Accounts payable

 

$          59,038

 

$         59,713

 

Accrued payroll and benefits

 

117,997

 

170,806

 

Accrued expenses and other current liabilities

 

109,083

 

153,808

 

Unearned revenue

 

236,596

 

240,398

 

Income taxes payable

 

8,100

 

7,952

 

    Total Current Liabilities

 

530,814

 

632,677

           

Long-term debt

 

250,000

 

250,000

Deferred income taxes

 

30,571

 

32,035

Other liabilities

 

77,505

 

76,630

 

    Total Liabilities

 

888,890

 

991,342

           

Stockholders' Equity:

       
 

Common stock

 

824

 

809

 

Paid-in capital

 

929,961

 

859,535

 

Retained earnings

 

1,830,649

 

1,779,833

 

Accumulated other comprehensive income

 

37,307

 

25,746

 

Treasury stock

 

(1,138,362)

 

(1,100,677)

 

    Total Stockholders' Equity

 

1,660,379

 

1,565,246

 

    Total Liabilities and Stockholders'  Equity

 

$     2,549,269

 

$   2,556,588

 

COVANCE INC.

         

CONSOLIDATED STATEMENTS OF CASH FLOWS

         

FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013

         

(Dollars in thousands)

         

(UNAUDITED)

         
   

Three Months Ended March 31

         
   

2014

 

2013

Cash flows from operating activities:

       

  Net income

 

$     50,816

 

$         48,166

  Adjustments to reconcile net income to net cash used in

       

    operating activities:

       

    Depreciation and amortization

 

33,329

 

31,385

    Non-cash compensation expense associated with employee benefit

       

       and stock compensation plans

 

9,342

 

10,932

    Deferred income tax benefit

 

(2,631)

 

(4,710)

    Gain on sale of business

 

(1,648)

 

-

    Gain on sale of investment

 

-

 

(15,693)

    Loss on disposal of property and equipment

 

240

 

202

    Changes in operating assets and liabilities, net of business sold:

       

       Accounts receivable

 

(5,566)

 

(4,804)

       Unbilled services

 

(17,385)

 

(18,876)

       Inventory

 

(3,752)

 

480

       Accounts payable

 

(675)

 

7,162

       Accrued liabilities

 

(97,534)

 

(67,536)

       Unearned revenue

 

(3,365)

 

(14,765)

       Income taxes

 

5,170

 

8,460

       Other assets and liabilities, net

 

(36,890)

 

(34,461)

Net cash used in operating activities

 

(70,549)

 

(54,058)

         

Cash flows from investing activities:

       

  Capital expenditures

 

(35,129)

 

(30,350)

  Proceeds from sale of business

 

8,429

 

-

  Proceeds from sale of investment

 

-

 

17,074

  Other, net

 

-

 

393

Net cash used in investing activities

 

(26,700)

 

(12,883)

         

Cash flows from financing activities:

       

  Stock issued under option plans

 

56,077

 

24,909

  Purchase of treasury stock

 

(37,685)

 

(8,649)

  Net borrowings under revolving credit facility

 

-

 

5,000

Net cash provided by financing activities

 

18,392

 

21,260

Effect of exchange rate changes on cash

 

7,764

 

(17,296)

Net change in cash and cash equivalents

 

(71,093)

 

(62,977)

         

Cash and cash equivalents, beginning of period

 

617,686

 

492,824

         

Cash and cash equivalents, end of period

 

$   546,593

 

$       429,847

 

COVANCE INC.

               

GAAP to Pro Forma Reconciliation

               

Q1 2014

               

(Dollars in thousands, except per share data)

               

(UNAUDITED)

               
     

Adjustments

 
 

GAAP

 

 Restructuring
and Other Cost 
Reduction 
Activities (1)

 

Other
Items (2)

 

Pro Forma

               

Net revenues

$   620,052

         

$     620,052

Reimbursable out-of-pocket expenses

46,236

         

46,236

     Total revenues

666,288

 

-

 

-

 

666,288

               

Costs and expenses:

             

  Cost of revenue

432,553

         

432,553

  Reimbursable out-of-pocket expenses

46,236

         

46,236

  Selling, general and administrative

87,282

 

(3,720)

     

83,562

  Depreciation and amortization

33,329

 

(418)

     

32,911

        Total costs and expenses

599,400

 

(4,138)

 

-

 

595,262

               

Income from operations

66,888

 

4,138

 

-

 

71,026

               

Other expense, net:

             

  Interest expense, net

2,448

         

2,448

  Foreign exchange transaction loss, net

402

         

402

  Gain on sale of business

(1,648)

     

1,648

 

-

        Other expense, net

1,202

 

-

 

1,648

 

2,850

               

Income before taxes

65,686

 

4,138

 

(1,648)

 

68,176

               

Taxes on income

14,870

 

1,551

 

(615)

 

15,806

               

Net income 

$     50,816

 

$              2,587

 

$         (1,033)

 

$       52,370

               

Basic earnings per share

$         0.91

 

$                0.05

 

$           (0.02)

 

$           0.94

               

Weighted average shares outstanding - basic

55,681,285

 

55,681,285

 

55,681,285

 

55,681,285

               

Diluted earnings per share

$         0.88

 

$                0.04

 

$           (0.02)

 

$           0.90

               

Weighted average shares outstanding - diluted

57,989,826

 

57,989,826

 

57,989,826

 

57,989,826

               
               

(1) Represents costs incurred to better align capacity to preclinical market demand and reduce overall cost structure.

(2) Represents gain on sale of business.

 

COVANCE INC.

               

GAAP to Pro Forma Reconciliation

               

Q1 2013

               

(Dollars in thousands, except per share data)

               

(UNAUDITED)

               
     

Adjustments

 
 

GAAP

 

 Restructuring Activities (1)

 

Other
Items (2)

 

Pro Forma

               

Net revenues

$   580,199

         

$   580,199

Reimbursable out-of-pocket expenses

54,136

         

54,136

     Total revenues

634,335

 

-

 

-

 

634,335

               

Costs and expenses:

             

  Cost of revenue

411,344

         

411,344

  Reimbursable out-of-pocket expenses

54,136

         

54,136

  Selling, general and administrative

89,219

 

(4,673)

     

84,546

  Depreciation and amortization

31,385

 

(1,497)

     

29,888

        Total costs and expenses

586,084

 

(6,170)

 

-

 

579,914

               

Income from operations

48,251

 

6,170

 

-

 

54,421

               

Other (income) expense, net:

             

  Interest expense, net

871

         

871

  Foreign exchange transaction loss, net

335

         

335

  Gain on sale of investment

(15,693)

     

15,693

 

-

        Other (income) expense, net

(14,487)

 

-

 

15,693

 

1,206

               

Income before taxes

62,738

 

6,170

 

(15,693)

 

53,215

               

Taxes on income

14,572

 

1,823

 

(5,499)

 

10,896

               

Net income 

$     48,166

 

$            4,347

 

$   (10,194)

 

$     42,319

               

Basic earnings per share

$         0.89

 

$              0.08

 

$       (0.19)

 

$         0.78

               

Weighted average shares outstanding - basic

54,207,032

 

54,207,032

 

54,207,032

 

54,207,032

               

Diluted earnings per share

$         0.86

 

$              0.08

 

$       (0.18)

 

$         0.75

               

Weighted average shares outstanding - diluted

56,307,034

 

56,307,034

 

56,307,034

 

56,307,034

               
               

(1) Represents costs incurred to better align capacity to preclinical market demand and reduce overall cost structure.

(2) Represents gain on sale of investment.

         

 

 

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