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

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

Operating Segment Results

Early Development

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        

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