PRINCETON, N.J. -- Covance Inc. (NYSE: CVD) today reported results for its second quarter ended June 30, 2013. Net revenue was $592.3 million, representing 9.1% growth from the second quarter of 2012's GAAP result of $542.8 million, and 10.0% growth from the second quarter of 2012's pro forma result of $538.5 million. On a GAAP basis, the company reported earnings of $0.72 per diluted share in the second quarter. Excluding charges associated with restructuring and other cost reduction actions totaling $6.0 million and a gain on the sale of an equity investment of $0.7 million, the company reported earnings per diluted share of $0.78, up 19.9% over the pro forma earnings of $0.65 for the second quarter of 2012.
"Accelerated revenue growth in central laboratories was the primary driver of better-than-expected consolidated results in the second quarter, including pro forma revenue growth of 10%, operating margin of 9.7%, and EPS growth of 20% to $0.78," saidJoe Herring, Chairman and Chief Executive Officer. "Strong commercial performance, led by clinical development, delivered record adjusted net orders of $776 million in the quarter. These orders result in an adjusted net book-to-bill of 1.31 to 1.
"Late-Stage Development second quarter revenue grew 17% year-on-year to $378 million and pro forma operating margins were 21.4%, up 30 basis points from a year ago despite increased spending on strategic IT projects. Better-than-expected kit volumes in central laboratories drove both year-over-year revenue growth of 22% and operating margin expansion. Clinical development grew revenue 13% year-on-year and delivered record adjusted net orders.
"In Early Development, revenue of $215 million was flat from last year's pro forma result as strong revenue growth in nutritional chemistry and clinical pharmacology and a return to growth in toxicology were offset by declines in discovery support services and pharmaceutical chemistry services. Pro forma operating margin increased 260 basis points year-on-year, largely as a result of our 2012 restructuring actions, and 160 basis points from the first quarter primarily from sequential growth in toxicology that carried strong incremental earnings.
"As we look ahead to the remainder of the year, we are increasing our pro forma diluted earnings per share target to the range of $3.10 to $3.20 (excluding gains on sale, costs associated with our ongoing restructuring activities, and assuming foreign exchange rates remain at June 30, 2013 levels), versus our previous expectation of $3.00 to $3.20, and we continue to expect revenue growth in the high-single digit range. We expect sequential increases in earnings per share of approximately two cents in each of the third and fourth quarters."
Operating Segment Results
The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the second quarter of 2013 were $214.6 million, compared to $219.7 million on a GAAP basis and $215.4 million on a pro forma basis in the second quarter of last year. Last year's pro forma revenue excluded$4.3 million in revenue from the three sites closed by the end of 2012. On a pro forma basis, net revenue declined 0.4%, including a 60 basis point foreign exchange headwind, as growth in nutritional chemistry, clinical pharmacology, and toxicology were offset by declines in discovery support and pharmaceutical chemistry. Sequentially, revenue increased by $7.3 millionfrom the first quarter as growth in toxicology, nutritional chemistry and clinical pharmacology more than offset declines in discovery support services and research products.
GAAP operating income in the second quarter of 2013 was $21.9 million, and included $2.3 million in costs associated with our ongoing restructuring actions versus an operating loss of $33.1 million in the second quarter of 2012, which included losses at facilities closed in 2012 of $3.8 million, restructuring costs of $9.2 million and other charges of $38.7 million. Pro forma operating income, excluding these costs, was $24.2 million in the second quarter of this year, a 29.8% increase from the$18.7 million reported in the second quarter of 2012. Pro forma operating margins expanded 260 basis points year-over-year and 160 basis points sequentially. The year-over-year increase was led primarily by our restructuring actions while the sequential increase was led by growth and increased profitability in toxicology.
The Late-Stage Development segment includes central laboratory, Phase IIb-IV clinical development, and market access services. Net revenues for the second quarter of 2013 grew 16.9% year-on-year to $377.7 million, a sequential increase of$4.8 million from the first quarter level. In the quarter, foreign exchange negatively impacted revenue growth by 20 basis points. Year-over-year growth was driven by increases of 22% in central laboratories and 13% in clinical development.
Operating income for the second quarter was $79.5 million on a GAAP basis and included $1.4 million in costs associated with our ongoing restructuring actions. On a pro forma basis, operating income was $80.9 million, up 18.6% year-over-year. Pro Forma operating income declined $4.0 million sequentially due to a planned increase in spending on our strategic IT projects as well as mix across the segment's service offerings. Pro forma operating margins were 21.4% for the second quarter of 2013, versus 21.1% in the second quarter of 2012 and 22.8% last quarter. The year-on-year increase in profitability was driven by operating leverage in central laboratories, which more than offset increased spending on strategic IT projects.
During the quarter ended June 30, 2013 the company received an additional $0.7 million in contingent consideration in connection with the 2012 sale of its investment in Caprion Proteomics Inc., which has been excluded from pro forma earnings.
The company reported second quarter adjusted net orders of $776 million. Backlog at June 30, 2013 was $6.73 billioncompared to $6.61 billion at March 31, 2013 and $6.23 billion at June 30, 2012. Foreign exchange contributed $27 million to backlog on a sequential basis.
Corporate expenses totaled $49.9 million in the second quarter of 2013 (including $2.3 million in restructuring costs) compared to $51.3 million last quarter (including $0.7 million in restructuring costs) and $38.9 million in the second quarter of 2012 (including $0.3 million in restructuring costs). The largest driver of the year-over-year increase in corporate expenses is spending on our strategic IT initiatives followed by higher incentive compensation expenses related to stronger-than-budgeted business performance. Sequentially, the decline was driven by lower expenses in a number of areas, which offset increased spending on our strategic IT initiatives.
Cash and cash equivalents at June 30, 2013 were $446 million compared to $430 million at March 31, 2013 and $398 millionat June 30, 2012. Debt outstanding remained at $325 million.
Net Days Sales Outstanding (DSO) were 48 days at June 30, 2013 compared to 41 days at March 31, 2013 and 35 days atJune 30, 2012.
Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2013 was $13 million, consisting of operating cash flow of $51 million less capital expenditures of $38 million. Free cash flow year-to-date was negative $71 million, consisting of operating cash flow of negative $3 million less capital expenditures of $68 million. In 2013, we continue to expect free cash flow to be at least $125 million, net of capital expenditures of approximately $160 million. The free cash flow target for 2013 assumes net DSO at 40 days at December 31, 2013.
The Company's investor conference call will be webcast on July 31 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 $2.2 billion, global operations in more than 30 countries, and more than 12,000 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 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