PRINCETON, N.J., Jan. 25, 2012 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its fourth quarter ended December 31, 2011 of $0.35 per diluted share. Included in fourth quarter results is approximately $0.41 per diluted share in charges, approximately $0.10 of which relates to the completion of the previously-announced restructuring actions, approximately $0.11 of which relates to the termination of a research products inventory supply agreement and inventory write down, and approximately $0.20 for the impairment of a related equity investment, partially offset by a gain of approximately $0.03 from favorable income tax developments in the quarter. Excluding these items, diluted earnings per share for the fourth quarter ended December 31, 2011 was $0.73. For the full year, diluted earnings per share were $2.16 inclusive of $0.58 per share in charges, partially offset by a gain of approximately $0.04 from favorable income tax developments during the year. Excluding these items, diluted earnings per share for the year ended December 31, 2011 was $2.70.
"During 2011, Covance increased revenue by 8.8% to $2.1 billion, improved pro forma operating margin by 70 basis points (when excluding charges in both periods), and drove pro forma EPS growth of 26% to $2.70 per diluted share. In addition, adjusted net orders for the year were a record $2.53 billion, a year-on-year increase of 13.5%, resulting in a strong adjusted net book-to-bill of 1.21 to 1 for the year," said Joe Herring, Chairman and Chief Executive Officer. "For the fourth quarter, consolidated revenues grew 8.3% and pro forma operating margin expanded by 130 basis points year-on-year and 50 basis points sequentially to 10.9%.
"In Early Development, fourth quarter net revenues grew 6.3% year-on-year, but declined $5.7 million sequentially due to lower demand in research products and European toxicology services, as well as a $2.3 million foreign exchange headwind. Early Development pro forma operating margin (when excluding charges in all periods), increased 190 basis points year-on-year to 13.9%, but did not expand sequentially as we had forecasted due primarily to operating losses incurred in research products this quarter. This lower demand for our research products caused us to reassess inventory levels and the fair value of an equity investment in a supplier. In Late-Stage Development, net revenues grew 10.0% year-on-year driven by the continued strong performance in our clinical development services. Pro forma operating margin of 20.0% exceeded our expectations due to increased profitability in our central laboratory, which grew revenues sequentially on a constant currency basis for the second consecutive quarter.
"On the commercial front, adjusted net orders in the fourth quarter were a record $759 million, representing an adjusted book-to-bill of 1.42 to 1. We were particularly pleased to see continued strong orders in clinical development and a further increase in orders in our central laboratory for the second consecutive quarter. The ongoing strength of our service portfolio, as evidenced by our strong 2011 orders, gives us confidence to continue our investments to drive future growth.
"Looking ahead, we are making strategic investments in our information technology infrastructure and applications to increase the productivity of our drug development services, drive operating efficiencies, and arrest the long-term rate of growth of our information technology spending. In addition to the implementation of our central laboratory system, which we previously disclosed as a $10 million incremental spend, we are funding three additional strategic projects to help us achieve these objectives. In total, these four projects will increase our IT capital expenditures to approximately $90 million in 2012 (versus approximately $60 million in 2011), and will lead to a significant increase in operating expense over the next two years. We are also planning to continue expanding our commercial footprint in order to capture an increasing share of the opportunities available in the CRO industry and position us for longer-term growth. In aggregate, we are projecting spending in these areas to be above the growth rate in revenue by approximately $25 million, or $0.32 per diluted share in 2012.
"In the first quarter of 2012, we expect a modest increase in net revenues from the fourth quarter level as we forecast a further sequential decline in Early Development net revenue, to be offset by an increase in Late-Stage net revenues. A drop in Early Development earnings due to the expected lower level of revenue, when combined with the increased information technology spending and foreign exchange headwind, is expected to result in diluted earnings per share in the low $0.60 range.
"For the full year, we are forecasting mid-single digit year-on-year revenue growth (inclusive of an approximate 200 basis point headwind from the stronger USD) and diluted earnings per share in the range of $2.50 to $2.80. This diluted earnings per share range reflects increased investment in IT and commercial, the estimated impact of anticipated share repurchases that may be made under our Board-approved share repurchase programs ($0.15 to $0.20 per share), excludes potential new strategic alliances with clients, and assumes foreign exchange rates remain at year-end 2011 levels."
Consolidated Results($ in millions except EPS)4Q114Q10ChangeFY 2011 FY 2010ChangeTotal Revenues
$2,038.5Less: Reimbursable Out-of-Pockets
93.7%Earnings Per Share
($137.6)Favorable Income Tax items*
$17.3Operating Income, excluding items*
16.3% Operating Margin %, ex items*
9.6%Net Income, excluding items*
19.1%Diluted EPS, excluding items*
25.7%* See attached pro forma income statements for reconciliation of GAAP to pro forma amounts.
Operating Segment Results Early Development($ in millions)4Q114Q10ChangeFY 2011FY 2010ChangeNet Revenues
10.7%GAAP Operating Income (Loss)
-GAAP Operating Margin %
($124.6)2010 Cost Actions
($8.0)Pro Forma Operating Income
26.1%Pro Forma OM%
12.0%The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the fourth quarter of 2011 grew 6.3% year-on-year to $234.5 million, driven by the results from our new Alnwick, UK and Porcheville, France sites and clinical pharmacology. On a sequential basis, revenues declined $5.7 million due to lower demand in research products and European toxicology services, as well as a $2.3 million foreign exchange headwind. North American toxicology experienced modest year-on-year growth and was flat sequentially.
GAAP operating income for the fourth quarter of 2011 was $17.7 million, and included $4.7 million in charges relating to our previously announced restructuring activities as well as $10.3 million in charges associated with lower demand for our research products (costs to terminate a product supply agreement and inventory write-down). Pro forma operating income, excluding charges in all periods, was $32.6 million in the current quarter, compared to $35.0 million last quarter and $26.6 million in the fourth quarter of last year. The primary driver of the sequential decline in pro forma operating income was the loss we incurred in our research products operation from lower demand, as previously discussed. Pro forma operating margins, excluding charges in all periods, were 13.9% for the fourth quarter, compared to 14.6% last quarter and 12.0% in the fourth quarter of 2010.
Late-Stage Development($ in millions)4Q114Q10ChangeFY 2011FY 2010 ChangeNet Revenues
7.4%GAAP Operating Income
0.4%GAAP Operating Margin %
($7.1)2010 Cost Actions
($0.2)Pro Forma Operating Income
(0.7%)Pro Forma OM%
21.5%The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services. Net revenues for the fourth quarter of 2011 grew 10.0% year-on-year to $298.0 million, primarily driven by the continued strong performance in clinical development and a 190 basis point tailwind in foreign exchange. On a sequential basis, revenues declined $5.0 million due to a $10.1 million foreign exchange headwind, which more than offset growth across the segment's service offerings, at constant exchange rates.
GAAP operating income for the fourth quarter was $58.2 million and included $1.3 million in costs associated with our restructuring actions. Pro forma operating income, excluding these costs, was $59.5 million, compared to $58.4 million last quarter and $54.7 million in the fourth quarter of the prior year. Pro forma operating margins, excluding these costs, were 20.0% for the fourth quarter of 2011 compared to 19.3% last quarter and 20.2% in the fourth quarter of last year. The sequential increase in profitability was primarily due to stronger central laboratory performance.
Corporate InformationThe Company's backlog at December 31, 2011 was $6.14 billion compared to $6.08 billion at September 30, 2011 and $6.19 billion at December 31, 2010. Foreign exchange negatively impacted sequential backlog growth by $75 million.
Corporate expenses totaled $37.0 million in the fourth quarter of 2011 (including $2.7 million in restructuring costs) compared to $38.4 million last quarter (including $1.4 million in restructuring costs) and $39.9 million in the fourth quarter of last year.
During the fourth quarter, the company recorded a $12.1 million charge to recognize an impairment in the carrying value of an equity investment in a supplier of research products. This charge is reflected as a component of other income (expense) in the consolidated statements of income.
Cash and cash equivalents at December 31, 2011 were $389 million compared to $400 million at September 30, 2011 and $377 million at December 31, 2010. Covance repaid $60 million in debt during the quarter and now has $30.0 million in debt outstanding, originating from borrowings related to the fourth quarter 2010 accelerated share repurchase.
Free cash flow (defined as operating cash flow less capital expenditures) for the fourth quarter of 2011 was $54 million, consisting of operating cash flow of $102 million less capital expenditures of $48 million. Free cash flow for the full year was $109 million, consisting of operating cash flow of $243 million less capital expenditures of $135 million. We expect 2012 capital spending to be approximately $180 million.
Net Days Sales Outstanding (DSO) were 38 days at December 31, 2011 compared to 38 days at September 30, 2011 and 31 days at December 31, 2010.
The Company's investor conference call will be webcast on January 26 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 billion, global operations in more than 30 countries, and more than 11,000 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 price and rate at which the company executes its share repurchase program, 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 STATEMENTSFOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2011 AND 2010(Dollars in thousands, except per share data)Three Months Ended December 31Years Ended December 312011201020112010(UNAUDITED)Net revenues$
491,513$ 2,095,938$ 1,925,630Reimbursable out-of-pocket expenses49,90727,942140,508112,843Total revenues582,385519,4552,236,4462,038,473Costs and expenses: Cost of revenue371,852346,9241,467,0511,348,498 Reimbursable out-of-pocket expenses49,90727,942140,508112,843 Selling, general and administrative95,75289,810343,044307,386 Depreciation and amortization25,92325,919105,214103,024 Asset impairment charges---119,229Total costs and expenses543,434(a)
1,990,980(e)Income from operations38,951(a)
47,493(e)Other expense, net: Interest expense, net3394301,97952 Foreign exchange transaction loss, net3561,0541,2483,649 Impairment of equity investment12,119-12,119-Other expense, net12,814(b)
3,701Income before taxes and equity investee earnings26,137(a),(b)
43,792(e)Tax expense (benefit)5,172(a),(b)
(23,655)(e)Equity investee earnings (loss)175(119)480807Net income$
8,254(e)Basic earnings per share$
.08(e)Weighted average shares outstanding - basic59,730,27061,390,96559,629,78863,043,561Diluted earnings per share$
.06(e)Weighted average shares outstanding - diluted61,080,38762,703,69061,091,35464,472,326(a) Includes, as applicable, $8,667 in restructuring costs ($5,961 net of tax), $10,287 in costs associated with the termination of an inventory supply agreement and related inventory write-down ($7,130 net of tax) and favorable income tax items totaling $1,769 during the three months ended December, 2011.(b) Includes $12,119 impairment of equity investment ($12,119 net of tax) during the three and twelve months ended December 31, 2011.(c) Includes, as applicable, $24,369 in restructuring costs ($16,067 net of tax), $10,287 in costs associated with the termination of an inventory supply agreement and related inventory write-down ($7,130 net of tax) and favorable income tax items totaling $2,469 during the year ended December 31, 2011.(d) Includes, as applicable, $18,362 in restructuring costs ($13,688 net of tax) and $6,946 in favorable income tax items during the three months ended December 31, 2010. (e) Includes, as applicable, asset impairment charges ($119,229) and restructuring costs ($18,362) totaling $137,591 ($87,610 net of tax) and favorable income tax items totaling $17,298 during the year ended December 31, 2010. Excluding the impact of restructuring charges, inventory write-down and related charges, the asset impairment charges, the impairment of equity investment and favorable income tax items:Income from operations$
85,084Taxes on income$
43,624Net income $
38,566Basic earnings per share$
2.20Diluted earnings per share$
2.15COVANCE INC.CONSOLIDATED BALANCE SHEETSDECEMBER 31, 2011 and DECEMBER 31, 2010(Dollars in thousands)December 31December 3120112010ASSETSCurrent Assets:Cash & cash equivalents$
377,223Accounts receivable, net312,127261,160Unbilled services114,09590,729Inventory74,69882,924Deferred income taxes52,07835,648Prepaid expenses and other current assets144,80998,127Total Current Assets1,086,910945,811Property and equipment, net849,551843,983Goodwill, net127,779127,653Other assets43,76848,095Total Assets$
,965,542LIABILITIES and STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable$
34,079Accrued payroll and benefits142,229107,572Accrued expenses and other current liabilities119,30897,395Unearned revenue202,210186,301Short-term debt and current portion of long-term debt30,00045,000Income taxes payable6,88928,827Total Current Liabilities537,029499,174Long-term debt-87,500Deferred income taxes42,29530,531Other liabilities70,88968,516Total Liabilities650,213685,721Stockholders' Equity:Common stock781774Paid-in capital689,584639,341Retained earnings1,505,8941,373,705Accumulated other comprehensive income4,622277Treasury stock(743,086)(734,276)Total Stockholders' Equity1,457,7951,279,821Total Liabilities and Stockholders' Equity$
,965,542COVANCE INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010(Dollars in thousands)Years Ended December 3120112010Cash flows from operating activities: Net income$ 132,189$ 68,254 Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization105,214103,024Asset impairment charges-119,229Non-cash compensation expense associated with employee benefitand stock compensation plans40,05732,289Deferred income tax benefit(6,128)(71,661)Impairment of equity investment12,119-Loss on disposal of property and equipment1,6181,487Equity investee earnings(480)(807)Changes in operating assets and liabilities, net of businessesacquired:Accounts receivable(50,754)23,959Unbilled services(23,366)6,550Inventory8,226(1,998)Accounts payable2,297(2,755)Accrued liabilities56,40920,097Unearned revenue15,90919,411Income taxes payable(21,070)14,797Other assets and liabilities, net(28,762)2,547Net cash provided by operating activities243,478334,423Cash flows from investing activities: Capital expenditures(134,633)(126,278) Acquisition of businesses, net of cash acquired(411)(20,994) Other, net19247Net cash used in investing activities(134,852)(147,225)Cash flows from financing activities: Net (repayments) borrowings under revolving credit facility(5,000)35,000 Borrowings under long-term debt-100,000 Repayments under long-term debt(97,500)(2,500) Stock issued under employee stock purchase and option plans9,32518,825 Purchase of treasury stock(8,810)(256,351)Net cash used in financing activities(101,985)(105,026)Effect of exchange rate changes on cash5,2395,582Net change in cash and cash equivalents11,88087,754Cash and cash equivalents, beginning of period377,223289,469Cash and cash equivalents, end of period$ 389,103$ 377,223COVANCE INC.GAAP to Pro Forma ReconciliationQ4 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAP Restructuring
Charges (2)Income Tax
Items (3)Pro FormaNet revenues$
532,478Reimbursable out-of-pocket expenses49,90749,907Total revenues582,385---582,385Costs and expenses: Cost of revenue371,852371,852 Reimbursable out-of-pocket expenses49,90749,907 Selling, general and administrative95,752(8,754)(10,287)76,711 Depreciation and amortization25,9238726,010Total costs and expenses543,434(8,667)(10,287)-524,480Income from operations38,9518,66710,287-57,905Other expense (income), net: Interest expense (income), net339339 Foreign exchange transaction loss, net356356 Impairment of equity investment12,119(12,119)-Other expense (income), net12,814-(12,119)-695Income before taxes and equity investee earnings26,1378,66722,406-57,210Tax expense5,1722,7063,1571,76912,804Equity investee earnings175175Net income $
44,581Basic earnings per share$
.75Weighted average shares outstanding - basic59,730,27059,730,27059,730,27059,730,27059,730,270Diluted earnings per share$
.73Weighted average shares outstanding - diluted61,080,38761,080,38761,080,38761,080,38761,080,387(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.(2) Represents costs incurred in connection with termination of an inventory supply agreement and related inventory write-down and an impairment of a related equity investment.(3) Represents favorable resolutions of income tax matters.COVANCE INC.GAAP to Pro Forma ReconciliationQ4 2010(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring
Activities (1)Income Tax
Items (2)Pro FormaNet revenues$
491,513Reimbursable out-of-pocket expenses27,94227,942Total revenues519,455--519,455Costs and expenses: Cost of revenue346,924346,924 Reimbursable out-of-pocket expenses27,94227,942 Selling, general and administrative89,810(18,092)71,718 Depreciation and amortization25,919(270)25,649Total costs and expenses490,595(18,362)-472,233Income from operations28,86018,362-47,222Other expense (income), net: Interest expense (income), net430430 Foreign exchange transaction loss, net1,0541,054Other expense (income), net1,484--1,484Income before taxes and equity investee earnings27,37618,362-45,738Tax (benefit) expense(1,121)4,6746,94610,499Equity investee (loss) earnings(119)(119)Net income $
35,120Basic earnings per share$
.57Weighted average shares outstanding - basic61,390,96561,390,96561,390,96561,390,965Diluted earnings per share$
.56Weighted average shares outstanding - diluted62,703,69062,703,69062,703,69062,703,690(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.(2) Represents favorable resolutions of income tax matters.COVANCE INC.GAAP to Pro Forma ReconciliationFor the year ended December 31, 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring
Charges (2)Income Tax
Items (3)Pro FormaNet revenues$ 2,095,938$ 2,095,938Reimbursable out-of-pocket expenses140,508140,508Total revenues2,236,446---2,236,446Costs and expenses: Cost of revenue1,467,0511,467,051 Reimbursable out-of-pocket expenses140,508140,508 Selling, general and administrative343,044(22,592)(10,287)310,165 Depreciation and amortization105,214(1,777)103,437Total costs and expenses2,055,817(24,369)(10,287)-2,021,161Income from operations180,62924,36910,287-215,285Other expense (income), net: Interest expense (income), net1,9791,979 Foreign exchange transaction loss, net1,2481,248 Impairment of equity investment12,119(12,119)-Other expense (income), net15,346-(12,119)-3,227Income before taxes and equity investee earnings165,28324,36922,406-212,058Tax expense33,5748,3023,1572,46947,502Equity investee earnings480480Net income $
5,036Basic earnings per share$
2.77Weighted average shares outstanding - basic59,629,78859,629,78859,629,78859,629,78859,629,788Diluted earnings per share$
2.70Weighted average shares outstanding - diluted61,091,35461,091,35461,091,35461,091,35461,091,354(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.(2) Represents costs incurred in connection with termination of an inventory supply agreement and related inventory write-down and an impairment of a related equity investment.(3) Represents favorable resolutions of income tax matters.COVANCE INC.GAAP to Pro Forma ReconciliationFor the year ended December 31, 2010(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPAsset
Activities (1)Income Tax
Items (2)Pro FormaNet revenues$ 1,925,630$ 1,925,630Reimbursable out-of-pocket expenses112,843112,843Total revenues2,038,473--2,038,473Costs and expenses: Cost of revenue1,348,4981,348,498 Reimbursable out-of-pocket expenses112,843112,843 Selling, general and administrative307,386(18,092)289,294 Depreciation and amortization103,024(270)102,754 Asset impairment charges119,229(119,229)-Total costs and expenses1,990,980(137,591)-1,853,389Income from operations47,493137,591-185,084Other expense (income), net: Interest expense (income), net5252 Foreign exchange transaction loss, net3,6493,649Other expense (income), net3,701--3,701Income before taxes and equity investee earnings43,792137,591-181,383Tax (benefit) expense(23,655)49,98117,29843,624Equity investee earnings807807Net income $
38,566Basic earnings per share$
2.20Weighted average shares outstanding - basic63,043,56163,043,56163,043,56163,043,561Diluted earnings per share$
2.15Weighted average shares outstanding - diluted64,472,32664,472,32664,472,32664,472,326(1) Represents asset impairment charges totaling $119,229 and restructuring costs totaling $18,362 incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.(2) Represents favorable resolutions of income tax matters.
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