PRINCETON, N.J., July 25, 2012 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported results for its second quarter ended June 30, 2012. On a GAAP basis, net revenue was $543 million. Excluding revenue from facilities where closure activities have commenced (as described below), pro forma net revenue was $538 million. On a GAAP basis, the company reported a loss of $0.23 per share in the second quarter. Excluding losses from facilities where closure activities have commenced, restructuring costs, and asset impairments, the company reported earnings per diluted share of $0.65.
"In the second quarter pro forma net revenues grew sequentially in both of our business segments, pro forma operating margin expanded 30 basis points sequentially to 9.0%, and pro forma EPS increased to $0.65," said Joe Herring, Chairman and Chief Executive Officer. "Continued strong commercial performance, led by another record order performance in clinical development, drove a third consecutive quarter of adjusted net orders of at least $700 million, representing a 14% year-on-year increase and an adjusted book-to-bill of 1.30 to 1. In addition, our strategic information technology projects continue to progress on time and on budget.
"In terms of segment performance in the quarter, Late-Stage Development revenues grew 12.8% year-on-year, led again by revenue growth in excess of 25% in clinical development and continued year-on-year and sequential growth in central laboratories, which more than offset a decline in our market access services. Operating margins increased 110 basis points year-on-year to 21.1%, but declined as expected from the exceptional first quarter level on increased staffing in clinical development, lower profitability in market access services and increased spending on strategic IT projects. Late-Stage margins are expected to decline in the back half of 2012 due to increased IT spending, continued hiring in clinical, normal seasonality, and the impact of the stronger US dollar.
"In Early Development, we continued to drive our cost reduction and capacity rationalization actions in order to better align supply with demand and improve margins. In addition to the $20 million of annualized profit improvement announced in May, today we are announcing an incremental $15 million, bringing the total annualized impact of these actions to approximately $35 million from the cost reductions and capacity rationalizations, with approximately one-third expected to be realized in 2012. The 2012 savings are largely expected to offset a slower ramp in Early Development earnings this year. New actions include the further streamlining of operations, closure activities at our Phase I clinics in Honolulu and Basel, and a one-third reduction in our Muenster toxicology capacity (the actions in Muenster and Basel are pending the completion of customary employee consultations). In addition, we are pursuing further cost actions, including a reduction of our corporate spending.
"In terms of Early Development's second quarter results, pro forma revenue and earnings (which exclude restructuring costs; losses incurred in Chandler, Honolulu, and Basel; and asset impairments) improved sequentially from first quarter levels. Pro forma net revenues increased $3.7 million sequentially to $215.4 million while pro forma operating margin increased 340 basis points sequentially to 8.7%. We expect a sequential increase in revenue and operating margins for the segment in the third quarter as somewhat higher volumes in toxicology and discovery support are expected to more than offset a decline in clinical pharmacology results.
"Looking forward to the third quarter of 2012, we expect pro forma revenue and EPS to be slightly higher than the second quarter level. For the full year, we are revising our revenue growth forecast to the low- to mid-single-digit range primarily due to foreign exchange headwinds and more modest sequential growth in Early Development. We now expect pro forma diluted earnings per share to be in the range of $2.50 to $2.70 (excluding impairment charges, restructuring costs and losses from facilities in wind-down, and using June 30 foreign exchange rates)."
Consolidated Results($ in millions except EPS)2Q122Q11ChangeYTD12YTD11ChangeTotal Revenues
$1,075.2Less: Reimbursable Out-of-Pockets
5.2%Operating Income (Loss)
8.9%Net Income (Loss)
(67.3%)Earnings (Loss) per Share
(65.2%)Revenue from facilities in wind-down**
-Net Revenue, continuing ops*
($10.4)Loss from facilities in wind-down**
-Impairment of Goodwill & Inventory
-Operating Income, excluding items*
(6.6%) Operating Margin, excluding items*
9.9%Impairment of Equity Investment
-Net Income, excluding items*
(6.6%)Diluted EPS, excluding items*
(0.7%)* See attached pro forma income statement for reconciliation of 2012 & 2011 GAAP to pro forma amounts.
** Facilities in wind-down include Chandler, Honolulu, and Basel (pending the completion of customary Swiss employee consultation).Operating Segment Results Early Development($ in millions)2Q122Q11ChangeYTD12YTD11ChangeNet Revenues
(5.4%)Operating Income (Loss)
12.0%Revenue from facilities in wind-down**
-Net Revenue, continuing ops
($4.9)Loss from facilities in wind-down**
-Impairment of Goodwill & Inventory
-Operating Income, excluding items
(49.5%)Operating Margin, excluding items
13.0%** Facilities in wind-down include Chandler, Honolulu, and Basel (pending the completion of customary Swiss employee consultation).The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the second quarter of 2012 declined 5.2% year-on-year on a GAAP basis to $219.7 million and 7.1% on a pro forma basis to $215.4 million, due to a decline in toxicology and research products. In the quarter, foreign exchange was a 100 basis point year-on-year headwind. Sequentially, revenues increased $3.7 million on a rebound in discovery support and clinical pharmacology, which more than offset a decline in research products and toxicology. Revenue from ongoing toxicology operations increased on a sequential basis.
The GAAP operating loss in the second quarter of 2012 was $33.1 million, and included $9.2 million in costs associated with our restructuring actions, $3.8 million in losses at locations in wind-down and asset impairment charges of $38.7 million relating to the write down of goodwill for the Basel clinic as well as certain preclinical inventory. GAAP operating income for the second quarter of 2011 was $30.9 million, and included $2.0 million in restructuring costs. Pro forma operating income, excluding these items, was $18.7 million in the quarter, compared to $32.9 million in the second quarter of last year, but up from $11.3 million last quarter. Pro forma operating margins, excluding these items, were 8.7% for the second quarter of this year, compared to 14.2% in the second quarter of 2011 and 5.3% last quarter. Sequentially, pro forma operating income increased primarily from a return to profitability in discovery support services (which experienced a loss last quarter), increased profitability in toxicology and the exclusion of losses in Chandler, Honolulu and Basel. Research products, which was profitable in the first quarter, experienced a loss in the second quarter.
($ in millions)2Q122Q11ChangeYTD12YTD11ChangeNet Revenues
($1.7)Operating Income, excluding items
24.0%Operating Margin, excluding items
20.1%The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services. Net revenues for the second quarter of 2012 grew 12.8% year-on-year to $323.1 million. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 320 basis points. Growth was driven by the continued strong performance in clinical development, which offset a decline in market access revenue. Central laboratories grew by over 4% for the second consecutive quarter.
Operating income for the second quarter was $68.0 million on a GAAP basis or $68.2 million on a pro forma basis. This compares to $56.5 million on a GAAP basis and $57.3 million on a pro forma basis in the second quarter of the prior year and to $72.4 million last quarter. Pro forma operating margins were 21.1% for the second quarter of 2012 compared to pro forma operating margins of 20.0% in the second quarter of last year and 22.7% last quarter. The year-on-year increase in profitability was driven by both clinical development and central laboratories, while the sequential decrease was primarily driven by hiring and staff costs in clinical development, lower profitability in market access services, and increased spending on strategic IT projects.
The company reported second quarter adjusted net orders of $701 million. Backlog at June 30, 2012 was $6.23 billion compared to $6.28 billion at March 31, 2012 and $6.25 billion at June 30, 2011. Foreign exchange negatively impacted backlog sequentially by $105 million.
Corporate expenses totaled $38.9 million in the second quarter of 2012 (including $0.3 million in restructuring costs) compared to $37.6 million last quarter and $38.7 million in the second quarter of last year (including $1.8 million in restructuring costs). We expect corporate expenses as a percent of revenue, excluding restructuring costs, to trend slightly higher during 2012 and 2013 as we incur costs to execute our strategic IT projects.
During the second quarter, the company recorded an impairment charge of $7.4 million to write-off the remaining 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 June 30, 2012 were $398 million compared to $440 million at March 31, 2012 and $406 million at June 30, 2011. Covance repaid $10 million in debt during the quarter and now has $330 million in debt outstanding, originating from borrowings related to our share repurchase program. Covance repurchased $18 million of shares outstanding within the second quarter.
Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2012 was negative $3 million, consisting of operating cash flow of $36 million less capital expenditures of $39 million. Free cash flow year-to-date was $13 million, consisting of operating cash flow of $82 million less capital expenditures of $69 million.
Net Days Sales Outstanding (DSO) were 35 days at June 30, 2012 compared to a record low 29 days at March 31, 2012 and 38 days at June 30, 2011.
The Company's investor conference call will be webcast on July 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 11,500 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 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 STATEMENTSFOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011(Dollars in thousands, except per share data)(UNAUDITED)Three Months Ended June 30Six Months Ended June 302012201120122011Net revenues$ 542,782$ 518,220$1,073,623$1,020,206Reimbursable out-of-pocket expenses42,26329,50785,33054,979Total revenues585,045547,7271,158,9531,075,185Costs and expenses: Cost of revenue408,198358,332784,658711,852 Reimbursable out-of-pocket expenses42,26329,50785,33054,979 Selling, general and administrative90,60185,297171,630166,000 Depreciation and amortization29,95325,83657,18351,699 Goodwill impairment charge17,959-17,959-Total costs and expenses588,974(a)498,972(b)1,116,760(a)984,530(c)(Loss) income from operations(3,929)(a)48,755(b)42,193(a)90,655(c)Other expense, net: Interest expense, net9405791,4331,297 Foreign exchange transaction loss, net7923071,020115 Impairment of equity investment7,373-7,373- Loss on sale of business169-169-Other expense, net9,2748869,9951,412(Loss) income before taxes and equity investee results(13,203)(a)47,869(b)32,198(a)89,243(c)Tax (benefit) expense(607)(a)9,987(b)9,200(a)18,621(c)Equity investee (loss) earnings(81)(240)17(242)Net (loss) income $ (12,677)(a)$
70,380(c)Basic (loss) earnings per share$
.18(c)Weighted average shares outstanding - basic54,184,96659,636,97355,965,41059,546,773Diluted (loss) earnings per share$
.15(c)Weighted average shares outstanding - diluted54,184,96661,226,47757,456,15461,105,838(a) Three and six months ended June 30, 2012 include, as applicable, $9,667 in restructuring costs ($6,530 net of tax), $20,781 in inventory impairment charges ($14,391 net of tax), $17,959 of goodwill impairment charges ($17,959 net of tax), $7,373 of impairment of equity investment ($7,373 net of tax) and $3,815 in losses at sites in wind-down ($2,746 net of tax).(b) Three months ended June 30, 2011 includes, as applicable, $4,564 in restructuring costs ($2,937 net of tax).(c) Six months ended June 30, 2011 includes, as applicable, $10,432 in restructuring costs ($6,714 net of tax).Excluding the impact of restructuring charges, impairment charges and losses at sites in wind-down:Income from operations$
,087Taxes on income$
22,339Net income $
77,094Basic earnings per share$
.29Diluted earnings per share$
.26COVANCE INC.CONSOLIDATED BALANCE SHEETSJUNE 30, 2012 and DECEMBER 31, 2011(Dollars in thousands)June 30December 3120122011(UNAUDITED)ASSETSCurrent Assets:Cash & cash equivalents$
389,103Accounts receivable, net313,160312,127Unbilled services134,163114,095Inventory48,36674,698Deferred income taxes53,22052,078Prepaid expenses and other current assets175,131144,809Total Current Assets1,121,8681,086,910Property and equipment, net858,508849,551Goodwill109,820127,779Other assets47,14043,768Total Assets$ 2,137,336$ 2,108,008LIABILITIES and STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable$
36,393Accrued payroll and benefits97,583142,229Accrued expenses and other current liabilities138,062119,308Unearned revenue237,220202,210Short-term debt 330,00030,000Income taxes payable1,5296,889Total Current Liabilities847,188537,029Deferred income taxes28,40842,295Other liabilities72,35970,889Total Liabilities947,955650,213Stockholders' Equity:Common stock788781Paid-in capital712,853689,584Retained earnings1,528,9091,505,894Accumulated other comprehensive (loss) income(7,984)4,622Treasury stock(1,045,185)(743,086)Total Stockholders' Equity1,189,3811,457,795Total Liabilities and Stockholders' Equity$ 2,137,336$ 2,108,008 COVANCE INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011(Dollars in thousands)(UNAUDITED)Six Months Ended June 3020122011Cash flows from operating activities: Net income$
70,380 Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization57,18351,699Non-cash impairment charges44,610-Non-cash compensation expense associated with employee benefit and stock compensation plans19,42218,939Deferred income tax benefit(15,507)(3,828)Loss on sale of business169-Loss on disposal of property and equipment432344Equity investee (earnings) loss(17)242Changes in operating assets and liabilities, net of business sold:Accounts receivable(2,143)(36,544)Unbilled services(20,704)(16,948)Inventory8,948(6,075)Accounts payable6,40110,611Accrued liabilities(26,023)17,838Unearned revenue36,4422,027Income taxes payable(5,028)(17,811)Other assets and liabilities, net(45,124)(2,142)Net cash provided by operating activities82,07688,732Cash flows from investing activities: Capital expenditures(69,343)(50,548) Proceeds from sale of business900- Other, net90106Net cash used in investing activities(68,353)(50,442)Cash flows from financing activities: Net borrowings (repayments) under revolving credit facility300,000(35,000) Repayments under long-term debt-(5,000) Stock issued under employee stock purchase and option plans3,5227,622 Purchase of treasury stock(302,099)(7,517)Net cash provided by (used in) financing activities1,423(39,895)Effect of exchange rate changes on cash(6,421)30,589Net change in cash and cash equivalents8,72528,984Cash and cash equivalents, beginning of period389,103377,223Cash and cash equivalents, end of period$
406,207 COVANCE INC.GAAP to Pro Forma ReconciliationQ2 2012(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAP Restructuring Activities (1)Other
Charges (2)Operating Results at Sites in Wind-Down (3)Inclusion of
Computation(4)Pro FormaNet revenues$ 542,782$
(4,289)$ 538,493Reimbursable out-of-pocket expenses42,26342,263Total revenues585,045--(4,289)-580,756Costs and expenses: Cost of revenue408,198(20,781)(6,939)380,478 Reimbursable out-of-pocket expenses42,26342,263 Selling, general and administrative90,601(8,458)(222)81,921 Depreciation and amortization29,953(1,209)(943)27,801 Goodwill impairment charge17,959(17,959)-Total costs and expenses588,974(9,667)(38,740)(8,104)-532,463(Loss) income from operations(3,929)9,66738,7403,815-48,293Other expense, net: Interest expense, net940940 Foreign exchange transaction loss, net792792 Impairment of equity investment7,373(7,373)- Loss on sale of business169-169Other expense, net9,274-(7,373)--1,901(Loss) income before taxes and equity investee earnings(13,203)9,66746,1133,815-46,392Tax (benefit) expense(607)3,1376,3901,069-9,989Equity investee (loss) earnings(81)(81)Net (loss) income $
36,322Basic (loss) earnings per share$
.67Weighted average shares outstanding - basic54,184,96654,184,96654,184,96654,184,96654,184,966Diluted (loss) earnings per share$
.65Weighted average shares outstanding - diluted54,184,96654,184,96654,184,96654,184,9661,500,115(4)55,685,081(1) Represents costs incurred to better align capacity to preclinical market demand and reduce cost structure.(2) Consists of inventory impairment ($20,781), goodwill impairment ($17,959) and impairment of equity investment ($7,373).(3) Represents results of operations at sites where wind-down activities have commenced.(4) Reflects inclusion of impact of common stock equivalents in computation of diluted earnings per share as GAAP loss transitions to Pro Forma income.COVANCE INC.GAAP to Pro Forma ReconciliationQ2 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring Activities (1)Pro FormaNet revenues$ 518,220$ 518,220Reimbursable out-of-pocket expenses29,50729,507Total revenues547,727-547,727Costs and expenses: Cost of revenue358,332358,332 Reimbursable out-of-pocket expenses29,50729,507 Selling, general and administrative85,297(4,159)81,138 Depreciation and amortization25,836(405)25,431Total costs and expenses498,972(4,564)494,408Income from operations48,7554,56453,319Other expense, net: Interest expense, net579579 Foreign exchange transaction loss, net307307Other expense, net886-886Income before taxes and equity investee earnings47,8694,56452,433Tax (benefit) expense9,9871,62711,614Equity investee (loss) earnings(240)(240)Net income $
40,579Basic earnings per share$
.68Weighted average shares outstanding - basic59,636,97359,636,97359,636,973Diluted earnings per share$
.66Weighted average shares outstanding - diluted61,226,47761,226,47761,226,477(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions. COVANCE INC.GAAP to Pro Forma ReconciliationYTD Q2 2012(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAP Restructuring Activities (1)Other
Charges (2)Operating Results at Sites in Wind-Down (3)Pro FormaNet revenues$ 1,073,623$
(4,289)$1,069,334Reimbursable out-of-pocket expenses85,33085,330Total revenues1,158,953--(4,289)1,154,664Costs and expenses: Cost of revenue784,658(20,781)(6,939)756,938 Reimbursable out-of-pocket expenses85,33085,330 Selling, general and administrative171,630(8,458)(222)162,950 Depreciation and amortization57,183(1,209)(943)55,031 Goodwill impairment charge17,959(17,959)-Total costs and expenses1,116,760(9,667)(38,740)(8,104)1,060,249(Loss) income from operations42,1939,66738,7403,81594,415Other expense, net: Interest expense, net1,4331,433 Foreign exchange transaction loss, net1,0201,020 Impairment of equity investment7,373(7,373)- Loss on sale of business169169Other expense, net9,995-(7,373)-2,622Income before taxes and equity investee earnings32,1989,66746,1133,81591,793Tax (benefit) expense9,2003,1376,3901,06919,796Equity investee (loss) earnings1717Net income $
72,014Basic earnings per share$
.29Weighted average shares outstanding - basic55,965,41055,965,41055,965,41055,965,41055,965,410Diluted earnings per share$
.25Weighted average shares outstanding - diluted57,456,15457,456,15457,456,15457,456,15457,456,154(1) Represents costs incurred to better align capacity to preclinical market demand and reduce cost structure.(2) Consists of inventory impairment ($20,781), goodwill impairment ($17,959) and impairment of equity investment ($7,373).(3) Represents results of operations at sites where wind-down activities have commenced. COVANCE INC.GAAP to Pro Forma ReconciliationYTD Q2 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring Activities (1)Pro FormaNet revenues$1,020,206$1,020,206Reimbursable out-of-pocket expenses54,97954,979Total revenues1,075,185-1,075,185Costs and expenses: Cost of revenue711,852711,852 Reimbursable out-of-pocket expenses54,97954,979 Selling, general and administrative166,000(9,622)156,378 Depreciation and amortization51,699(810)50,889Total costs and expenses984,530(10,432)974,098Income from operations90,65510,432101,087Other expense, net: Interest expense, net1,2971,297 Foreign exchange transaction loss, net115115Other expense, net1,412-1,412Income before taxes and equity investee earnings89,24310,43299,675Tax (benefit) expense18,6213,71822,339Equity investee (loss) earnings(242)(242)Net income $
77,094Basic earnings per share$
.29Weighted average shares outstanding - basic59,546,77359,546,77359,546,773Diluted earnings per share$
.26Weighted average shares outstanding - diluted61,105,83861,105,83861,105,838(1) Represents costs incurred in connection with capacity rationalization, streamlining operations and other cost reduction actions.
|SOURCE Covance Inc.|
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