PRINCETON, N.J., July 27, 2011 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its second quarter ended June 30, 2011 of $0.61 per diluted share. Included in second quarter results is $0.05 per diluted share in costs from the previously-announced restructuring actions. Excluding these costs, earnings per diluted share were $0.66 in the quarter.
"On a consolidated basis, second quarter net revenues grew 9.1% year-on-year and pro forma operating margin (when excluding $4.6 million of restructuring costs), expanded 80 basis points sequentially to 10.3%," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 11.4% year-on-year to $231.8 million. Revenues were up sequentially in toxicology, analytical chemistry, clinical pharmacology, and discovery support, driving a $7.8 million increase in revenues and a 240 basis point increase in pro forma operating margin from last quarter to 14.2%. In Late-Stage Development, revenues grew 7.3% year-on-year and 3.0% sequentially driven by the continued strong performance in clinical development coupled with the weakening of the US dollar, which more than offset the impact of continued project delays and cancellations in central laboratories. Pro forma operating margin in the segment was 20.0%.
"On the commercial front, adjusted net orders in the second quarter were $614 million, representing an adjusted book-to-bill of 1.18 to 1 led by continued strong orders across all phases of clinical development. Looking forward, we are encouraged by the increasing demand for our early development services, including toxicology, as well as the continued robust pipeline of clinical development proposals. In order to fully capitalize on the market opportunities we are seeing, several dozen incremental sales and marketing professionals were hiANCE INC.GAAP to Pro Forma ReconciliationYTD Q2 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring Activities (1)Pro FormaNet revenues$ 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 (income), net1,2971,297 Foreign exchange transaction loss, net115115Other expense, net1,412-1,412Income before taxes and equity investee earnings89,24310,43299,675Taxes on income18,6213,71822,339Equity 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. red globally in the first half of this year.
"Covance now expects full-year revenue growth in the mid-to-high single digit range and pro forma earnings to be in the range of $2.60 to $2.80 per diluted share, excluding costs associated with previously announced restructuring activities. This range assumes no new strategic alliances with clients and foreign exchange rates remain at June 30, 2011 levels. In the third quarter, we are expecting a continued sequential increase in net revenues and pro forma earnings per share of approximately $0.70."
Consolidated Results($ in millions except EPS)2Q112Q10ChangeYTD11YTD10ChangeTotal Revenues
$1,005.7Less: Reimbursable Out-of-Pockets
$ 48.6Net Revenues
(4.9%) Operating Margin
5.9%2011 Restructuring Costs*
($4.6)($10.4)Operating Income, excluding 2011 items*
$53.3$101.1 Operating Margin, ex 2011 items*
10.3%9.9%Net Income, ex 2011 items*
$40.6$77.1Diluted EPS, ex 2011 items*
$0.66$1.26* See attached pro forma income statement for reconciliation of 2011 GAAP to pro forma amounts.Operating Segment Results Early Development($ in millions)2Q112Q10ChangeYTD11YTD10ChangeNet Revenues
10.3%GAAP Operating Income
20.0%GAAP Operating Margin %
11.0%2011 Restructuring Costs
($2.0)($4.9)2010 Cost Actions($6.7)($6.7)Pro Forma Operating Income
13.9%Pro Forma OM%
12.6%The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the second quarter of 2011 grew 11.4% year-on-year to $231.8 million, driven by the results from our new Alnwick, UK and Porcheville, France sites, foreign exchange tailwind of 230 basis points, and stronger results in clinical pharmacology, which more than offset a decline in revenue from the wind-down of our Vienna, Virginia toxicology facility. Sequentially, revenues increased $7.8 million on broad-based revenue growth.
GAAP operating income for the second quarter of 2011 was $30.9 million, and included $2.0 million in costs associated with our restructuring actions, while GAAP operating income for the second quarter of 2010 was $22.5 million, which included $6.7 million in cost actions. Pro forma operating income, excluding these costs, was $32.9 million in the current quarter, compared to $26.5 million last quarter and $29.2 million in the second quarter of last year. Pro forma operating margins, excluding restructuring costs, were 14.2% for the second quarter, compared to 11.8% last quarter and 14.0% in the second quarter of 2010. Sequentially, profitability improvement was broad-based across the segment.
Late-Stage Development($ in millions)2Q112Q10ChangeYTD11YTD10ChangeNet Revenues
3.8%GAAP Operating Income
(8.9%)GAAP Operating Margin %
22.6%2011 Restructuring Costs
($0.7)($1.7)Pro Forma Operating Income
(7.6%)Pro Forma OM%
22.6%The Late-Stage Development segment includes central laboratory, Phase II-IV clinical development, and market access services. Net revenues for the second quarter of 2011 grew 7.3% year-on-year and 3.0% sequentially to $286.4 million; growth over both periods was primarily driven by the continued strong performance in clinical development coupled with the weakening of the US dollar.
GAAP operating income for the second quarter was $56.5 million and included $0.7 million in costs associated with our restructuring actions. Pro forma operating income, excluding these costs, was $57.3 million, compared to $56.2 million last quarter and $56.5 million in the second quarter of the prior year. Pro forma operating margins were 20.0% for the second quarter of 2011 compared to 20.2% last quarter and 21.2% in the second quarter of last year. The year-on-year profitability decline was due to lower revenues and operating income in central laboratory services.
Corporate InformationThe Company's backlog at June 30, 2011 grew 29.4% year-over-year to $6.25 billion compared to $4.83 billion at June 30, 2010 and $6.29 billion at March 31, 2011. Foreign exchange positively impacted sequential backlog growth by approximately $100 million. Negatively impacting backlog was the removal of $141 million remaining from a contractual minimum volume (CMV) commitment for early development services which is being replaced with a broader, non-CMV relationship with the same client. The CMV contract, which was initiated in 2006, was due to expire at the end of 2015. The client has now committed to place a number of studies in excess of the remaining value of the CMV contract for services spanning both early development and late-stage development. The studies under the new arrangement are expected to be included in future orders as the individual project study documentation is prepared, and are expected to generate revenue of at least $170 million over the next four years.
Corporate expenses totaled $38.7 million in the second quarter of 2011 (including $1.8 million in restructuring costs) compared to $36.9 million last quarter (including $2.0 million in restructuring costs) and $36.5 million in the second quarter of last year (including $0.8 million in cost actions). We expect corporate expenses as a percent of revenue, excluding restructuring costs, to trend lower during 2011 as we realize more of the savings from the ongoing restructuring actions.
Cash and cash equivalents at June 30, 2011 were $406 million compared to $368 million at March 31, 2011 and $291 million at June 30, 2010. Covance repaid $37.5 million in debt during the quarter and now has $92.5 million in debt outstanding, originating from borrowings related to the fourth quarter accelerated share repurchase.
Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2011 was $59 million, consisting of operating cash flow of $89 million less capital expenditures of $30 million. Free cash flow year-to-date was $38 million, consisting of operating cash flow of $89 million less capital expenditures of $51 million.
Net Days Sales Outstanding (DSO) were 38 days at June 30, 2011 compared to 37 days at March 31, 2011 and 47 days at June 30, 2010.
The Company's investor conference call will be webcast on July 28 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 $1.9 billion, global operations in more than 30 countries, and more than 10,500 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, 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, 2011 AND 2010(Dollars in thousands, except per share data)(UNAUDITED)Three Months Ended June 30Six Months Ended June 302011201020112010Net revenues$
957,095Reimbursable out-of-pocket expenses29,50725,54854,97948,643Total revenues547,727500,7191,075,1851,005,738Costs and expenses: Cost of revenue358,332331,360711,852663,876 Reimbursable out-of-pocket expenses29,50725,54854,97948,643 Selling, general and administrative85,29775,045166,000146,845 Depreciation and amortization25,83626,25651,69951,000Total costs and expenses498,972(a)
910,364Income from operations48,755(a)
95,374Other expense, net: Interest expense (income), net579(77)1,297(142) Foreign exchange transaction loss, net3077611151,914Other expense, net8866841,4121,772Income before taxes and equity investee earnings47,869(a)
93,602Taxes on income9,987(a)
23,469Equity investee (loss) earnings(240)254(242)673Net income $
70,806Basic earnings per share$
.11Weighted average shares outstanding - basic59,636,97363,620,30059,546,77363,531,999Diluted earnings per share$
.09Weighted average shares outstanding - diluted61,226,47765,027,45261,105,83865,058,693(a) Includes $4,564 in restructuring costs ($2,937 net of tax) during the three months ended June 30, 2011.(b) Includes $10,432 in restructuring costs ($6,714 net of tax) during the six months ended June 30, 2011.COVANCE INC.CONSOLIDATED BALANCE SHEETSJUNE 30, 2011 and DECEMBER 31, 2010(Dollars in thousands)June 30December 3120112010(UNAUDITED)ASSETSCurrent Assets:Cash & cash equivalents$
377,223Accounts receivable, net297,704261,160Unbilled services107,67790,729Inventory88,99982,924Deferred income taxes38,39735,648Prepaid expenses and other current assets104,55698,127Total Current Assets1,043,540945,811Property and equipment, net857,857843,983Goodwill, net127,653127,653Other assets52,49648,095Total Assets$ 2,081,546$
,965,542LIABILITIES and STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable$
34,079Accrued payroll and benefits105,776107,572Accrued expenses and other current liabilities117,02997,395Unearned revenue188,328186,301Short-term debt and current portion of long-term debt10,00045,000Income taxes payable10,48528,827Total Current Liabilities476,308499,174Long-term debt82,50087,500Deferred income taxes29,88130,531Other liabilities69,98868,516Total Liabilities658,677685,721Stockholders' Equity:Common stock780774Paid-in capital666,427639,341Retained earnings1,444,0851,373,705Accumulated other comprehensive income53,370277Treasury stock(741,793)(734,276)Total Stockholders' Equity1,422,8691,279,821Total Liabilities and Stockholders' Equity$ 2,081,546$
,965,542COVANCE INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010(Dollars in thousands)(UNAUDITED)Six Months Ended June 3020112010Cash flows from operating activities: Net income$ 70,380$ 70,806 Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization51,69951,000Non-cash compensation expense associated with employee benefitand stock compensation plans18,93916,215Deferred income tax benefit(3,828)(5,752)Loss on disposal of property and equipment344345Equity investee loss (earnings)242(673)Changes in operating assets and liabilities:Accounts receivable(36,544)4,013Unbilled services(16,948)(16,830)Inventory(6,075)3,302Accounts payable10,611(1,141)Accrued liabilities17,838(19,636)Unearned revenue2,027(14,817)Income taxes payable(17,811)3,994Other assets and liabilities, net(2,142)(9,454)Net cash provided by operating activities88,73281,372Cash flows from investing activities: Capital expenditures(50,548)(67,461) Other, net10650Net cash used in investing activities(50,442)(67,411)Cash flows from financing activities: Net repayments under revolving credit facility(35,000)- Repayments under long-term debt(5,000)- Stock issued under employee stock purchase and option plans7,6229,270 Purchase of treasury stock(7,517)(5,283)Net cash (used in) provided by financing activities(39,895)3,987Effect of exchange rate changes on cash30,589(16,572)Net change in cash and cash equivalents28,9841,376Cash and cash equivalents, beginning of period377,223289,469Cash and cash equivalents, end of period$ 406,207$ 290,845COVANCE INC.GAAP to Pro Forma ReconciliationQ2 2011(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPRestructuring Activities (1)Pro FormaNet revenues$
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 (income), net579579 Foreign exchange transaction loss, net307307Other expense, net886-886Income before taxes and equity investee earnings47,8694,56452,433Taxes on income9,9871,62711,614Equity 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.COV
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