PRINCETON, N.J., Nov. 3, 2010 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported results for its third quarter ended September 30, 2010, which included a GAAP loss of $0.49 per diluted share. Included in results is a $1.16 per diluted share non-cash impairment charge related to a write-down of preclinical assets, partially offset by a gain of $0.16 per diluted share from favorable income tax resolutions in the quarter. Excluding these items, earnings per diluted share were $0.50.
"Despite a tougher environment for our toxicology services, we achieved our consolidated revenue and earnings expectations in the third quarter. In addition, as evidence of the success of our long-term business strategy, we were selected by sanofi-aventis as its R&D partner, executing a 10-year alliance which we expect to generate revenues ranging from a minimum commitment of $1.2 billion to at least $2.2 billion when including the sole-source components. This alliance drove year-on-year backlog growth of 26% to more than $6 billion," said Joe Herring, Chairman and Chief Executive Officer.
"In order to address softer market conditions across much of our portfolio, we are taking decisive actions to reduce capacity and significantly lower our cost structure while maintaining service quality. These actions will enable us to enter 2011 as a leaner, more competitive company. First, the weakening in the market for outsourced toxicology services in the third quarter drove us to reassess our toxicology service offering. This has resulted in a decision to consolidate our North American toxicology services by closing our toxicology facility in Vienna, Virginia. In addition, we have taken an asset impairment charge in the third quarter totaling $119 million reflecting the excess of the carrying value of our Chandler, Arizona and Manassas, Virginia assets over their estimated fair market value. We will also be reducing spending across the company, including corporate overhead; realizing savings from process improvements and automation investments; and restructuring the executive management team. The future cost of these actions is expected to total approximately $35 million to $40 million, with more than half of the cost being incurred in the fourth quarter of 2010 and the remainder in 2011. We expect savings, net of costs, to generate incremental operating income of at least $25 million in 2011.
"Looking ahead to the fourth quarter of 2010, we expect consolidated revenue, excluding the sanofi-aventis alliance, to be roughly flat sequentially, reflecting market conditions in toxicology and, in Late-Stage Development, the slower start-up, delays, and cancellations of clinical trials. These factors are expected to result in earnings per share in the range of $0.50 to $0.55, including earnings from the sanofi-aventis alliance and excluding the site closure and other costs associated with the restructuring actions."
Consolidated Results($ in millions except EPS)3Q103Q09Change2010YTD2009YTDChangeTotal Revenues
$1,455.3Less: Reimbursable Out-of-Pockets
$ 72.7 Net Revenues
3.7%Operating Income (Loss)
(89.3)%Net Income (Loss)
(70.3)%Earnings (Loss) Per Share
-Favorable Income Tax Items*
$2.1Gain on Sale, net of tax*
$ 6.3Operating Income, excluding items*
(20.6)% Operating Margin %, ex items*
12.6%Net Income, excluding items*
(17.9)%Diluted EPS, excluding items*
(18.9)%* See attached pro forma income statements for reconciliation of GAAP to Pro Forma amounts.Operating Segment Results Early Development($ in millions)3Q103Q09 Change 2010 YTD 2009 YTD ChangeNet Revenues
5.3%Operating Income (Loss)
-2Q10 Cost Actions
-Operating Income, excluding items
(3.3)%Margin % ex items
13.0%The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the third quarter of 2010 grew 5.1% to $206.5 million compared to $196.4 million in the third quarter of 2009. Year-on-year growth was led by chemistry services. Revenues declined sequentially in toxicology which more than offset growth in chemistry and clinical pharmacology. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 190 basis points.
Operating loss for the third quarter was $98.5 million and included an asset impairment charge of $119.2 million and continuing costs of $1.3 million from our second quarter actions. Operating income, excluding these items, was $22.0 million, compared to $22.4 million in the third quarter of last year. Operating margins for the third quarter, excluding the impairment charge and second quarter cost actions, were 10.7% compared to 11.4% in the third quarter of 2009 and 14.0% last quarter. Year-over-year and sequentially, operating margins were impacted by a lower level of new orders, delays of scheduled study starts, and the mix of pricing in toxicology.
Late-Stage Development($ in millions)3Q103Q09 Change 2010 YTD 2009 YTD ChangeNet Revenues
24.0%The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval and market access services). Late-Stage Development net revenues for the third quarter of 2010 declined 3.0% year-on-year to $270.5 million compared to $278.9 million in the third quarter of 2009. Foreign exchange positively impacted year-on-year revenue growth in the quarter by 30 basis points. While the previously-announced delayed clinical trials are performing largely as we forecasted in July, several factors lead us to moderate our near-term expectations. These factors include a longer duration between the time a project is awarded and revenue generation begins, a higher level of project scope reductions and other project cancellations, and a shifting mix of central lab tests performed and kits returned.
Operating income for the third quarter of 2010 decreased 19.9% to $55.2 million compared to $68.9 million in the third quarter of the prior year. Operating margins were 20.4% for the third quarter of 2010 compared to 24.7% in the third quarter of last year and 21.2% last quarter. Late-stage margins were impacted by the longer time period between project award and commencement of revenue and, in addition, central laboratory margins continue to be impacted by testing mix and geographic mix of kit receipts.
Corporate InformationThe Company's backlog at September 30, 2010 grew 25.6% year-over-year to $6.02 billion compared to $4.79 billion at September 30, 2009 and $4.83 billion at June 30, 2010. Foreign exchange positively impacted sequential backlog growth by $125 million. Adjusted net orders (orders adjusted for dedicated capacity contracts such as the $1.2 billion order from sanofi-aventis) were $549 million in the third quarter of 2010, representing an adjusted book-to-bill ratio of 1.15 to 1. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill was approximately 1.2 to 1.
Corporate expenses totaled $33.4 million in the third quarter (or 7.0% of revenue), compared to $36.5 million (or 7.7% of revenue) last quarter. We expect corporate expenses as a percent of revenue, excluding severance and other restructuring costs, to continue to trend lower.
Cash and cash equivalents at September 30, 2010 were $389 million compared to $291 million at June 30, 2010 and $266 million at September 30, 2009. The company remains debt free.
Free cash flow (defined as operating cash flow less capital expenditures) for the third quarter of 2010 was $75 million, consisting of operating cash flow of $108 million less capital expenditures of $33 million. Free cash flow year to date was $89 million, consisting of operating cash flow of $189 million less capital expenditures of $100 million. In 2010, we now expect free cash flow to be approximately $115 million, consisting of operating cash flow of approximately $250 million less capital expenditures of approximately $135 million. The free cash flow target for 2010 assumes net Days Sales Outstanding (DSO) at 43 days.
Net Days Sales Outstanding (DSO) were 45 days at September 30, 2010 compared to 47 days at June 30, 2010 and 42 days at September 30, 2009.
Taxes in the third quarter included a benefit of $10.4 million, primarily as a result of the favorable resolution of an income tax inquiry. The tax rate for the quarter excluding this benefit and the tax benefit associated with the impairment charge was 23.0%. We expect the tax rate for the company to be approximately 23% in the fourth quarter, reflecting the prospective impact of the favorable income tax resolution and continued favorable trends in the mix of earnings relative to various tax jurisdictions.
The Company's investor conference call will be webcast on November 4 at 9:00 am EDT. 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 $1.8 billion, global operations in more than 30 countries, and more than 10,000 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 of large contracts, 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, 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 NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009(Dollars in thousands, except per share data)(UNAUDITED)Three Months Ended September 30Nine Months Ended September 302010200920102009Net revenues$
475,284$ 1,434,117$ 1,382,569Reimbursable out-of-pocket expenses36,25822,28284,90172,729Total revenues513,280497,5661,519,0181,455,298Costs and expenses: Cost of revenue337,698324,3111,001,574939,246 Reimbursable out-of-pocket expenses36,25822,28284,90172,729 Selling, general and administrative70,73169,526217,576203,049 Depreciation and amortization26,10523,64977,10566,536 Asset impairment charges119,229-119,229-Total costs and expenses590,021(a)
1,281,560(Loss) income from operations(76,741)(a)
173,738Other expense (income), net: Interest (income) expense, net(236)181(378)258 Foreign exchange transaction loss (gain), net681(903)2,595(108) Gain on sale of businesses-(9,026)-(9,681)Other expense (income), net445(9,748)(b)
2,217(9,531)(c)(Loss) income before taxes and equity investee earnings(77,186)(a)
183,269(c)Tax (benefit) expense(46,003)(a)
49,050(c)Equity investee earnings253166926128Net (loss) income $
34,347(c)Basic (loss) earnings per share$
2.11(c)Weighted average shares outstanding - basic63,739,91063,895,97563,601,30263,768,728Diluted (loss) earnings per share$
2.09(c)Weighted average shares outstanding - diluted63,739,91064,472,57265,069,90164,235,983(a) Includes the impact of $119,229 in asset impairment charges ($73,922 net of tax) and favorable income tax items totaling $10,352 during the three and nine months ended September 30, 2010.
(b) Includes the impact of a $9,026 gain on sale of Interactive Voice & Web Response Services ($5,867 net of tax) and favorable income tax items totaling $2,072 during the three months ended September 30, 2009.
(c) Includes the impact of a $9,026 gain on sale of Interactive Voice & Web Response Services ($5,867 net of tax) and a $655 gain on sale of Cardiac Safety Services ($426 net of tax) and favorable income tax items totaling $2,072 during the nine months ended September 30, 2009.Excluding the impact of the asset impairment charges, favorable income tax items and gain on sale of businesses:Income before taxes and equity investee earnings$
73,588Taxes on income$
47,734Net income $
25,982Basic earnings per share$
.98Diluted earnings per share$
.96COVANCE INC.CONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2010 and DECEMBER 31, 2009(Dollars in thousands)September 30December 3120102009(UNAUDITED)ASSETSCurrent Assets:Cash & cash equivalents$
289,469Accounts receivable, net281,677285,119Unbilled services103,66097,279Inventory82,31480,926Deferred income taxes41,95131,512Prepaid expenses and other current assets93,05893,367Total Current Assets991,684877,672Property and equipment, net817,956921,995Goodwill, net127,653127,653Other assets45,46847,624Total Assets$
,974,944LIABILITIES and STOCKHOLDERS' EQUITYCurrent Liabilities:Accounts payable$
36,834Accrued payroll and benefits100,797111,365Accrued expenses and other current liabilities80,37473,383Unearned revenue149,496166,890Income taxes payable13,86714,272Total Current Liabilities379,929402,744Deferred income taxes55,53098,945Other liabilities57,96562,251Total Liabilities493,424563,940Stockholders' Equity:Common stock772764Paid-in capital626,209587,995Retained earnings1,345,3271,305,451Accumulated other comprehensive income (loss)555(5,281)Treasury stock(483,526)(477,925)Total Stockholders' Equity1,489,3371,411,004Total Liabilities and Stockholders' Equity$
,974,944COVANCE INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009(Dollars in thousands)(UNAUDITED)Nine Months Ended September 3020102009Cash flows from operating activities: Net income$ 39,876$ 134,347 Adjustments to reconcile net income to net cash provided byoperating activities:Depreciation and amortization77,10566,536Asset impairment charges119,229-Non-cash compensation expense associated with employee benefitand stock compensation plans24,81520,295Deferred income tax benefit(53,185)(2,981)Gain on sale of businesses-(9,681)Loss on sale of property and equipment961838Equity investee earnings(926)(128)Changes in operating assets and liabilities, net of businessesacquired and sold:Accounts receivable3,442(61,341)Unbilled services(6,381)1,342Inventory(1,388)(11,070)Accounts payable(1,439)(5,426)Accrued liabilities(3,577)(12,518)Unearned revenue(17,394)18,770Income taxes payable36231,494Other assets and liabilities, net7,6583,658Net cash provided by operating activities189,158174,135Cash flows from investing activities: Capital expenditures(100,488)(98,020) Acquisition of businesses, net of cash acquired-(28,370) Proceeds from sale of businesses-10,373 Other, net7326Net cash used in investing activities(100,415)(115,991)Cash flows from financing activities: Stock issued under employee stock purchase and option plans12,6407,251 Purchase of treasury stock(5,601)(2,509) Net repayments under revolving credit facility-(25,000) Payment of debt assumed upon acquisition of business-(5,431)Net cash provided by (used in) financing activities7,039(25,689)Effect of exchange rate changes on cash3,77312,459Net change in cash and cash equivalents99,55544,914Cash and cash equivalents, beginning of period289,469221,334Cash and cash equivalents, end of period$ 389,024$ 266,248COVANCE INC.GAAP to Pro Forma ReconciliationQ3 2010(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPAsset
Computation (1)Pro FormaNet revenues$
477,022Reimbursable out-of-pocket expenses36,25836,258Total revenues513,280---513,280Costs and expenses: Cost of revenue337,698337,698 Reimbursable out-of-pocket expenses36,25836,258 Selling, general and administrative70,73170,731 Depreciation and amortization26,10526,105 Asset impairment charges119,229(119,229)-Total costs and expenses590,021(119,229)--470,792(Loss) income from operations(76,741)119,229--42,488Other expense (income), net: Interest (income) expense, net(236)(236) Foreign exchange transaction loss (gain), net681681 Gain on sale of businesses--Other expense (income), net445---445(Loss) income before taxes and equity investee earnings(77,186)119,229--42,043Tax (benefit) expense(46,003)45,30710,352-9,656Equity investee earnings253253Net (loss) income $
32,640Basic (loss) earnings per share$
.51Weighted average shares outstanding - basic63,739,91063,739,91063,739,91063,739,910Diluted (loss) earnings per share$
.50Weighted average shares outstanding - diluted63,739,91063,739,91063,739,9101,270,798(1)65,010,708(1)(1) 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 ReconciliationQ3 2009(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPIncome Tax
ItemsGain on sale of
IVRSPro FormaNet revenues$
475,284Reimbursable out-of-pocket expenses22,28222,282Total revenues497,566--497,566Costs and expenses: Cost of revenue324,311324,311 Reimbursable out-of-pocket expenses22,28222,282 Selling, general and administrative69,52669,526 Depreciation and amortization23,64923,649 Asset impairment charges--Total costs and expenses439,768--439,768(Loss) income from operations57,798--57,798Other expense (income), net: Interest (income) expense, net181181 Foreign exchange transaction loss (gain), net(903)(903) Gain on sale of businesses(9,026)9,026-Other expense (income), net(9,748)-9,026(722)(Loss) income before taxes and equity investee earnings67,546-(9,026)58,520Tax (benefit) expense16,6502,072(3,159)15,563Equity investee earnings166166Net (loss) income $
43,123Basic (loss) earnings per share$
.67Weighted average shares outstanding - basic63,895,97563,895,97563,895,97563,895,975Diluted (loss) earnings per share$
.67Weighted average shares outstanding - diluted64,472,57264,472,57264,472,57264,472,572COVANCE INC.GAAP to Pro Forma ReconciliationYTD Q3 2010(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPAsset
ItemsPro FormaNet revenues$ 1,434,117$ 1,434,117Reimbursable out-of-pocket expenses84,90184,901Total revenues1,519,018--1,519,018Costs and expenses: Cost of revenue1,001,5741,001,574 Reimbursable out-of-pocket expenses84,90184,901 Selling, general and administrative217,576217,576 Depreciation and amortization77,10577,105 Asset impairment charges119,229(119,229)-Total costs and expenses1,500,385(119,229)-1,381,156(Loss) income from operations18,633119,229-137,862Other expense (income), net: Interest (income) expense, net(378)(378) Foreign exchange transaction loss (gain), net2,5952,595 Gain on sale of businesses--Other expense (income), net2,217--2,217(Loss) income before taxes and equity investee earnings16,416119,229-135,645Tax (benefit) expense(22,534)45,30710,35233,125Equity investee earnings926926Net (loss) income $
3,446Basic (loss) earnings per share$
.63Weighted average shares outstanding - basic63,601,30263,601,30263,601,30263,601,302Diluted (loss) earnings per share$
.59Weighted average shares outstanding - diluted65,069,90165,069,90165,069,90165,069,901COVANCE INC.GAAP to Pro Forma ReconciliationYTD Q3 2009(Dollars in thousands, except per share data)(UNAUDITED)AdjustmentsGAAPIncome Tax ItemsGain on Sale of
Businesses (1)Pro FormaNet revenues$ 1,382,569$ 1,382,569Reimbursable out-of-pocket expenses72,72972,729Total revenues1,455,298--1,455,298Costs and expenses: Cost of revenue939,246939,246 Reimbursable out-of-pocket expenses72,72972,729 Selling, general and administrative203,049203,049 Depreciation and amortization66,53666,536 Asset impairment charges--Total costs and expenses1,281,560--1,281,560(Loss) income from operations173,738--173,738Other expense (income), net: Interest (income) expense, net258258 Foreign exchange transaction loss (gain), net(108)(108) Gain on sale of businesses(9,681)9,681-Other expense (income), net(9,531)-9,681150(Loss) income before taxes and equity investee earnings183,269-(9,681)173,588Tax (benefit) expense49,0502,072(3,388)47,734Equity investee earnings128128Net (loss) income $
25,982Basic (loss) earnings per share$
.98Weighted average shares outstanding - basic63,768,72863,768,72863,768,72863,768,728Diluted (loss) earnings per share$
.96Weighted average shares outstanding - diluted64,235,98364,235,98364,235,98364,235,983(1) Includes the impact of a $9,026 gain on sale of Interactive Voice & Web Response Services ($5,867 net of tax) and a $655 gain on sale of Cardiac Safety Services ($426 net of tax).
|SOURCE Covance Inc.|
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