PRINCETON, N.J., May 1, 2014 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported results for its first quarter ended March 31, 2014. Net revenue was $620 million, representing 6.9% growth from the first quarter of 2013. On a GAAP basis, the company reported earnings of $0.88 per diluted share in the first quarter. Excluding a gain on the sale of our Seattle genomics laboratory of $1.6 million and charges associated with restructuring and other cost reduction actions totaling $4.1 million, the company reported earnings per diluted share of $0.90, up 20.1% over the first quarter of 2013.
"Covance's first quarter of 2014 featured a higher level of new toxicology orders and continued operational success in our clinical and central laboratory service offerings. Our 20% year-on-year increase in pro forma EPS was driven by 7% revenue growth and expanded pro forma operating margins of 11.5%," said Joe Herring, Chairman and Chief Executive Officer. "Adjusted net orders in the first quarter were $710 million, representing an adjusted net book-to-bill of 1.15 to 1. Net orders remained strong in central laboratories and grew significantly in toxicology and clinical pharmacology, offsetting lower-than-expected net orders in clinical development.
"Late-Stage Development first quarter revenues grew 7.8% year-on-year to $402 million. Central laboratories and clinical development grew 11% and 6%, respectively, which more than offset a decline in our market access services. Late-Stage Development operating margin expanded to 23.2%.
"Early Development results were in-line with our expectation with revenue increasing 5.3% year-on-year to $218 million with pro forma operating margin of 9.7%. Sequentially, growth in clinical pharmacology, research products, and nutritional chemistry was more than offset by the sale of our Seattle genomics laboratory and seasonal declines in toxicology and discovery support. Early Development second quarter revenue and operating margin are expected to increase considerably from the seasonally weak first quarter level.
"Looking ahead, we expect increases of a few cents in earnings per share each quarter as we progress throughout the year. We are narrowing our 2014 financial expectations to revenue growth of 6% to 9% and pro forma diluted earnings per share of $3.70 to $3.95 (excluding the gain on sale, costs associated with our on-going restructuring activities and assuming foreign exchange rates remain at March 31, 2014 levels)."
Consolidated Results
($ in millions except EPS) 1Q14 1Q13 Change ------------------------- ---- ---- ------ Total Revenues $666.3 $634.3 Less: Reimbursable Out-of-Pockets $46.2 $54.1 Net Revenues $620.1 $580.2 6.9% Operating Income $66.9 $48.3 38.6% Operating Margin 10.8% 8.3% Net Income $50.8 $48.2 5.5% Diluted Earnings per Share $0.88 $0.86 2.5% -------------------------- ----- ----- --- Restructuring costs ($4.1) ($6.2) Operating Income, excluding items* $71.0 $54.4 30.5% Operating Margin, excluding items* 11.5% 9.4% Gain on Sale of Business/Investment $1.6 $15.7 Net Income, excluding items* $52.4 $42.3 23.8% Diluted EPS, excluding items* $0.90 $0.75 20.1% ---------------------------- ----- ----- ----
* See attached pro forma income statements for reconciliation of 2014 and 2013 GAAP to pro forma amounts.
Operating Segment Results
Early Development
($ in millions) 1Q14 1Q13 Change -------------- ---- ---- ------ Net Revenues $218.2 $207.3 5.3% Operating Income $19.5 $16.6 17.6% Operating Margin 8.9% 8.0% ---------------- --- --- Restructuring costs ($1.6) ($3.6) Operating Income, excluding items $21.1 $20.1 5.0% Operating Margin, excluding items 9.7% 9.7% --------------------------- --- ---
The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the first quarter of 2014 increased 5.3% year-on-year to $218.2 million, as growth in clinical pharmacology and toxicology more than offset a decline in discovery support and the impact of the sale of our Seattle genomics laboratory. In the quarter, foreign exchange favorably impacted revenue growth by 180 basis points. Sequentially, revenue declined by $10.0 million from the fourth quarter as sequential growth in clinical pharmacology and research products were more than offset by the impact of the sale of our Seattle genomics laboratory and seasonality in toxicology and discovery support.
GAAP operating income in the first quarter of 2014 was $19.5 million, and included $1.6 million in costs associated with our on-going restructuring actions versus operating income of $16.6 million in the first quarter of 2013, which included charges associated with restructuring and other cost reduction actions of $3.6 million. Pro forma operating income, excluding these costs, was $21.1 million in the first quarter of this year, a 5.0% increase from the first quarter of 2013. Pro forma operating margins were 9.7% in the first quarter of both this year and last year, versus 12.1% in the fourth quarter of 2013. The sequential decline in pro forma operating margin resulted from seasonal headwinds in toxicology and discovery support, which more than offset increases in our chemistry services.
Late-Stage Development
($ in millions) 1Q14 1Q13 Change -------------- ---- ---- ------ Net Revenues $401.8 $372.9 7.8% Operating Income $93.1 $82.9 12.2% Operating Margin 23.2% 22.2% ---------------- ---- ---- Restructuring Costs ($0.2) ($1.9) Operating Income, excluding items $93.3 $84.8 10.0% Operating Margin, excluding items 23.2% 22.8% --------------------------- ---- ----
The Late-Stage Development segment includes central laboratory, Phase IIb-IV clinical development, and market access services. Net revenues for the first quarter of 2014 grew 7.8% year-on-year to $401.8 million, a sequential increase of $7.0 million from the fourth quarter level. In the quarter, foreign exchange favorably impacted revenue growth by 160 basis points. Year-over-year growth was driven by 10.9% growth in central laboratories and 5.7% growth in clinical development, which more than offset a decline in our market access services. Sequentially, although all three service areas increased, growth was driven by clinical development services.
Operating income for the first quarter was $93.1 million on a GAAP basis and included $0.2 million in costs associated with our on-going restructuring actions. On a pro forma basis, operating income was $93.3 million, up 10.0% year-over-year and $3.8 million sequentially from the $89.5 million delivered last quarter. Pro forma operating margins expanded to 23.2% for the first quarter of 2014, up from 22.7% last quarter and 22.8% in the first quarter of 2013. The year-on-year and sequential increases in profitability were driven by clinical development. IT operating expenses were up year-over-year, but down sequentially due to project timing.
Corporate Information
The company reported first quarter adjusted net orders of $710 million. Backlog at March 31, 2014 was $6.90 billion compared to $6.92 billion at December 31, 2013 and $6.61 billion at March 31, 2013. Backlog was negatively impacted in the quarter by the sale of our Seattle genomics laboratory and was partially offset by a $37 million foreign exchange tailwind.
Corporate expenses totaled $45.6 million in the first quarter of 2014 (including $2.3 million in restructuring costs) down from $56.2 million last quarter (including $3.8 million in restructuring costs) and $51.3 million (including $0.7 million in restructuring costs) in the first quarter of 2013. The prior year and prior quarter both reflected significantly higher spending on the corporate component of our strategic IT initiatives and higher incentive compensation expenses related to the stronger-than-expected business performance in 2013. The current quarter reflects incremental savings from the company's on-going efforts to streamline its corporate and functional support organizations and the previously disclosed shift of informatics expenses which were previously reflected in corporate expense and are now reflected in the Late-Stage Development segment.
Cash, cash equivalents, and short-term investments at March 31, 2014 were $660 million compared to $729 million at December 31, 2013 and $430 million at March 31, 2013. Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2014 was a negative $106 million, consisting of operating cash flow of a negative $71 million (reflecting the payment of 2013 annual bonuses, the remittance of a client VAT payment of $28 million received in the fourth quarter of 2013 to the tax authorities coupled with a 4 day increase in DSO) less capital expenditures of $35 million. Debt outstanding remains at $250 million.
Net Days Sales Outstanding (DSO) were 38 days at March 31, 2014 compared to 34 days at December 31, 2013 and 41 days at March 31, 2013.
The pro forma effective tax rate in the first quarter was 23.2% and is expected to be approximately 24% for the full year 2014.
The Company's investor conference call will be webcast on May 2 at 9:00 am ET. Management's commentary and presentation slides will be available through www.covance.com.
Covance, the world's most comprehensive drug development company and a leader in nutritional analysis, is dedicated to advancing healthcare and delivering Solutions Made Real(TM). The company, headquartered in Princeton, New Jersey, has annual revenues greater than $2.4 billion and more than 12,500 employees located in over 60 countries. Information on Covance's solutions, 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
COVANCE INC. CONSOLIDATED INCOME STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (Dollars in thousands, except per share data) (UNAUDITED) Three Months Ended March 31 ------------------- 2014 2013 ---- ---- Net revenues $620,052 $580,199 Reimbursable out-of-pocket expenses 46,236 54,136 Total revenues 666,288 634,335 ------- ------- Costs and expenses: Cost of revenue 432,553 411,344 Reimbursable out-of-pocket expenses 46,236 54,136 Selling, general and administrative 87,282 89,219 Depreciation and amortization 33,329 31,385 Total costs and expenses 599,400 (a) 586,084 (b) ------- ------- Income from operations 66,888 (a) 48,251 (b) Other expense (income), net: Interest expense, net 2,448 871 Foreign exchange transaction loss, net 402 335 Gain on sale of business (1,648) - Gain on sale of investment - (15,693) Other expense (income), net 1,202 (a) (14,487) (b) ----- ------- Income before taxes 65,686 (a) 62,738 (b) Taxes on income 14,870 (a) 14,572 (b) Net income $50,816 (a) $48,166 (b) ======= ======= Basic earnings per share $0.91 (a) $0.89 (b) Weighted average shares outstanding - basic 55,681,285 54,207,032 Diluted earnings per share $0.88 (a) $0.86 (b) Weighted average shares outstanding - diluted 57,989,826 56,307,034 (a) Three months ended March 31, 2014 includes, as applicable, $4,138 in charges associated with restructuring and other cost reduction actions ($2,587 net of tax) and $1,648 gain on sale of certain assets of Genomics Laboratory ($1,033 net of tax). (b) Three months ended March 31, 2013 includes, as applicable, $6,170 in restructuring costs ($4,347 net of tax), and $15,693 gain on sale of investment in BioClinica, Inc. ($10,194 net of tax). Excluding the impact of charges associated with restructuring and other cost reduction ----------------------------------------------- actions, gain on sale of business and gain on sale of investment, as applicable: ----------------------------------------------------- Income from operations $71,026 $54,421 Taxes on income $15,806 $10,896 Net income $52,370 $42,319 Basic earnings per share $0.94 $0.78 Diluted earnings per share $0.90 $0.75
COVANCE INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2014 and DECEMBER 31, 2013 (Dollars in thousands) March 31 December 31 2014 2013 ---- ---- (UNAUDITED) ASSETS Current Assets: Cash & cash equivalents $546,593 $617,686 Short- term investments 113,546 111,359 Accounts receivable, net 337,381 331,815 Unbilled services 159,092 141,707 Inventory 48,839 48,257 Deferred income taxes 52,575 51,543 Prepaid expenses and other current assets 232,343 201,621 ------- ------- Total Current Assets 1,490,369 1,503,988 Property and equipment, net 919,009 913,612 Goodwill 108,522 109,820 Other assets 31,369 29,168 Total Assets $2,549,269 $2,556,588 ========== ========== LIABILITIES and STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $59,038 $59,713 Accrued payroll and benefits 117,997 170,806 Accrued expenses and other current liabilities 109,083 153,808 Unearned revenue 236,596 240,398 Income taxes payable 8,100 7,952 ----- ----- Total Current Liabilities 530,814 632,677 Long-term debt 250,000 250,000 Deferred income taxes 30,571 32,035 Other liabilities 77,505 76,630 Total Liabilities 888,890 991,342 ------- ------- Stockholders' Equity: Common stock 824 809 Paid-in capital 929,961 859,535 Retained earnings 1,830,649 1,779,833 Accumulated other comprehensive income 37,307 25,746 Treasury stock (1,138,362) (1,100,677) Total Stockholders' Equity 1,660,379 1,565,246 --------- --------- Total Liabilities and Stockholders' Equity $2,549,269 $2,556,588 ========== ==========
COVANCE INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013 (Dollars in thousands) (UNAUDITED) Three Months Ended March 31 --------------- 2014 2013 ---- ---- Cash flows from operating activities: Net income $50,816 $48,166 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 33,329 31,385 Non-cash compensation expense associated with employee benefit and stock compensation plans 9,342 10,932 Deferred income tax benefit (2,631) (4,710) Gain on sale of business (1,648) - Gain on sale of investment - (15,693) Loss on disposal of property and equipment 240 202 Changes in operating assets and liabilities, net of business sold: Accounts receivable (5,566) (4,804) Unbilled services (17,385) (18,876) Inventory (3,752) 480 Accounts payable (675) 7,162 Accrued liabilities (97,534) (67,536) Unearned revenue (3,365) (14,765) Income taxes 5,170 8,460 Other assets and liabilities, net (36,890) (34,461) Net cash used in operating activities (70,549) (54,058) ------- ------- Cash flows from investing activities: Capital expenditures (35,129) (30,350) Proceeds from sale of business 8,429 - Proceeds from sale of investment - 17,074 Other, net - 393 Net cash used in investing activities (26,700) (12,883) ------- ------- Cash flows from financing activities: Stock issued under option plans 56,077 24,909 Purchase of treasury stock (37,685) (8,649) Net borrowings under revolving credit facility - 5,000 Net cash provided by financing activities 18,392 21,260 ------ ------ Effect of exchange rate changes on cash 7,764 (17,296) ----- ------- Net change in cash and cash equivalents (71,093) (62,977) Cash and cash equivalents, beginning of period 617,686 492,824 ------- ------- Cash and cash equivalents, end of period $546,593 $429,847 ======== ========
COVANCE INC. GAAP to Pro Forma Reconciliation Q1 2014 (Dollars in thousands, except per share data) (UNAUDITED) Adjustments ----------- GAAP Restructuring Other Pro Forma and Other Cost Items (2) Reduction Activities (1) --- Net revenues $620,052 $620,052 Reimbursable out-of-pocket expenses 46,236 46,236 Total revenues 666,288 - - 666,288 ------- --- --- ------- Costs and expenses: Cost of revenue 432,553 432,553 Reimbursable out-of-pocket expenses 46,236 46,236 Selling, general and administrative 87,282 (3,720) 83,562 Depreciation and amortization 33,329 (418) 32,911 Total costs and expenses 599,400 (4,138) - 595,262 ------- ------ --- ------- Income from operations 66,888 4,138 - 71,026 Other expense, net: Interest expense, net 2,448 2,448 Foreign exchange transaction loss, net 402 402 Gain on sale of business (1,648) 1,648 - Other expense, net 1,202 - 1,648 2,850 ----- --- ----- ----- Income before taxes 65,686 4,138 (1,648) 68,176 Taxes on income 14,870 1,551 (615) 15,806 Net income $50,816 $2,587 $(1,033) $52,370 ======= ====== ======= ======= Basic earnings per share $0.91 $0.05 $(0.02) $0.94 Weighted average shares outstanding - basic 55,681,285 55,681,285 55,681,285 55,681,285 Diluted earnings per share $0.88 $0.04 $(0.02) $0.90 Weighted average shares outstanding - diluted 57,989,826 57,989,826 57,989,826 57,989,826 (1) Represents costs incurred to better align capacity to preclinical market demand and reduce overall cost structure. (2) Represents gain on sale of business.
COVANCE INC. GAAP to Pro Forma Reconciliation Q1 2013 (Dollars in thousands, except per share data) (UNAUDITED) Adjustments ----------- GAAP Restructuring Activities (1) Other Pro Forma Items (2) --- Net revenues $580,199 $580,199 Reimbursable out-of-pocket expenses 54,136 54,136 Total revenues 634,335 - - 634,335 ------- --- --- ------- Costs and expenses: Cost of revenue 411,344 411,344 Reimbursable out-of-pocket expenses 54,136 54,136 Selling, general and administrative 89,219 (4,673) 84,546 Depreciation and amortization 31,385 (1,497) 29,888 Total costs and expenses 586,084 (6,170) - 579,914 ------- ------ --- ------- Income from operations 48,251 6,170 - 54,421 Other (income) expense, net: Interest expense, net 871 871 Foreign exchange transaction loss, net 335 335 Gain on sale of investment (15,693) 15,693 - Other (income) expense, net (14,487) - 15,693 1,206 ------- --- ------ ----- Income before taxes 62,738 6,170 (15,693) 53,215 Taxes on income 14,572 1,823 (5,499) 10,896 Net income $48,166 $4,347 $(10,194) $42,319 ======= ====== ======== ======= Basic earnings per share $0.89 $0.08 $(0.19) $0.78 Weighted average shares outstanding - basic 54,207,032 54,207,032 54,207,032 54,207,032 Diluted earnings per share $0.86 $0.08 $(0.18) $0.75 Weighted average shares outstanding - diluted 56,307,034 56,307,034 56,307,034 56,307,034 (1) Represents costs incurred to better align capacity to preclinical market demand and reduce overall cost structure. (2) Represents gain on sale of investment.
SOURCE Covance Inc.