PRINCETON, N.J., April 28 Covance Inc. (NYSE: CVD) today reported earnings for its first quarter ended March 31, 2010 of $0.60 per diluted share versus $0.63 per diluted share in the first quarter of 2009.
"On a consolidated basis, first quarter net revenues grew 9.2%, operating margin was 11.0%, and diluted EPS of $0.60 met our first quarter expectation," said Joe Herring, Chairman and Chief Executive Officer. "Early Development revenues grew 6.5% year-on-year and increased for the second consecutive quarter; operating margin was 11.2%. Toxicology revenues were essentially flat from the fourth quarter, while sequential improvement in clinical pharmacology was partially offset by softness in some of our chemistry services. In Late-Stage Development, revenue grew 11.3% over the first quarter of 2009 and operating margin exceeded our expectation at 23.9%. Strong performance in clinical development services helped to offset a sequential decline in central laboratory revenue resulting largely from the slower start-up of some new trials. While we expect sequential increases in central laboratory revenue as the year progresses, we expect clinical development to have a slower conversion of backlog to revenue in the second quarter and for the balance of the year primarily due to delays in the commencement of three large Phase III clinical studies.
"On the commercial front, adjusted net orders in the first quarter were $490 million, representing an adjusted book-to-bill of 1.02 to 1. Our Early Development segment achieved an adjusted book-to-bill greater than 1.0 to 1 for the third consecutive quarter. Late-Stage Development net book-to-bill in the quarter was below 1.0 to 1, due to delayed decision making by clients. However, the trailing twelve month adjusted book-to-bill for the Late-Stage segment was approximately 1.25 to 1, and outstanding proposals are at record levels. With regard to building new strategic relationships, we continue to advance discussions with several large clients.
"In the second quarter, we began closure of two smaller underperforming sites - our Phase I clinic in Austin, Texas and our research products facility in Kalamazoo, Michigan - consolidating the volume into more efficient locations. These closures, combined with smaller cost rationalizations in other parts of our company, will reduce our employee-base by approximately 200 people and result in a cost of approximately $0.09 per share in the second quarter. We expect these actions to generate savings ramping to at least $0.12 per share on an annualized basis by year-end.
"As a result of these cost actions (and related savings), coupled with the headwinds created by a stronger US dollar, and delays in the commencement of Late-Stage studies, we are adjusting our 2010 revenue growth rate expectation to the 5%-8% range and our earnings per share target to $2.40 to $2.65. This range includes the impact of the second quarter cost actions, but it does not include benefits from any potential strategic transactions. In the second quarter of 2010, we expect earnings per share to be approximately $0.50, inclusive of site closure and severance costs outlined earlier."
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the first quarter of 2010 grew 6.5% to $205.0 million compared to $192.5 million in the first quarter of 2009 and $203.1 million in the fourth quarter of 2009. The year-on-year revenue growth was led by clinical pharmacology and research products, offset to some degree by lower levels of revenue in toxicology and chemistry. In the quarter, foreign exchange positively impacted year-on-year revenue growth by 200 basis points. The commercial outlook for our Early Development services continues to see gradual improvement, and we now expect segment revenue to increase sequentially through the balance of the year.
Operating income for the first quarter of 2010 declined 15.7% year-over-year to $22.9 million, compared to $27.2 million in the first quarter of last year. Operating margins for the first quarter of 2010 were 11.2% compared to 14.1% in the first quarter of 2009 and 11.3% last quarter. Early Development operating margins, excluding facility rationalization costs in the second quarter, are expected to expand sequentially throughout the year.
The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services). Late-Stage Development net revenues for the first quarter of 2010 grew 11.3% to $276.9 million compared to $248.7 million in the first quarter of 2009. Foreign exchange positively impacted revenue growth in the quarter by approximately 380 basis points. Sequentially, revenues declined $5.0 million due to lower than expected central laboratory revenues from the slower commencement of new trials and the negative impact of the strengthening dollar. In the second quarter, an anticipated sequential increase in central laboratory revenues is not expected to offset lower clinical development revenue resulting from three large study delays. As a result, we now anticipate 2010 Late-Stage Development revenue growth to be in the mid-single-digit range.
Operating income for the first quarter of 2010 increased 17.6% to $66.2 million compared to $56.3 million in the first quarter of the prior year. Stronger than expected profitability in central laboratory services and clinical development led to operating margins of 23.9% for the first quarter of 2010 compared to 22.6% in the first quarter of last year and 22.6% last quarter. Operating margin is expected to be approximately 300 basis points lower than the first quarter level in the next two quarters as headcount in clinical development will be underutilized due primarily to the delay of three large trials.
The Company's backlog at March 31, 2010 grew 8.4% year-over-year to $4.79 billion compared to $4.42 billion at March 31, 2009 and $4.87 billion at year-end. Foreign exchange negatively impacted sequential backlog growth by approximately $37 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $490 million in the first quarter of 2010.
Corporate expenses totaled $36.3 million in the first quarter of 2010 compared to $32.0 million last quarter and $27.5 million in the first quarter of last year. In 2010, corporate expenses are expected to be approximately 7% of revenue.
Cash and cash equivalents at March 31, 2010 were $268 million compared to $289 million at December 31, 2009 and $190 million at March 31, 2009. The Company remains debt free.
Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2010 was negative $10 million, consisting of operating cash flow of $20 million (which includes the payment of annual bonuses) less capital expenditures of $30 million. In 2010, we expect free cash flow to be approximately $120 million, net of capital expenditures of approximately $170 million. The free cash flow target for 2010 assumes net Days Sales Outstanding (DSO) at 40 days.
Net DSO were 42 days at March 31, 2010 compared to 40 days at December 31, 2009 and 39 days at March 31, 2009.
We continue to experience a lower effective tax rate primarily from a shift in the geographic mix of earnings. The effective tax rate was 25.2% in the first quarter. Our 2010 EPS target assumes an effective tax rate of approximately 25% to 26%.
The Company's investor conference call will be webcast on April 29 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 20 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.
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SOURCE Covance Inc.