PRINCETON, N.J., July 29 Covance Inc. (NYSE: CVD) today reported GAAP earnings for its second quarter ended June 30, 2009 of $0.67 per diluted share, inclusive of a $0.01 per share gain related to the sale of its centralized ECG business in 2007. Excluding the gain on sale, earnings were $0.66 per diluted share.
"On a consolidated basis, second quarter net revenues grew 6.7% year-on-year (13.1% excluding the impact of foreign exchange), operating margin expanded sequentially to 12.9%, and EPS of $0.66 exceeded our second quarter expectation," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 3.8% from the first quarter and operating margins were 13.6%, despite toxicology results declining sequentially as we previously forecasted. Toxicology results are on track for sequential improvement in the third quarter, based upon scheduled backlog. In Late-Stage Development, very strong demand led to accelerated revenue growth of 19.0% in the quarter (26.4% excluding the impact of foreign exchange) and operating margin of 24.6%, a 200 basis point increase above last quarter's record high.
"On the commercial front, adjusted net orders in the second quarter were $516 million, representing an adjusted book-to-bill ratio of 1.11 to 1. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill was 1.5 to 1. Consolidated backlog grew 55% year on year to $4.66 billion. The $145 million minimum contract commitment associated with the pending acquisition of Merck's genomics laboratory is included in backlog, but is excluded from adjusted net orders.
"To reflect the weakening of the US dollar and a slightly lower tax rate, we are upwardly adjusting our 2009 revenue growth target to the mid- to upper-single digits and our earnings per share target to a range of $2.60 to $2.80 per share (excluding gains on the sales of our centralized ECG and IVRS service lines and using June 30 exchange rates), versus our previous targets of single-digit revenue growth and earnings of $2.50 to $2.70 per share."
Operating Segment Results
The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the second quarter of 2009 were $199.8 million compared to $213.1 million in the second quarter of 2008 and $192.5 million in the first quarter of 2009. Lower demand in toxicology drove the year-on-year decline in revenue. Sequential growth was driven by a rebound in demand for clinical pharmacology, analytical chemistry, and research products. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 540 basis points.
Operating income for the second quarter of 2009 declined 50.0% year-over-year to $27.1 million, compared to $54.2 million in the second quarter of last year. Operating margins for the second quarter of 2009 were 13.6% compared to 25.4% in the second quarter of 2008 and 14.1% last quarter. Second quarter operating margins were impacted by a lower level of study activity, costs related to the staffing and validating of the new preclinical drug development facility in Chandler, and severance related to the retirement of a building on the Vienna, Virginia campus. In addition, the company continued to maintain staffing levels above current needs at our five other preclinical campuses to support expected increases in revenue generation in the second half of 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 second quarter of 2009 grew 19.0% to $266.3 million compared to $223.8 million in the second quarter of 2008. Sequentially, revenues grew $17.6 million, or 7.1% from last quarter. The sequential and year-on-year growth was led by the continued exceptional performance of our central laboratory as well as strong performances in our Clinical Development and Commercialization services. Foreign exchange negatively impacted year-on-year revenue growth in the quarter by 740 basis points.
Operating income for the second quarter of 2009 increased 52.4% to $65.5 million compared to $43.0 million in the second quarter of the prior year. Record profitability in central laboratory and clinical development services led to exceptional operating margins of 24.6% for the second quarter of 2009 compared to 19.2% in the second quarter of last year and 22.6% last quarter. Operating margin in Late-Stage Development is expected to moderate closer to first quarter 2009 levels in the back half of the year.
The Company's backlog at June 30, 2009 grew 54.7% year-over-year to $4.66 billion compared to $3.01 billion at June 30, 2008 and $4.42 billion at March 31, 2009. Foreign exchange positively impacted sequential backlog growth by $85 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $516 million in the second quarter of 2009.
Corporate expenses totaled $32.6 million in the second quarter of 2009 compared to $27.5 million last quarter and $29.8 million in the second quarter of last year. We continue to make investments that will improve our ability to provide strategic partnering and integrated services as well as investments in infrastructure to enhance our ability to manage future growth.
Cash and cash equivalents at June 30, 2009 were $204 million compared to $190 million at March 31, 2009 and $196 million at June 30, 2008. At June 30, 2009, short-term debt totaled $58 million, a reduction of $22 million from last quarter.
Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2009 was $19 million, consisting of operating cash flow of $49 million less capital expenditures of $30 million. Free cash flow year to date was negative $12 million, consisting of operating cash flow of $59 million less capital expenditures of $71 million. In 2009, we now expect free cash flow to be approximately $85 million, consisting of operating cash flow of approximately $255 million less capital expenditures of approximately $170 million. The free cash flow target for 2009 assumes net Days Sales Outstanding (DSO) at 40 days.
Net Days Sales Outstanding (DSO) were 41 days at June 30, 2009 compared to 39 days at both March 31, 2009 and June 30, 2008.
The effective tax rate in the second quarter was 27.0%, down from the 29.0% rate last quarter, due primarily to a shift in the geographic mix of our earnings. We expect that the effective tax rate will be in the 28.0% range on a prospective basis.
The Company's investor conference call will be webcast on July 30 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 $1.7 billion, global operations in more than 25 countries, and more than 10,000 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at www.covance.com.
Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the closings of the acquisition of Merck's genomics laboratory and the divestiture of the company's IVRS service offering, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, fluctuations in currency exchange rates, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.
Financial Exhibits Follow
($in millions except EPS) 2Q09 2Q08 Change 1H09 1H08 Change ---- ---- ------ ---- ---- ------ Total Revenues $489.2 $461.8 $957.7 $895.9 Less: Reimbursable Out-of-Pockets $23.2 $24.9 $50.4 $46.5 Net Revenues $466.0 $436.9 6.7% $907.3 $849.4 6.8% Operating Income $60.0 $67.5 (11.1)% $115.9 $130.2 (10.9)% Operating Margin % 12.9% 15.4% 12.8% 15.3% Net Income $43.0 $50.9 (15.5)% $83.3 $100.0 (16.7)% Diluted EPS $0.67 $0.80 (16.0)% $1.30 $1.56 (16.7)% ----- ----- ------ ----- ----- ------ Gain on Sale, net of tax $0.4 $0.6 $0.4 $2.6 Net Income Excluding Gain on Sale $42.6 $50.3 (15.3)% $82.9 $97.4 (14.9)% Diluted EPS Excluding Gain on Sale $0.66 $0.79 (15.9)% $1.29 $1.52 (14.9)% ----- ----- ------ ----- ----- ------
SOURCE Covance Inc.