PRINCETON, N.J., Oct. 21 Covance Inc. (NYSE: CVD) today reported GAAP earnings for its third quarter ended September 30, 2009 of $0.79 per diluted share, inclusive of a $0.09 per share gain related to the sale of its IVRS business and $0.03 cents from favorable income tax resolutions. Excluding the gain on sale and tax items in the quarter, earnings were $0.67 per diluted share.
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"On a consolidated basis, third quarter net revenues grew 8.0% year-on-year and EPS was $0.67. In addition, adjusted net orders grew approximately 20% both year-on-year and sequentially and free-cash-flow was strong at $88 million," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, results were below our expectations, as revenues and operating margins declined sequentially, primarily due to weaker performance in clinical pharmacology and some of our chemistry services. Toxicology revenue was up modestly from the second quarter with lower operating margin. In Late-Stage Development, better than expected performances in central laboratory and clinical development led to accelerated revenue growth of 24.1% and record operating margin of 24.7%.
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"On the commercial front, continued strong business awards in clinical development and central laboratory led to record adjusted net orders in the third quarter of $623 million, representing an adjusted book-to-bill ratio of 1.31 to 1. For the first time this year, Early Development recorded a quarterly adjusted book-to-bill greater than 1.0 to 1. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill remained at 1.5 to 1.
"We are encouraged by the exceptional strength of our Late-Stage Development segment, which represented 59% of Covance's third quarter revenues. In Early Development, overall demand has been lower and the timing of study starts has been less predictable. We are projecting relatively flat Early Development results until we see a sustained recovery in demand. Accordingly, using September 30 exchange rates, we expect consolidated fourth quarter earnings per share to be in the $0.64 to $0.67 range, which would bring full-year earnings per share to the low end of our previous targeted range of $2.60 to $2.80 (excluding gains on sales and favorable income tax resolutions)."
Consolidated Results
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 third quarter of 2009 were $196.4 million compared to $215.4 million in the third quarter of 2008. Reduced demand for Early Development service offerings led to the 8.8% year-on-year decline in revenues. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 330 basis points. Clinical pharmacology revenue and operating income in the quarter were down from the second quarter level and are expected to decline further in the fourth quarter primarily due to lower market demand.
Operating income for the third quarter of 2009 declined 59.1% year-over-year to $22.4 million, compared to $54.8 million in the third quarter of last year. Operating margins for the third quarter of 2009 were 11.4% compared to 25.5% in the third quarter of 2008 and 13.6% last quarter. Year-over-year, operating margins were impacted by a lower level of study activity, delays of scheduled study starts, start-up losses in our new Chandler facility, lower early development pricing, and staffing levels above current demand.
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 2009 grew 24.1% to $278.9 million compared to $224.7 million in the third quarter of 2008. Sequentially, revenues grew $12.6 million, or 4.7%. The sequential and year-on-year growth was led by the continued exceptional performances of central laboratory and clinical development. Foreign exchange negatively impacted year-on-year revenue growth in the quarter by 290 basis points.
Operating income for the third quarter of 2009 increased 55.6% to $68.9 million compared to $44.3 million in the third quarter of the prior year. Central laboratory and clinical development services drove the record operating margins of 24.7% for the third quarter of 2009 compared to 19.7% in the third quarter of last year and 24.6% last quarter. Operating margin in Late-Stage Development is expected to moderate slightly in the fourth quarter.
Corporate Information
The Company's backlog at September 30, 2009 grew 12.8% year-over-year to $4.79 billion compared to $4.25 billion at September 30, 2008 and $4.66 billion at June 30, 2009. Foreign exchange positively impacted sequential backlog growth by $51 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $623 million in the third quarter of 2009.
Corporate expenses totaled $33.5 million in the third quarter of 2009 compared to $32.6 million last quarter and $29.2 million in the third 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 September 30, 2009 were $266 million compared to $204 million at June 30, 2009 and $209 million at September 30, 2008. At September 30, 2009, short-term debt totaled $25 million, a reduction of $33 million from last quarter.
Free cash flow (defined as operating cash flow less capital expenditures) for the third quarter of 2009 was $88 million, consisting of operating cash flow of $115 million less capital expenditures of $27 million. Free cash flow year to date was $76 million, consisting of operating cash flow of $174 million less capital expenditures of $98 million. In 2009, we now expect free cash flow to be approximately $120 million, consisting of operating cash flow of approximately $260 million less capital expenditures of approximately $140 million. The free cash flow target for 2009 assumes net Days Sales Outstanding (DSO) at 40 days.
Net Days Sales Outstanding (DSO) were 42 days at September 30, 2009 compared to 41 days at both June 30, 2009 and September 30, 2008.
The third quarter effective tax rate was 24.6% and included the tax impact of the gain on sale of business, which unfavorably impacted the effective tax rate by 100 basis points, and a $2.1 million tax benefit from favorable income tax resolutions, which favorably impacted the effective tax rate by 300 basis points. Excluding these items, the effective tax rate was 26.6% in the quarter and 27.5% on a YTD basis. The effective tax rate is expected to remain approximately 27.5% going forward.
The Company's investor conference call will be webcast on October 22 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 $1.7 billion, global operations in more than 25 countries, and more than 10,000 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at www.covance.com.
Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.
Financial Exhibits Follow
($in millions except EPS) 3Q09 3Q08 Change 2009YTD 2008YTD Change Total Revenues 493.7 $467.4 $1,451.5 $1,363.2 Less: Reimbursable Out-of-Pockets $18.4 $27.3 $68.9 $73.8 Net Revenues $475.3 $440.1 8.0% $1,382.6 $1,289.4 7.2% Operating Income $57.8 $70.0 (17.4)% $173.7 $200.2 (13.2)% Operating Margin % 12.2% 15.9% 12.6% 15.5% Net Income $51.1 $51.1 (0.1)% $134.3 $151.1 (11.1)% Diluted EPS $0.79 $0.80 (0.8)% $2.09 $2.36 (11.4)% Gain on Sale, net of tax $5.9 - $6.3 $2.6 Favorable Income Tax Resolutions $2.1 - $2.1 - Net Income ex Gain on Sale and Favorable Income Tax Resolutions $43.1 $51.1 (15.6)% $126.0 $148.5 (15.2)% Diluted EPS Excluding Gain on Sale and Favorable Income Tax Resolut. $0.67 $0.80 (16.3)% $1.96 $2.32 (15.4)%
SOURCE Covance Inc.
