) reported earnings per share (EPS) of 61 cents in the fourth
quarter of 2012, higher than the year-ago quarter EPS of 35
cents. The year-over-year increase in earnings was primarily due
to a healthy top-line growth and a reduction in share count by
Excluding the impact of the one-time items (losses from
facilities in wind-down, restructuring costs and other charges),
adjusted EPS in the reported quarter came in at 73 cents, beating
the Zacks Consensus Estimate of 71 cents as well as the company's
expectation of about 70 cents. However, adjusted EPS was
relatively flat compared with the year-ago quarter.
For full year 2012, adjusted EPS of $2.70 was similar to the
prior year and edged past the corresponding Zacks Consensus
Estimate of $2.68.
Quarter in Detail
Revenues in the fourth quarter increased 4.6% to $609.1 million,
sailing past the Zacks Consensus Estimate of $551 million. For
2012, revenues were $2,365.7 million, up 5.8% year over year and
considerably higher than the Zacks Consensus Estimate of $2,161
Covance primarily derives its revenues from two segments, Early
Development and Late-Stage Development. Pro forma revenues from
Early Development declined 7.9% year over year to $215.9 million
in the quarter, mainly due to a decline in toxicology, research
products and clinical pharmacology, sale of environmental
services (which contributed $2.0 million in quarterly revenue)
and the inclusion of the Chandler, Honolulu and Basel sites in
the year-ago results. However, currency movement had a positive
impact of 20 basis points (bps) on year-over-year sales
In the reported quarter, Early Development pro forma operating
margin was 12.0%, down from 13.9% in the year-ago quarter and
down 40 bps sequentially. The fall in profitability from
discovery support services was responsible for the sequential
Net revenues from the Late-Stage Development surged 15.7% year
over year to $344.8 million although unfavorable foreign exchange
headwinds impacted year-over-year growth by 130 bps. The growth
in this segment was attributable to persistent strong performance
in clinical development and a robust contribution from clinical
labs, offsetting a decline in market access services revenue.
Despite the higher spending on strategic IT projects, pro forma
operating margin expanded 130 bps on a year-over-year basis as
well as sequentially to 21.3%. The increase in operating margin
was attributable to improved results from clinical development
and central laboratories.
At year-end 2012, Covance's backlog was $6.64 billion, up 8.1%
year over year. Sequentially, backlog increased 4.2% as foreign
exchange favorably impacted sequential backlog growth by $44
million. Adjusted net orders (net orders adjusted for dedicated
capacity contracts) were $769 million in the quarter,
representing an adjusted book-to-bill ratio of 1.37.
Covance exited 2012 with cash and cash equivalents of $492.8
million, up 26.7% year over year. Operating cash flow of $260
million and capital expenditure of $152 million in 2012 resulted
in annual free cash flow of $108 million.
Covance envisages mid- to high-single digit growth for 2013.
Based on current foreign exchange rates, the company expects
adjusted EPS to be in the range of $2.85 to $3.15. Currently, the
Zacks Consensus Estimate for 2013 is pegged at $2.98.
For the first quarter of 2013, Covance expects nominal sequential
improvement in revenues. The company believes that
periodically-lower Early Development revenues will offset the
growth in Late-Stage Development revenues. Accordingly, the
forecast for adjusted EPS lies in the band of 71-73 cents for the
first quarter. The current Zacks Consensus Estimate of 68 cents
is lower than the guidance.
With the ongoing softness in the Early Development franchise,
Late-Stage Development continues to single-handedly drive growth.
However, the company looks forward to 2013 with optimism and
expects to accelerate growth in the future. This is primarily due
to several patent expiries in the pharmaceutical industry which
might improve market conditions for Covance. With the ongoing
'patent cliff', the company expects higher demand from its
customers in the pharmaceutical and biotechnology industries as
they develop their pipeline.
With positive industry trends, estimates continue to move higher
for Covance. Accordingly, the stock carries a short-term Zacks
Rank #2 (Buy). Other Zacks Rank #2 medical stocks are
), which reported a positive quarter last week, carries a Zacks
Rank #1 (Strong Buy) and also warrants a look.
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