) reported earnings per share (EPS) of 69 cents per share in the
third quarter of 2012, up from the year-ago quarter EPS of 67
cents. The result included losses from facilities in wind-down,
restructuring costs and other charges and favorable income tax
developments. However, excluding the impact of the one-time items
from both the periods, adjusted EPS in the reported quarter came
in at 72 cents, beating the Zacks Consensus Estimate of 67 cents
as well as surpassing the third quarter 2011 adjusted EPS by a
penny. However, adjusted EPS was in line with the company's
guidance. Net revenue in the third quarter edged up 0.3% to
$544.8 million, but missed the Zacks Consensus Estimate of $548
The company primarily derives its revenues from two segments,
Early Development and Late-Stage Development. Proforma revenues
from Early Development declined 9.3% year over year to $217.8
million during 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. Also unfavorable
currency movement had a negative impact of 90 basis points (bps)
on year-over-year sales comparisons.
However, proforma revenues increased 1.1% on a sequential
basis (in line with the guidance), mainly on the back of a
rebound in toxicology combined with a faster-than-expected
increase in savings from cost reduction actions, which more than
offset a disappointing clinical pharmacology performance.
In the reported quarter, Early Development pro forma operating
margin was 12.4%, down from 14.6% in the year-ago quarter.
However, it expanded 370 bps sequentially, based on a return to
profitability in North American toxicology.
However, revenues from the Late-Stage Development grew 6.9%
year over year to $324.1 million although unfavorable foreign
exchange headwinds impacted year-over-year growth by 620 bps. The
positive growth in this segment was attributable to persistent
strong performance in clinical development, offsetting a decline
in market access revenue. Moreover, central laboratory services
registered 2.3% growth (up 10.7% at CER) for the quarter
reflecting the fourth consecutive quarter of increase in kit
Adjusted operating margin expanded 70 bps year over year but
declined 110 bps sequentially to 20.0%. The year-over-year
increase in operating margin was attributable to improved results
from clinical development and central laboratories, while the
sequential decrease was primarily driven by increased spending on
strategic IT projects, lower profitability in market access
services and increased hiring and staff costs in clinical
At the end of the reported quarter, Covance's backlog remained
at $6.37 billion, up 4.8% year over year. Sequentially, backlog
was marginally down 2.2%. Foreign exchange favorably impacted
sequential backlog growth by $69 million. Adjusted net orders
(net orders adjusted for dedicated capacity contracts) were $701
million in the quarter, representing an adjusted book-to-bill
ratio of 1.29.
Covance exited the quarter with cash and cash equivalents of
$441.4 million compared with $389.1 million at the end of fiscal
2011. Free cash flow in the third quarter of 2012 was $35
million, while capital expenditures were $36 million.
For the fourth quarter, Covance expects adjusted EPS to be
around 70 cents, reflecting the impact of increased IT spending
on Late-Stage Development tools as well as the corporate data
center initiative. The current Zacks Consensus Estimate for the
fourth quarter 2012 is 69 cents per share, which remains below
the guidance. Moreover, pro forma revenue for the next
quarter is expected to be sequentially up. Currently, the Zacks
Consensus Estimate for the quarter remains at $550 million.
Moreover, the company narrowed its earlier provided adjusted
EPS guidance range for 2012 to a new band of $2.50-$2.65 (from
$2.50-$2.70). The Zacks Consensus Estimate of $2.63 falls within
the guided range.
We are concerned about the continued downside of the Early
Development segment of Covance, which is currently linked with
the disappointing clinical pharmacology performance. Moreover,
unfavorable foreign exchange and economic uncertainties were the
main spoilers for the overall business of the company. Despite
sales growth in Late Stage Development, the decline in fiscal
2012 guidance indicated that near-term challenges will persist.
Presently, Covance retains a short-term Zacks #3 Rank (Hold
COVANCE INC (CVD): Free Stock Analysis Report
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