Covance Reports Fourth Quarter Net Revenue Of $634 Million, Pro Forma EPS Of $0.97 And Record Adjusted Net Orders Of $823 Million

PRINCETON, N.J., Feb. 4, 2015 /PRNewswire/ -- Covance Inc. (NYSE: CVD) today reported results for its fourth quarter ended December 31, 2014. Net revenue was $634 million, representing 1.8% growth on a GAAP basis from the fourth quarter of 2013. When adjusting for the impact of foreign exchange and the divestitures of the Seattle genomics laboratory and antibody products service line and the acquisition of Medaxial in 2014, revenue growth was 5.3% versus the fourth quarter of 2013. On a GAAP basis, the company reported earnings of $0.91 per diluted share in the fourth quarter. The company reported pro forma earnings per diluted share of $0.97, up 11.9% over the fourth quarter of 2013. Pro forma results exclude charges associated with restructuring and other cost reduction actions and expenses incurred in connection with the planned merger with Laboratory Corporation of America® Holdings (LabCorp®) (NYSE: LH) totaling $5.6 million or $0.06 per share.

"In the fourth quarter, our underlying operating results improved both year-on-year and sequentially. On a constant foreign exchange rate basis and adjusted for the acquisition of Medaxial, revenue in our Late-Stage Development segment grew sequentially by 5.6% (or $22 million), and year-on-year growth accelerated to 4.8%. In our Early Development segment, on a constant foreign exchange rate basis and adjusted for divestitures, revenue grew 6.3% year-on-year, similar to the year-on-year growth we delivered the last two quarters. On a constant foreign exchange rate basis and adjusted for divestitures and an acquisition, consolidated revenue grew $24 million sequentially and 5.3% on a year-on-year basis to $634 million. This compares to year-on-year constant foreign exchange rate and organic revenue growth of 2.6% last quarter. Consolidated financial highlights for the full year 2014 included 5% revenue growth, a 190 basis point increase in pro forma operating margin to 12.1%, pro forma EPS growth of 18%, and free-cash-flow of $154 million, which exceeded our target by over $20 million," said Joe Herring, Covance Chairman and Chief Executive Officer. "On the commercial front, performance in the quarter was well above our previous record level, with fourth quarter adjusted net orders of $823 million, resulting in an adjusted net book-to-bill of 1.30 to 1. In addition to our record fourth quarter orders, we are receiving significant positive client feedback regarding our planned merger with LabCorp. For example, in a notable January clinical trial win, a key driver in the client's decision was the potential data synergies with LabCorp, which are expected to accelerate clinical trial patient recruitment."  

Covance will not host a fourth quarter earnings conference call or provide 2015 financial guidance as a result of its pending acquisition by LabCorp, which is expected to close shortly following Covance's special stockholder meeting scheduled for February 18, 2015. However, Covance has posted its supplemental quarterly slide presentation on www.covance.com and Covance's Investor Relations Officer will respond to questions via telephone and email.

Consolidated Results

* See revenue growth reconciliation which follows.
** See attached pro forma income statements for reconciliation of 2014 and 2013 GAAP to pro forma amounts.

Operating Segment Results

Early Development

* See revenue growth reconciliation which follows.
** Reflects impact of asset impairment charges and/or restructuring charges as applicable in all periods.

The Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology, discovery support, and research products. Net revenues in the fourth quarter of 2014 increased 1.4% year-on-year to $231.4 million. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 120 basis points, and the divestitures of the Seattle genomics laboratory and antibody products service line negatively impacted revenue growth by 370 basis points. When adjusting for these items, Early Development revenue grew 6.3% year-on-year. The strongest contributors to the year-on-year growth were clinical pharmacology and nutritional analysis. Sequentially revenue declined $3.4 million. Adjusting for the impact of the stronger US dollar and the divestiture of the antibody products service line, revenue increased by $1.9 million. This sequential growth was led by nutritional analysis and other chemistry services which more than offset the expected decline in clinical pharmacology, which followed a normal seasonal pattern; toxicology services revenues were up slightly from the third quarter level.  Orders in the segment were at the highest level of the year, driven in part by robust biotech funding in the quarter.

GAAP operating income in the fourth quarter of 2014 was $30.9 million, and included $1.1 million in charges associated with our restructuring and cost reduction actions. This compares to operating income of $21.9 million in the fourth quarter of 2013, which included charges associated with restructuring and other cost reduction actions and asset impairment charges totaling $5.7 million. Pro forma operating income, excluding these items, was $32.0 million in the fourth quarter of this year, a 15.8% increase from the fourth quarter of 2013. Pro forma operating margins were 13.8% in the fourth quarter of this year, up 170 basis points year-on-year, but down 50 basis points sequentially. The year-over-year increase in pro forma operating income was driven by continued strength in clinical pharmacology and higher margins in chemistry services.

Late-Stage Development                

* See revenue growth reconciliation which follows.
** Reflects impact of restructuring charges in all applicable periods.

The Late-Stage Development segment includes central laboratory, Phase IIb-IV clinical development, and market access services. Net revenues for the fourth quarter of 2014 grew 2.1% year-on-year to $403.0 million. In the quarter, foreign exchange negatively impacted year-over-year revenue growth by 310 basis points while an acquisition positively impacted year-over-year revenue growth by 40 basis points; excluding the impact of both foreign exchange and the Medaxial acquisition, revenue growth was 4.8%. Year-over-year growth was driven by market access services and central labs, which had record kit volume in the quarter, while clinical development was roughly flat to the prior year on a constant foreign exchange rate basis. Sequentially, revenue increased $22 million on a constant foreign exchange rate basis, led by clinical development and followed by central labs and market access services. Orders in the segment were at the highest level of the year.

Operating income for the fourth quarter was $91.9 million on a GAAP basis and included $0.5 million in costs associated with our restructuring and cost reduction actions. On a pro forma basis, operating income was $92.4 million, up from the $87.5 million delivered last quarter and $89.5 million delivered in the fourth quarter of last year. Pro forma operating margins were 22.9% for the fourth quarter of 2014, up 60 basis points sequentially, on margin expansion in all three service lines, and 20 basis points year-over-year, driven by margin expansion in clinical development and market access services.

Corporate Information

The company reported fourth quarter adjusted net orders of $823 million. Backlog at December 31, 2014 was $6.79 billion compared to $6.82 billion at September 30, 2014 and $6.92 billion at December 31, 2013. Backlog was negatively impacted in the quarter by a $128 million foreign exchange headwind.

Corporate expenses totaled $50.8 million in the fourth quarter of 2014 (including $4.1 million in transaction-related expenses and cost reduction actions) versus $41.4 million last quarter (including $0.1 million in restructuring and other cost reduction actions) and $56.2 million (including $3.8 million in restructuring and other cost reduction actions) in the fourth quarter of 2013. On a pro forma basis, excluding these costs and expenses, corporate spending was $46.7 million or 7.4% of net revenue in the fourth quarter of 2014 versus $41.3 million or 6.6% of net revenue last quarter and $52.4 million or 8.4% of net revenue in the fourth quarter of 2013. The sequential increase in pro forma corporate expense in the quarter reflects higher IT operating expense due to project timing and higher incentive compensation expense. The year-over-year decline in pro forma corporate expense reflects lower IT operating expense and the impact of our cost reduction actions.

Cash and cash equivalents at December 31, 2014 were $815 million compared to $705 million at September 30, 2014 and to cash, cash equivalents and short-term investments of $729 million at December 31, 2013. Free cash flow (defined as operating cash flow less capital expenditures) for the fourth quarter of 2014 was $127 million, consisting of operating cash flow of $164 million less capital expenditures of $37 million. Full year free cash flow was $154 million, consisting of operating cash flow of $296 million less capital expenditures of $142 million. Debt outstanding was $250 million at December 31, 2014, unchanged from both September 30, 2014 and December 31, 2013.

Net Days Sales Outstanding (DSO) were 41 days at December 31, 2014 compared to 39 days at September 30, 2014 and 34 days at December 31, 2013.

The pro forma effective tax rate in the fourth quarter was 25.2%.

Revenue Growth Reconciliation – As Reported to As Adjusted

The following tables are provided to reconcile revenue growth in reported US Dollars to revenue growth adjusted to reflect changes in foreign exchange rates between periods and for the divestitures of the Seattle genomics laboratory and antibody products service line and the acquisition of Medaxial in 2014.               

Covance, the world's most comprehensive drug development company and a leader in nutritional analysis, is dedicated to advancing healthcare and delivering Solutions Made Real™. The company, headquartered in Princeton, New Jersey, has annual revenues greater than $2.5 billion and more than 12,800 employees located in over 60 countries. Information on Covance's solutions, 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 or delay of large studies, 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, testing mix and geographic mix of kit receipts in central laboratories, fluctuations in currency exchange rates, the realization of savings from the Company's announced restructuring actions, the cost and pace of completion of our information technology projects and the realization of benefits therefrom, 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.

Cautionary Statement Regarding Forward Looking Statements
This communication contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, known as the PSLRA. These statements, as they relate to Laboratory Corporation of America Holdings ("LabCorp") or Covance Inc. ("Covance"), the management of either such company or the proposed transaction between LabCorp and Covance, involve risks and uncertainties that may cause results to differ materially from those set forth in the statements. These statements are based on current plans, estimates and projections, and therefore, you are cautioned not to place undue reliance on them. No forward-looking statement can be guaranteed, and actual results may differ materially from those projected. LabCorp and Covance undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, except to the extent required by law. Forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and future financial results of the pharmaceutical industry, and other legal, regulatory and economic developments.  We use words such as "anticipates," "believes," "plans," "expects," "projects," "future," "intends," "may," "will," "should," "could," "estimates," "predicts," "potential," "continue," "guidance," and similar expressions to identify these forward-looking statements that are intended to be covered by the safe harbor provisions of the PSLRA. Actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including, but not limited to, those described in the documents LabCorp and Covance have filed with the U.S. Securities and Exchange Commission (the "SEC") as well as the possibility that (1) LabCorp and Covance may be unable to obtain stockholder or regulatory approvals required for the proposed transaction or may be required to accept conditions that could reduce the anticipated benefits of the merger as a condition to obtaining regulatory approvals; (2) the length of time necessary to consummate the proposed transaction may be longer than anticipated; (3) problems may arise in successfully integrating the businesses of LabCorp and Covance or such integration may be more difficult, time-consuming or costly than expected; (4) the proposed transaction may involve unexpected costs; (5) the businesses may suffer as a result of uncertainty surrounding the proposed transaction, including difficulties in maintaining relationships with customers or retaining key employees; (6) the parties may be unable to meet expectations regarding the timing, completion and accounting and tax treatments of the transaction; or (7) the industry may be subject to future risks that are described in the "Risk Factors" section of the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, the definitive proxy statement/prospectus referred to below and other documents filed from time to time with the SEC by LabCorp and Covance.  Neither LabCorp nor Covance gives any assurance that either LabCorp or Covance will achieve its expectations. 

The foregoing list of factors is not exhaustive. You should carefully consider the foregoing factors and the other risks and uncertainties that affect the businesses of LabCorp and Covance described in the "Risk Factors" section of their respective Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, the definitive proxy statement/prospectus referred to below and other documents filed by either of them from time to time with the SEC.  All forward-looking statements included in this communication are based upon information available to LabCorp and Covance on the date hereof, and neither LabCorp nor Covance assumes any obligation to update or revise any such forward-looking statements.

Additional Information and Where to Find It
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval in any jurisdiction, nor shall there be any sale, issuance, exchange or transfer of the securities referred to in this press release in any jurisdiction in contravention of applicable law. This communication relates to a proposed transaction between Covance and LabCorp, and may be deemed to be solicitation material in respect of the proposed transaction.  In connection with the proposed transaction, LabCorp has filed a registration statement on Form S-4 with the SEC, which was declared effective by the SEC on January 14, 2015, and LabCorp and Covance filed the definitive proxy statement/prospectus in connection with the proposed transaction on January 16, 2015.  Covance began mailing the definitive proxy statement/prospectus to Covance stockholders on January 20, 2015.  This communication is not a substitute for the registration statement, definitive proxy statement/prospectus or any other documents that Covance or LabCorp may file with the SEC or send to stockholders in connection with the proposed transaction. Before making any voting decision, investors and security holders of Covance are urged to read carefully and in their entirety the registration statement, definitive proxy statement/prospectus and all other relevant documents filed or that will be filed by LabCorp or Covance with the SEC in connection with the proposed transaction as they become available because they will contain important information about the proposed transaction and related matters.

Investors and security holders will be able to obtain free copies of the registration statement, definitive proxy statement/prospectus and all other relevant documents filed or that will be filed with the SEC by Covance or LabCorp through the website maintained by the SEC at www.sec.gov.

In addition, investors and security holders may obtain free copies of the definitive proxy statement/prospectus and other relevant documents filed by Covance with the SEC by accessing Covance's website at www.covance.com or upon written request to Covance Inc., Office of the Secretary, 210 Carnegie Center, Princeton, New Jersey 08540. Free copies of the registration statement, definitive proxy statement/prospectus and other relevant documents filed by LabCorp with the SEC are available on LabCorp's website at www.labcorp.com or upon written request to Laboratory Corporation of America Holdings, Office of the Secretary, 358 South Main Street, Burlington, North Carolina 27215. 

Participants in Solicitation
LabCorp, Covance and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from Covance's stockholders in connection with the proposed transaction. Information regarding Covance's directors and executive officers is contained in the proxy statement for Covance's 2014 Annual Meeting of Shareholders, which was filed with the SEC on March 24, 2014. You can obtain a free copy of this document at the SEC's website at www.sec.gov or by accessing Covance's website at www.covance.com. Information regarding LabCorp's executive officers and directors is contained in the proxy statement for LabCorp's 2014 Annual Meeting of Shareholders filed with the SEC on April 4, 2014. You can obtain a free copy of this document at the SEC's website at www.sec.gov or by accessing LabCorp's website at www.labcorp.com.  Additional information regarding those persons and other persons who may be deemed participants in the proxy solicitation, including their respective direct and indirect interests in the proposed transaction, by security holdings or otherwise, is contained in the definitive proxy statement/prospectus and other relevant materials filed with the SEC. You may obtain free copies of these documents as described in the preceding paragraph.

Financial Exhibits Follow

 

 

SOURCE Covance Inc.

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