Covance Beats Zacks Estimates

Covance (CVD - Snapshot Report) reported first-quarter fiscal 2011 earnings per share of 54 cents compared with 60 cents of the year-ago quarter. However, the adjusted (excluding restructuring costs) earnings per share came in at 60 cents, beating the Zacks Consensus Estimate of 58 cents but in line with the year-ago quarter’s result.

Net revenues rose 4.2% year over year to $502 million, surpassing the Zacks Consensus Estimate of $496 million.

The company derives revenues from two segments, Early Development and Late-Stage Development. While the Early Development segment deals with preclinical toxicology, analytical chemistry, clinical pharmacology services, research products and discovery services, Late-Stage Development caters to central laboratory, phase II-IV clinical development and commercialization services.

Revenues from the Early Development segment increased 9.3% year over year to $224 million banking on modest improvement in toxicology services for the second consecutive quarter. This also had a positive impact on operating margin (post adjustment), which improved by 60 basis points (bps) from the year-ago quarter to 11.8%.

However, revenues from the Late-Stage Development segment rose by a mere 0.4% year over year to $278 million as strong performance of clinical development services was party offset by lower central laboratories’ revenues. Decline in central laboratories sales led to a 15.2% fall in adjusted operating income (to $56.2 million), resulting in a 370 bps decline in adjusted margin (to 20.2%).

At the end of quarter, Covance’s backlog surged 31.3% year over year to $6.3 billion. Foreign exchange favorably impacted sequential backlog growth by roughly $127 million.   Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $564 million in the quarter, representing an adjusted book-to-bill of 1.12 to 1. In addition, nearly 20% of Covance’s revenues were derived from contractual minimum volume (CMV) commitments during the quarter.

Covance exited the quarter with cash and cash equivalents of $368 million, down 2.4% sequentially while up 37.3% year over year. Borrowings associated with the accelerated share repurchase in fourth-quarter fiscal 2010 resulted in $130 million of debt at the end of the quarter.

Covance has reaffirmed its guidance for fiscal 2011. The company continues to expect adjusted earnings per share of $2.50-$2.90 along with single-digit revenue growth. The current Zacks Consensus Estimate of $2.71 is within this range.

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