Covance Beats, Backlog Surges

Covance (CVD - Snapshot Report) reported an EPS of 61 cents in the second quarter of fiscal 2011 compared with 49 cents in the year-ago quarter. However, adjusted (excluding restructuring costs) EPS came in at 66 cents, beating the Zacks Consensus Estimate by a penny. Net revenues rose 9.1% year over year to $547.7 million.

The company primarily derives revenues from two segments, Early Development and Late-Stage Development. While the Early Development segment deals with pre-clinical 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 11.4% year over year to $231.8 million driven by improved results from the company’s Alnwick and Porcheville facilities and favorable currency movement of 230 basis points (bps). Additionally, positive performance in clinical pharmacology, more than mitigated a decline in revenue arising from the closure of Covance’s toxicology facility in Virginia. The over-all improved performance led to a year-over-year and sequential improvement in adjusted operating margin by 20 and 240 bps, respectively, to 14.2%.

Revenues from the Late-Stage Development segment jumped 7.3% year over year to $286.4 million attributable to strong performance of clinical development services and domestic currency depreciation, partly offset by lower central laboratories’ revenues resulting from  continued project delays and cancellations. Adjusted operating margin contracted 120 bps year over year to 20.0% due to lower central laboratories sales.

At the end of quarter, Covance’s backlog surged 29.4% year over year to $6.3 billion. Foreign exchange favorably impacted sequential backlog growth by roughly $100 million.  Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $614 million in the quarter, representing an adjusted book-to-bill ratio of 1.18 to 1.

Covance exited the quarter with cash and cash equivalents of $406 million compared with $368 million at the end of March 2011. The company repaid $37.5 million on debt during the quarter and currently has $92.5 million in debt outstanding associated with borrowings related to the accelerated share repurchase program during the fourth quarter of 2010.

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