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Covance (CVD - Analyst Report) reported EPS of 67 cents in the third quarter of fiscal 2011 compared with loss of 49 cents per share in the year-ago quarter. However, adjusted (excluding restructuring costs and gains from favorable income tax development) EPS came in at 71 cents, beating the Zacks Consensus Estimate by a penny and up 41.8% year over year.

Net revenue rose 13.9% year over year to $578.9 million, well ahead of the Zacks Consensus Estimate of $521 million.

The company primarily derives its revenues from two segments, namely Early Development and Late-Stage Development. Revenues from the Early Development segment increased 16.3% year over year to $240 million, on the back of improved results from the company’s two facilities (Alnwick in UK and Porcheville in France) along with a 140 basis points (bps) favorable currency movement.

Additionally, positive year-over-year performance in analytical chemistry, North American toxicology, and clinical pharmacology contributed to the strong growth. The overall improved performance led to a year-over-year and sequential growth of 390 bps and 40 bps, respectively, in adjusted operating margin to 14.6%.

Revenues from the Late-Stage Development segment jumped 12.0% year over year to $303 million attributable to strong performance of clinical development services and domestic currency depreciation (a benefit of 800 bps). However, adjusted operating margin contracted 110 bps year over year and 70 bps sequentially to 19.3%. Covance expects further sequential decline in operating margin based on the shift in revenue mix and continued hiring in clinical development.

At the end of the reported quarter, Covance’s backlog spiked 1.0% to $6.08 billion. Foreign exchange negatively impacted sequential backlog growth by roughly $133 million.  Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $597 million in the quarter, representing an adjusted book-to-bill ratio of 1.1.

Covance exited the quarter with cash and cash equivalents of $400 million compared with $389 million at the end of September 2010. The company repaid $2.5 million in debt during the quarter and currently has $90.0 million in debt outstanding associated with borrowings related to the accelerated share repurchase program since the fourth quarter of 2010.


Covance expects fiscal 2011 revenue growth in the high single-digit range and adjusted EPS to be roughly $2.70.

Presently, Covance retains a short-term Zacks #3 Rank (Hold). However, based on the company’s strong market leadership position, broad service offering, increasing geographical footprint, economies of scale and growing biotechnology and pharmaceutical customer base, we have a long-term ‘Outperform’ recommendation on the stock.

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