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Covance Inc. Reports Operating Results (10-K)

February 28, 2012 | About:
10qk

10qk

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Covance Inc. (CVD) filed Annual Report for the period ended 2011-12-31.

Covance Inc has a market cap of $2.91 billion; its shares were traded at around $48.47 with a P/E ratio of 17.7 and P/S ratio of 1.3. Covance Inc had an annual average earning growth of 6% over the past 10 years.

Highlight of Business Operations:

Overall, selling, general and administrative expenses increased 11.6% to $343.0 million for 2011 from $307.4 million for 2010. As a percentage of net revenues, selling, general and administrative expenses increased 40 basis points to 16.4% in 2011 from 16.0% in 2010. Included in selling, general and administrative expense during the 2011 period is $22.6 million (or 1.1% of net revenues) in costs associated with restructuring initiatives, as well as $10.3 million (or 0.5% of net revenues) in costs associated with the termination of a long-standing inventory supply agreement and related inventory write-down, as compared to $25.1 million (or 1.3% of net revenues) in restructuring costs for the 2010 period. These restructuring initiatives and cost reduction actions were taken to rationalize capacity, reduce the cost of overhead and support functions and to streamline processes. The inventory supply agreement was terminated due to a decline in demand for a research product, which also resulted in the write-down of inventory. Selling, general and administrative expenses as a percentage of net revenues can and does vary depending on the timing and nature of various professional fees and other discretionary spending.

Income from operations from Covance's early development segment for the year ended December 31, 2011 increased by $137.3 million to $105.3 million as compared to a loss of $32.0 million for the corresponding 2010 period. As a percentage of net revenues, early development income from operations increased from negative (3.8%) of early development net revenues in the 2010 period to 11.3% in the corresponding 2011 period. The increase in income from operations in Covance's early development segment for the 2011 period is primarily attributable to the 2010 asset impairment charges totaling $119.2 million (or 14.2% of segment net revenues). Also contributing to the increase in 2011 was the inclusion of a full year of results from the sites acquired in October 2010 from Sanofi and net incremental earnings from higher revenue in other service areas, as described above, partially offset by operating losses incurred in connection with the wind-down and transition of our Virginia toxicology services and start up losses related to the opening of our new specialty toxicology services in Indiana and the launch of our pre-clinical facility in China during 2011. Income from operations for 2011 includes restructuring costs of $11.4 million (or 1.2% of segment net revenues) and costs associated with the termination of an inventory supply agreement and related inventory write-down of $10.3 million (or 1.1% of segment net revenues), compared to costs associated with the restructuring initiatives in the 2010 period totaling $14.1 million (or 1.7% of segment net revenues).

Corporate expense increased $5.0 million to $151.0 million or 7.2% of net revenues for the year ended December 31, 2011, as compared to $146.0 million or 7.6% of net revenues for the corresponding 2010 period. Included in corporate expense is stock-based compensation expense of $40.1 million (or 1.9% of net revenues) for the year ended December 31, 2011, an increase of $7.8 million as compared to $32.3 million (or 1.7% of net revenues) for the corresponding 2010 period. Corporate expenses for the year ended December 31, 2011 also includes restructuring charges of $8.0 million (or 0.4% of net revenues) compared to $6.6 million (or 0.3% of net revenues) included in the corresponding 2010 period. Partially offsetting these increases were cost savings realized from the restructuring initiatives, as described above.

Corporate expense increased $20.4 million to $146.0 million or 7.6% of net revenues for the year ended December 31, 2010, as compared to $125.6 million or 6.7% of net revenues for the corresponding 2009 period. The increase was driven by investments to provide strategic partnering and integrated services, as well as investments in our infrastructure to enhance our ability to manage future growth. In addition, corporate expenses for the year ended December 31, 2010 includes restructuring charges of $6.6 million (or 0.3% of net revenues). Included in corporate expense is stock-based compensation expense of $32.3 million or 1.7% of net revenues for the year ended December 31, 2010, an increase of $5.4 million as compared to $26.9 million or 1.4% of net revenues for the corresponding 2009 period.

Cash and cash equivalents at December 31, 2011 and 2010 were $389.1 million and $377.2 million, respectively. Amounts held by foreign subsidiaries were approximately $367 million and $343 million at December 31, 2011 and 2010, respectively, primarily in Swiss Francs, British Pounds and Euros. Foreign cash balances generally result from unremitted foreign earnings, which the Company intends to leave invested indefinitely outside of the United States. If the Company were to remit such earnings to the United States, it would be subject to additional United States income taxes. Amounts are principally invested in short-term money market funds and bank deposits with major financial institutions which carry a Moody's rating of A1 P1 or better. Covance's expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible future acquisitions, geographic expansion, working capital and other general corporate purposes, including possible share repurchases. Covance has a credit agreement (the "Credit Agreement") that provides for a revolving credit facility of up to $250 million, which may be expanded to $300 million at Covance's election, and a term loan commitment of $100 million. On August 31, 2011, Covance repaid and retired all outstanding debt on the term loan portion of the Credit Agreement. At December 31, 2011, there were $30.0 million of outstanding borrowings and $2.6 million of outstanding letters of credit under the revolving credit facility. At December 31, 2010, there were $35.0 million of outstanding borrowings and $1.4 million of outstanding letters of credit under the revolving credit facility and $97.5 million of outstanding debt under the term loan facility. Interest on all outstanding borrowings under the Credit Agreement is computed in accordance with the terms of the Credit Agreement and is presently based upon the London Interbank Offered Rate plus a margin of 200 basis points. Interest on outstanding borrowings approximated 2.35% per annum during 2011 and 2.38% per annum during 2010. Costs associated with the Credit Agreement, which expires in October 2015, consisted primarily of bank and legal fees totaling $1.7 million and are being amortized over the five year term. The Credit Agreement contains various financial and other covenants and is collateralized by guarantees of certain of Covance's domestic subsidiaries and a pledge of 65 percent of the capital stock of certain of Covance's foreign subsidiaries. The Company pays a commitment fee of 30 basis points on the undrawn balance of the revolving credit facility, which totaled approximately $0.6 million and $0.5 million during the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, Covance was in compliance with the terms of the Credit Agreement. Covance believes cash on hand plus cash from operations and available borrowings under the Credit Agreement will provide sufficient liquidity for the foreseeable future.

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