On the eve of completion of its selloff to Laboratory Corp. of America Holdings (LH), Covance Inc. (CVD) reported adjusted earnings per share (EPS) of 97 cents in the fourth quarter of 2014. The results beat the year-ago figure by 11.5% and were in line with the Zacks Consensus Estimate. The upside was driven by an improved outcome on both the top line and margin front.
Including the impact of certain one-time items, reported earnings in the quarter came in at 91 cents, registering a 13.8% beat over the year-ago figure.
For full year 2014, adjusted EPS surged 17.6% to reach $3.80. Full year EPS was also on par with the Zacks Consensus Estimate.
Net Revenue
Net revenue increased 1.8% from the year-ago quarter to reach $634.4 million (up 5.3% on an adjusted basis), beating the Zacks Consensus Estimate of $631 million. For the full year, net revenues were $2.521 billion, up 4.9% over the prior year (or up 4.8% on an adjusted basis). However, the full year top line approximately came in line with the Zacks Consensus Estimate of $2.529 billion.
Segments in Details
Covance primarily derives its revenues from two segments, Early Development and Late-Stage Development.
Net revenue from continuing operation in Early Development rose 1.4% year over year on a reported basis to $231.4 million in the quarter. The increase was driven primarily by growth in clinical pharmacology services and improved results in nutritional analysis.
Foreign exchange adversely impacted revenue growth in this segment by 120 basis points (bps), while the divestitures of the Seattle genomics laboratory and antibody products service line resulted in a negative impact of 370 bps.
Early Development pro forma operating margin was 13.8%, reflecting an improvement of 170 basis points (bps) year over year, driven by continued strength in clinical pharmacology and higher margins in chemistry services.
Net revenue from Late-Stage Development climbed 2.1% year over year to $403 million on the back of market access services and central labs, which delivered record kit volumes in the quarter. However, clinical development was roughly flat compared to the prior year on a constant foreign exchange rate basis.
While foreign exchange negatively impacted year-over-year revenue growth at this segment by 310 bps, an acquisition positively influenced the same by 40 bps.
Pro forma operating margin in Late-Stage Development expanded 20 bps on a year-over-year basis to 22.9%, driven by margin expansion in clinical development and market access services.
Consolidated Margins
Gross margin expanded 80 bps to 35.6%. Adjusted operating margin improved about 120 bps to 22.7% with a 6.4% rise in adjusted operating income to $153 million.
Balance Sheet
Covance exited 2014 with cash and cash equivalents and short-term investments of $815 million, compared with $729 million in 2013. Operating cash flow of $296 million and capital expenditure of $142 million resulted in free cash flow of $154 million in 2014.
Our Take
Covance delivered a healthy performance in the quarter, breaking all prior records, specifically with fourth quarter adjusted net orders amounting to $823 million. Apart from delivering record orders in the fourth quarter, management received vital positive client feedback regarding its planned merger with LabCorp. With the completion of the acquisition around the corner (which is expected to be over soon after the stockholders’ meeting on Feb 18, 2015), it is expected that the resulting new company will emerge as the leading provider of medical testing besides operating as a premier full-service drug development organization.
We believe that the positive client feedback is indicative of the fact that potential investors are also looking forward to the completion of the merger and seek to invest in shares of the combined company, which is expected to emerge as an industry leader in both the laboratory testing and CRO spaces.
The stock presently carries a Zacks Rank #4 (Sell), while LabCorp holds a Zacks Rank #2 (Buy).
Stocks to Consider
Some top-ranked medical services stocks such as The Advisory Board Company (ABCO) and BioTelemetry, Inc. (BEAT) are worth considering. Both these stocks carry a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment