Covance
Covance Reports 3Q07 Earnings of $0.69 Per Share

- Net Revenue Growth Accelerates to 16.0%; Backlog Grows 26.5% to $2.6B; Record OM of 15.2% -

PRINCETON, N.J., Oct. 24 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its third quarter ended September 30, 2007 of $0.69/diluted share, representing 17.0% growth on a GAAP basis and 25.0% on a pro forma basis, after excluding an income tax gain of $0.04 per diluted share in the third quarter of 2006.

Listen to the webcast.

Download Presentation.

"In the third quarter, our business model continued to deliver strong results as we accelerated net revenue growth to 16.0%, expanded operating margins to a record 15.2%, and produced EPS growth of 25.0%. We also delivered strong net orders of $493 million in the quarter and 26.5% growth in backlog to $2.6 billion, as demand for our broad portfolio of services continued to be robust," said Joe Herring, Chairman and Chief Executive Officer. "Early Development net revenue growth was again very strong at 19.2% and operating margins increased both year-on-year and sequentially to 26.0%. In Late-Stage Development, year-on-year net revenue growth accelerated to 12.9% and operating margins expanded to 17.5%, marking the second consecutive quarter of increased profitability in the segment.

"Even as we deliver on our near-term financial targets and client projects, we are accelerating investments in capacity, talent, and IT systems to support future growth. During the third quarter we opened four new Covance facilities across three continents. In North America, we added a preclinical ABSL-2 facility to support the growth in vaccine research services. In Europe, we opened yet another expansion at our Muenster, Germany preclinical facility. In Asia, we opened two facilities -- a state-of-the-art central laboratory in Shanghai to support global clinical trials and a nutritional chemistry laboratory in Singapore to provide food safety testing services.

"Our strong financial performance over the first three quarters of this year leads us to raise our full-year 2007 earnings target to $2.65 per diluted share. Looking forward to 2008, based upon our strong performance again this quarter and our expanding backlog, we are again targeting revenue growth in the low- to mid-teens range and diluted earnings per share growth of 20%."


    Selected Consolidated Results

    ($ in millions except EPS)
                           3Q07    3Q06   Change  2007 YTD  2006 YTD  Change
    Total Revenues        $414.7  $356.2          $1,195.8  $1,047.0
    Less: Reimbursable
     Out-of-Pockets        $18.7   $14.7             $60.4     $49.8
    Net Revenues          $396.0  $341.5   16.0%  $1,135.4    $997.2   13.9%
    Operating Income       $60.1   $49.0   22.6%    $167.7    $141.9   18.1%
     Operating Margin %    15.2%   14.4%             14.8%     14.2%
    Net Income             $44.6   $38.3   16.6%    $125.0    $106.7   17.2%
    Diluted EPS            $0.69   $0.59   17.0%     $1.93     $1.65   17.2%
    Income Tax Gain                 $2.5                        $2.5
    Net Income Excluding
     Tax Gain              $44.6   $35.8   24.6%    $125.0    $104.2   20.0%
    Diluted EPS Excluding
     Tax Gain              $0.69   $0.55   25.0%     $1.93     $1.61   20.0%


    Operating Segment Results

    Early Development

    ($ in millions)        3Q07    3Q06   Change  2007 YTD  2006 YTD  Change
    Net Revenues          $199.5  $167.4   19.2%    $569.8    $465.6   22.4%
    Operating Income       $51.8   $40.3   28.4%    $144.4    $115.0   25.6%
    Margin %               26.0%   24.1%             25.4%     24.7%

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the third quarter of 2007 grew 19.2% to $199.5 million, compared to $167.4 million in the third quarter of 2006. Net revenue growth in the quarter was driven by strong performances in toxicology, chemistry, and clinical pharmacology. Year-to-date, net revenues are up 22.4% to $569.8 million compared to $465.6 million in the first nine months of the prior year.

Operating income for the third quarter of 2007 increased 28.4% to $51.8 million compared to $40.3 million for the third quarter of last year. Operating margins for the third quarter of 2007 expanded to 26.0% versus 24.1% in the third quarter of the prior year and 25.6% last quarter. Strength in operating margin was driven by continued strong performances in toxicology, chemistry services, and clinical pharmacology. Year-to-date, operating margins increased to 25.4% versus 24.7% in the first nine months of the prior year.


    Late-Stage Development

    ($ in millions)        3Q07    3Q06   Change  2007 YTD  2006 YTD  Change
    Net Revenues          $196.5  $174.1   12.9%    $565.6    $531.7   6.4%
    Operating Income       $34.4   $30.4   13.1%     $95.5     $90.9   5.0%
    Margin %               17.5%   17.5%             16.9%     17.1%

The Late-Stage Development segment includes central laboratory, Phase II- III clinical development, commercialization services (periapproval services and market access services), and cardiac safety services. Late-Stage Development net revenue for the third quarter of 2007 grew 12.9% to $196.5 million compared to $174.1 million in the third quarter of 2006. This accelerated growth rate was driven by another very strong performance in clinical development and improved year-on-year growth in central labs. Year- to-date, net revenues are up 6.4% to $565.6 million compared to $531.7 million in the first nine months of 2006.

Operating income for the third quarter of 2007 increased 13.1% to $34.4 million compared to $30.4 million in the third quarter of the prior year. Operating margins for the third quarter of 2007 was 17.5% versus 17.5% in the third quarter of 2006 and 16.8% last quarter. Year-on-year improvements in clinical development and increased central laboratory operating margins were offset by a decline in market access services operating margin. Year-to-date, operating margins were 16.9% compared to 17.1% in the first nine months of 2006.

Corporate Information

The Company's backlog at September 30, 2007 grew 26.5% year-over-year to $2.6 billion compared to $2.1 billion at September 30, 2006. Net orders in the third quarter of 2007 were $492.6 million versus $432.0 million reported in the third quarter of 2006.

Corporate expenses totaled $26.1 million in the third quarter of 2007 compared to $25.4 million last quarter and $21.7 million in the third quarter of last year, as we continue to make investments in infrastructure to enhance our ability to manage future growth.

The Company reported $259.8 million in cash and cash equivalents at September 30, 2007, up from $208.0 million at June 30, 2007.

Free cash flow for the third quarter was $41.3 million, consisting of operating cash flow of $84.3 million and capital expenditures of $43.0 million. Free cash flow year-to-date was $71.3 million, consisting of operating cash flow of $176.1 million and capital expenditures of $104.8 million. We now expect full year 2007 capital spending to be at least $165 million and free cash flow to be approximately $80 million, including significant expenditures for the new Arizona preclinical facility.

Net Days Sales Outstanding (DSO) was 47 days at September 30, 2007, versus 46 days at June 30, 2007, and 55 days at September 30, 2006.

The Company's investor conference call will be webcast on October 25 at 9:00 am EDT. Management's commentary and presentation slides will be available through www.covance.com.

Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with revenues over the last twelve months of approximately $1.5 billion, global operations in more than 20 countries, and approximately 8,700 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at www.covance.com.

Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward looking statement to conform the statement to actual results or changes in the Company's expectations.


                                   COVANCE INC.

                          CONSOLIDATED INCOME STATEMENTS
         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
                  (Dollars in thousands, except per share data)
                                   (UNAUDITED)

                                  Three Months Ended      Nine Months Ended
                                     September 30            September 30
                                   2007        2006        2007       2006

    Net revenues                  $395,989    $341,478  $1,135,453   $997,227
    Reimbursable out-of-pockets     18,712      14,681      60,361     49,744
         Total revenues            414,701     356,159   1,195,814  1,046,971

    Costs and expenses:
     Cost of revenue               258,355     223,662     743,812    660,045
     Reimbursed out-of-pocket
      expenses                      18,712      14,681      60,361     49,744
     Selling, general and
      administrative                61,089      54,196     174,972    153,794
     Depreciation and
      amortization                  16,447      14,584      49,015     41,468
        Total costs and expenses   354,603     307,123   1,028,160    905,051

    Income from operations          60,098      49,036     167,654    141,920

    Other (income) expense, net:
     Interest income, net           (2,298)     (1,693)     (6,771)    (5,188)
     Foreign exchange transaction
      (gain) loss,  net               (284)        (95)       (238)       (28)
        Other income, net           (2,582)     (1,788)     (7,009)    (5,216)

    Income before taxes and
     equity investee earnings       62,680      50,824     174,663    147,136

    Taxes on income                 18,469      12,726      51,326     41,389

    Equity investee earnings           403         178       1,683        938

    Net income                     $44,614     $38,276    $125,020   $106,685


    Basic earnings per share         $0.70       $0.60       $1.96      $1.68

    Weighted average shares
     outstanding - basic        63,711,628  63,827,555  63,718,720 63,542,002

    Diluted earnings per share       $0.69       $0.59       $1.93      $1.65

    Weighted average shares
     outstanding - diluted      64,728,253  64,965,380  64,758,890 64,758,456


    Excluding the impact of the $2.5 million income
     tax gain recorded in Q3'06:

    Taxes on income                 n/a        $15,193       n/a      $43,856

    Net income                      n/a        $35,809       n/a     $104,218

    Basic earnings per share        n/a          $0.56       n/a        $1.64

    Diluted earnings per share      n/a          $0.55       n/a        $1.61


                                  COVANCE INC.

                           CONSOLIDATED BALANCE SHEETS
                    SEPTEMBER 30, 2007 and DECEMBER 31, 2006
                             (Dollars in thousands)

                                                  September 30   December 31
                                                      2007          2006
                                                   (UNAUDITED)
    ASSETS
    Current Assets:
      Cash & cash equivalents                        $259,831      $219,810
      Accounts receivable, net                        222,480       205,473
      Unbilled services                               104,990        89,139
      Inventory                                        54,789        49,628
      Deferred income taxes                             4,523         4,320
      Prepaid expenses and other current assets        74,145        71,196
        Total Current Assets                          720,758       639,566

    Property and equipment, net                       577,507       500,057
    Goodwill, net                                     119,725       119,725
    Other assets                                       41,937        38,330
        Total Assets                               $1,459,927    $1,297,678

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
      Accounts payable                                $42,442       $35,479
      Accrued payroll and benefits                     91,729        76,657
      Accrued expenses and other current liabilities   51,710        50,855
      Unearned revenue                                122,175       109,559
      Income taxes payable                             11,499        17,154
        Total Current Liabilities                     319,555       289,704

    Deferred income taxes                              30,028        31,052
    Other liabilities                                  63,311        53,627
        Total Liabilities                             412,894       374,383

    Stockholders' Equity:
      Common stock                                        743           734
      Paid-in capital                                 476,952       426,806
      Retained earnings                               882,197       757,809
      Other Comprehensive Income:
        Cumulative translation adjustment              45,927        35,170
        FAS 158 adjustment                            (23,389)      (23,389)
      Treasury stock                                 (335,397)     (273,835)
        Total Stockholders' Equity                  1,047,033       923,295
        Total Liabilities and Stockholders' Equity $1,459,927    $1,297,678


                                  COVANCE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
                             (Dollars in thousands)
                                   (UNAUDITED)

                                                Nine Months Ended September 30
                                                      2007           2006
    Cash flows from operating activities:
     Net income                                      $125,020       $106,685
     Adjustments to reconcile net income to net
      cash provided by operating activities:
       Depreciation and amortization                   49,015         41,468
       Non-cash compensation expense associated
        with employee benefit and stock
        compensation plans                             21,472         21,990
       Deferred income tax (benefit) provision         (2,475)          (658)
       (Gain) loss on sale of property and equipment   (1,740)          (187)
       Equity investee earnings                        (1,683)          (938)
       Changes in operating assets and liabilities,
        net of businesses acquired:
         Accounts receivable                          (17,007)          (998)
         Unbilled services                            (15,851)        (7,364)
         Inventory                                     (5,161)        (4,087)
         Accounts payable                               6,963            725
         Accrued liabilities                           18,901         10,003
         Unearned revenue                              12,616          1,978
         Income taxes payable                            (749)         8,274
         Other assets and liabilities, net            (13,222)       (11,558)
    Net cash provided by operating activities         176,099        165,333

    Cash flows from investing activities:
     Capital expenditures                            (104,820)       (71,755)
     Acquisition of businesses                            -          (74,561)
     Other, net                                           111            699
    Net cash used in investing activities            (104,709)      (145,617)

    Cash flows from financing activities:
     Stock issued under employee stock purchase
      and option plans                                 25,948         34,901
     Purchase of treasury stock                       (61,562)        (8,705)
    Net cash (used in) provided by financing
     activities                                       (35,614)        26,196
    Effect of exchange rate changes on cash             4,245          3,451
    Net change in cash and cash equivalents            40,021         49,363

    Cash and cash equivalents, beginning of period    219,810        160,717

    Cash and cash equivalents, end of period         $259,831       $210,080