Covance
Covance Reports 3Q08 Earnings of $0.80 Per Share

- 11.1% Revenue Growth; Record Operating Margin of 15.9%; Backlog Grows $1.2B to $4.2B -

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PRINCETON, N.J., Oct. 22 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its third quarter ended September 30, 2008 of $0.80 per diluted share, representing 15.9% year-over-year EPS growth.

"In the third quarter, Covance's broad portfolio of market-leading drug development services delivered net revenue growth of 11.1%, record operating margin of 15.9%, and unprecedented new orders," said Joe Herring, Chairman and Chief Executive Officer. "During the quarter, we signed a landmark, ten-year strategic collaboration with Eli Lilly to provide a broad range of early and late-stage development services and to purchase Lilly's 450 acre early drug development campus in Greenfield, Indiana for $50 million. This groundbreaking asset transfer and services agreement provides tangible evidence that large pharmaceutical companies are challenging their vertically integrated business models and leveraging CRO expertise to make their cost structures more flexible and accelerate new product development timelines.

"Early Development grew revenues by 8.0% and had operating margin of 25.5% in the third quarter as strong results in North American preclinical labs were offset by softness in clinical pharmacology and slower European growth which was further impacted by the weakening of the British pound. We anticipate a sequential jump in revenue and operating income dollars in the fourth quarter as our newly-acquired preclinical campus in Greenfield, Indiana begins to contribute to our operating results. In Late-Stage Development, central laboratory and clinical development drove strong segment results during the third quarter, including year-over-year revenue growth of 14.4% and record operating margins of 19.7%.

"Net orders in the third quarter were $1.78 billion, driving our backlog over $4.2 billion and representing a book-to-bill ratio of 4.04:1. Excluding the $1.27 billion dedicated net order from Eli Lilly, net orders were $506 million. Both central laboratories and clinical development continued to deliver strong net orders in the quarter.

"In light of our growing backlog, we remain confident in the strong fundamentals of Covance's business model and market opportunity. However, with approximately 40% of our revenue coming from our overseas operations, the ongoing strengthening of the US Dollar is creating headwind. Based upon current foreign exchange rates, we expect 2008 revenue growth to be in the low-teens. While foreign exchange will increase pressure on earnings, we plan to closely manage costs and continue to target full year diluted earnings per share of $3.18 or 20% year-on-year growth (excluding the gain on sale in both periods)."



    Consolidated Results

    ($ in millions except EPS)
                         3Q08    3Q07    Change    2008YTD    2007YTD   Change
    Total Revenues     $ 467.4  $ 414.7           $1,363.2    $1,195.8
    Less: Reimbursable
     Out-of-Pockets     $ 27.3    $18.7              $73.8       $60.4
    Net Revenues       $ 440.1  $ 396.0   11.1%  $ 1,289.4    $1,135.4   13.6%
    Operating Income     $70.0    $60.1   16.4%    $ 200.2     $ 167.7   19.4%
      Operating Margin  % 15.9%    15.2%              15.5%       14.8%
    Net Income          $ 51.1   $ 44.6   14.6%     $151.1      $125.0   20.8%
    Diluted EPS         $ 0.80   $ 0.69   15.9%     $ 2.36      $ 1.93   22.2%
    Gain on Sale, net
     of tax-                -        -               $ 2.6          -
    Net Income Excluding
     Gain on Sale       $ 51.1   $ 44.6   14.6%     $148.5      $125.0   18.8%
    Diluted EPS Excluding
     Gain on Sale       $ 0.80   $ 0.69   15.9%     $ 2.32      $ 1.93   20.1%



    Operating Segment Results

    Early Development

    ($ in millions)     3Q08      3Q07    Change  2008 YTD   2007 YTD   Change
    Net Revenues       $215.4   $ 199.5     8.0%   $ 630.6   $ 569.8    10.7%
    Operating Income    $54.8     $51.8     5.9%   $ 159.6   $ 144.4    10.5%
    Margin %             25.5%     26.0%              25.3%     25.4%


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 2008 grew 8.0% year-over-year to $215.4 million, compared to $199.5 million in the third quarter of 2007. Strong year-on-year growth in North American preclinical labs was offset by softness in clinical pharmacology and slower European preclinical laboratory growth which was further impacted by a decline of the British pound against the US dollar.

Operating income for the third quarter of 2008 increased 5.9% year-over-year to $54.8 million, compared to $51.8 million in the third quarter of last year. Operating margins for the third quarter of 2008 were 25.5% compared to 26.0% in the third quarter of 2007 and 25.4% last quarter. Third quarter operating margins reflect the impact of start-up costs relating to the recently-acquired Greenfield, Indiana campus and our preclinical entry into China.


    Late-Stage Development

    ($ in millions)     3Q08      3Q07  Change   2008 YTD   2007 YTD   Change
    Net Revenues      $224.7   $ 196.5   14.4%    $658.9    $ 565.6    16.5%
    Operating Income   $44.3     $34.4   28.6%   $ 126.1      $95.5    32.0%
    Margin %            19.7%     17.5%             19.1%      16.9%


The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, and commercialization services (periapproval services and market access services). Late-Stage Development net revenues for the third quarter of 2008 grew 14.4% to $224.7 million compared to $196.5 million in the third quarter of 2007. Excluding the impact of the sale of our ECG business, which was divested in November 2007 but remains in the comparison year, Late-Stage Development revenue growth was 18.8%. Growth was again led by a strong performance in central laboratory (which delivered revenue growth in excess of 20% in the quarter on a year-on-year increase in kit volumes and a strengthening of the Swiss franc) and continued accelerating results in clinical development.

Operating income for the third quarter of 2008 was $44.3 million compared to $34.4 million in the third quarter of the prior year. Operating margins for the third quarter of 2008 increased substantially to an exceptional 19.7% from 17.5% in the third quarter of 2007 and 19.2% last quarter on the record operating profit in clinical development and strong performance in central labs.

Corporate Information

The Company's backlog at September 30, 2008 grew 62.1% year-over-year to $4.25 billion compared to $2.62 billion at September 30, 2007. Included in backlog is $1.27 billion in incremental net orders from Eli Lilly as part of the recently announced ten-year strategic relationship. Net orders excluding those from the ten-year agreement totaled $506 million in the third quarter. Foreign exchange negatively impacted the sequential backlog growth by approximately $100 million.

Corporate expenses totaled $29.2 million in the third quarter of 2008 compared to $29.8 million last quarter and $26.1 million in the third quarter of last year. We expect corporate expenses to average approximately 6.5% of revenue as we continue to make investments in infrastructure to enhance our ability to manage future growth.

Cash and cash equivalents at September 30, 2008 were $209 million compared to $196 million at June 30, 2008 and $260 million at September 30, 2007. At September 30, 2008, short-term debt totaled $23 million. Early in the fourth quarter of 2008, the Company borrowed $50 million to finance the purchase of the Greenfield, Indiana campus from Eli Lilly.

Free cash flow for the third quarter was $24 million, consisting of operating cash flow of $87 million less capital expenditures of $63 million. Free cash flow year-to-date was negative $33 million, consisting of operating cash flow of $173 million less capital expenditures of $206 million. Including the $50 million fourth quarter purchase of the Greenfield campus, we now expect full-year 2008 capital spending to be approximately $315 million. Also, full year free cash flow is expected to be approximately negative $25 million, assuming the same level of DSO as the end of last year.

Net Days Sales Outstanding (DSO) were 41 days at September 30, 2008 compared to 39 days at June 30, 2008 and 47 days at September 30, 2007.

The effective tax rate in the third quarter of 2008 was 28.5%, down from 28.8% last quarter, and we now expect the effective tax rate will be in the 28.5% range for the foreseeable future.

The Company's investor conference call will be webcast on October 23 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 annual revenues greater than $1.5 billion, global operations in more than 20 countries, and more than 9,300 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.

    Financial Exhibits Follow


                                   COVANCE INC.

                          CONSOLIDATED INCOME STATEMENTS

         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

                  (Dollars in thousands, except per share data)

                                   (UNAUDITED)

                              Three Months Ended      Nine Months Ended
                                 September 30             September 30
                               2008        2007        2008         2007

    Net revenues              $440,109    $395,989  $1,289,453     $1,135,453
    Reimbursable out-of-
     pockets                    27,263      18,712      73,779         60,361
         Total revenues        467,372     414,701   1,363,232      1,195,814

    Costs and expenses:
      Cost of revenue          287,804     258,355     848,018        743,812
      Reimbursed out-of-
       pocket expenses          27,263      18,712      73,779         60,361
      Selling, general and
       administrative           64,850      61,089     189,109        174,972
      Depreciation and
       amortization             17,493      16,447      52,172         49,015
            Total costs and
             expenses          397,410     354,603   1,163,078      1,028,160

    Income from operations      69,962      60,098     200,154        167,654

    Other (income) expense,
     net:
      Interest income, net      (1,531)     (2,298)     (5,628)        (6,771)
      Foreign exchange
       transaction (gain)
       loss, net                   730        (284)       (816)          (238)
      Gain on sale of
       business                    -           -        (3,927)           -
            Other income,
             net                  (801)     (2,582)    (10,371)(a)     (7,009)

    Income before taxes and
     equity investee
     earnings                   70,763      62,680     210,525 (a)    174,663

    Taxes on income             20,167      18,469      61,220 (a)     51,326

    Equity investee
     earnings                      511         403       1,777          1,683

    Net income                 $51,107     $44,614    $151,082 (a)   $125,020

    Basic earnings per
     share                       $0.81       $0.70       $2.40 (a)      $1.96

    Weighted average shares
     outstanding - basic    63,055,229  63,711,628  63,065,488     63,718,720

    Diluted earnings per
     share                       $0.80       $0.69       $2.36 (a)      $1.93

    Weighted average shares
     outstanding - diluted  63,994,532  64,728,253  64,052,224     64,758,890

(a) Includes the impact of a $3,927 gain on sale of Cardiac Safety Services ($2,553 net of tax) during the first nine months of 2008.


    Excluding the impact of the gain on sale of business in 2008:

    Income before taxes and
     equity investee
     earnings                   --          --        $206,598         --

    Taxes on income             --          --         $59,846         --

    Net income                  --          --        $148,529         --

    Basic earnings per
     share                      --          --           $2.36         --

    Diluted earnings per
     share                      --          --           $2.32         --



                                  COVANCE INC.

                           CONSOLIDATED BALANCE SHEETS

                    SEPTEMBER 30, 2008 and DECEMBER 31, 2007

                             (Dollars in thousands)


                                              September 30       December 31
                                                  2008               2007
                                              (UNAUDITED)
    ASSETS
    Current Assets:
       Cash & cash equivalents                    $209,094          $319,485
       Accounts receivable, net                    240,761           217,657
       Unbilled services                           103,960            88,835
       Inventory                                    67,644            54,788
       Deferred income taxes                         9,997             7,825
       Prepaid expenses and other current
        assets                                      89,324            81,467
           Total Current Assets                    720,780           770,057

    Property and equipment, net                    790,429           646,040
    Goodwill, net                                  105,486           105,486
    Other assets                                    38,211            38,602
           Total Assets                         $1,654,906        $1,560,185

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
       Accounts payable                            $44,677           $32,252
       Accrued payroll and benefits                 91,450            95,313
       Accrued expenses and other current
        liabilities                                 64,500            66,838
       Unearned revenue                            145,701           144,870
       Short-term debt                              23,000               -
       Income taxes payable                         27,734            18,887
           Total Current Liabilities               397,062           358,160

    Deferred income taxes                           29,111            32,562
    Other liabilities                               58,694            59,275
           Total Liabilities                       484,867           449,997

    Stockholders' Equity:
       Common stock                                    753               746
       Paid-in capital                             543,572           492,373
       Retained earnings                         1,084,188           933,106
       Other Comprehensive Income:
            Cumulative translation
             adjustment                             33,495            45,328
            FAS 158 adjustment                     (21,174)          (21,174)
       Treasury stock                             (470,795)         (340,191)
           Total Stockholders' Equity            1,170,039         1,110,188
           Total Liabilities and
            Stockholders'  Equity               $1,654,906        $1,560,185



                                  COVANCE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

                             (Dollars in thousands)

                                   (UNAUDITED)

                                            Nine Months Ended September 30

                                                    2008              2007
    Cash flows from operating activities:
      Net income                                  $151,082          $125,020
      Adjustments to reconcile net income
       to net cash provided by
        operating activities:
        Depreciation and amortization               52,172            49,015
        Non-cash compensation expense
         associated with employee benefit
         and stock compensation plans               19,190            21,472
        Deferred income tax (benefit)
         provision                                  (5,623)           (2,475)
        Gain on sale of business                    (3,927)              -
        Loss (gain) on sale of property
         and equipment                                 795            (1,740)
        Equity investee earnings                    (1,777)           (1,683)
        Changes in operating assets and
         liabilities:
           Accounts receivable                     (23,104)          (17,007)
           Unbilled services                       (15,125)          (15,851)
           Inventory                               (12,856)           (5,161)
           Accounts payable                         12,425             6,963
           Accrued liabilities                      (5,818)           18,901
           Unearned revenue                            831            12,616
           Income taxes payable                     11,322              (749)
           Other assets and liabilities,
            net                                     (6,361)          (13,222)
    Net cash provided by operating
     activities                                    173,226           176,099

    Cash flows from investing activities:
      Capital expenditures                        (206,179)         (104,820)
      Proceeds from sale of business                 3,927               -
      Other, net                                       366               111
    Net cash used in investing activities         (201,886)         (104,709)

    Cash flows from financing activities:
      Net borrowings under revolving
       credit facility                              23,000               -
      Stock issued under employee stock
       purchase and option plans                    29,158            25,948
      Purchase of treasury stock                  (130,604)          (61,562)
    Net cash used in financing activities          (78,446)          (35,614)

    Effect of exchange rate changes on
     cash                                           (3,285)            4,245

    Net change in cash and cash
     equivalents                                  (110,391)           40,021

    Cash and cash equivalents, beginning
     of period                                     319,485           219,810

    Cash and cash equivalents, end of
     period                                       $209,094          $259,831