Covance Reports First Quarter Revenue of $482M and EPS of $0.60; Updates Full Year Financial Targets

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PRINCETON, N.J., April 28, 2010 /PRNewswire via COMTEX/ --Covance Inc. (NYSE: CVD) today reported earnings for its first quarter ended March 31, 2010 of $0.60 per diluted share versus $0.63 per diluted share in the first quarter of 2009.

"On a consolidated basis, first quarter net revenues grew 9.2%, operating margin was 11.0%, and diluted EPS of $0.60 met our first quarter expectation," said Joe Herring, Chairman and Chief Executive Officer. "Early Development revenues grew 6.5% year-on-year and increased for the second consecutive quarter; operating margin was 11.2%. Toxicology revenues were essentially flat from the fourth quarter, while sequential improvement in clinical pharmacology was partially offset by softness in some of our chemistry services. In Late-Stage Development, revenue grew 11.3% over the first quarter of 2009 and operating margin exceeded our expectation at 23.9%. Strong performance in clinical development services helped to offset a sequential decline in central laboratory revenue resulting largely from the slower start-up of some new trials. While we expect sequential increases in central laboratory revenue as the year progresses, we expect clinical development to have a slower conversion of backlog to revenue in the second quarter and for the balance of the year primarily due to delays in the commencement of three large Phase III clinical studies.

"On the commercial front, adjusted net orders in the first quarter were $490 million, representing an adjusted book-to-bill of 1.02 to 1. Our Early Development segment achieved an adjusted book-to-bill greater than 1.0 to 1 for the third consecutive quarter. Late-Stage Development net book-to-bill in the quarter was below 1.0 to 1, due to delayed decision making by clients. However, the trailing twelve month adjusted book-to-bill for the Late-Stage segment was approximately 1.25 to 1, and outstanding proposals are at record levels. With regard to building new strategic relationships, we continue to advance discussions with several large clients.

"In the second quarter, we began closure of two smaller underperforming sites - our Phase I clinic in Austin, Texas and our research products facility in Kalamazoo, Michigan - consolidating the volume into more efficient locations. These closures, combined with smaller cost rationalizations in other parts of our company, will reduce our employee-base by approximately 200 people and result in a cost of approximately $0.09 per share in the second quarter. We expect these actions to generate savings ramping to at least $0.12 per share on an annualized basis by year-end.

"As a result of these cost actions (and related savings), coupled with the headwinds created by a stronger US dollar, and delays in the commencement of Late-Stage studies, we are adjusting our 2010 revenue growth rate expectation to the 5%-8% range and our earnings per share target to $2.40 to $2.65. This range includes the impact of the second quarter cost actions, but it does not include benefits from any potential strategic transactions. In the second quarter of 2010, we expect earnings per share to be approximately $0.50, inclusive of site closure and severance costs outlined earlier."

    Consolidated Results

    ($ in millions except EPS)    1Q10       1Q09      Change
    --------------------------    ----       ----      ------
    Total Revenues                $505.0     $468.4
    Less: Reimbursable Out-
     of-Pockets                    $23.1      $27.2
    Net Revenues                  $481.9     $441.2        9.2%
    Operating Income               $52.9      $55.9      (5.5%)
    Operating Margin %             11.0%      12.7%
    Net Income                     $39.1      $40.3      (2.9%)
    Diluted EPS                    $0.60      $0.63      (4.3%)
    -----------                    -----      -----     ------

    Operating Segment Results
    Early Development

    ($ in millions)     1Q10         1Q09        Change
                        ----         ----        ------
    Net Revenues         $205.0       $192.5           6.5%
     Income               $22.9        $27.2        (15.7%)
    Margin %              11.2%        14.1%

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the first quarter of 2010 grew 6.5% to $205.0 million compared to $192.5 million in the first quarter of 2009 and $203.1 million in the fourth quarter of 2009. The year-on-year revenue growth was led by clinical pharmacology and research products, offset to some degree by lower levels of revenue in toxicology and chemistry. In the quarter, foreign exchange positively impacted year-on-year revenue growth by 200 basis points. The commercial outlook for our Early Development services continues to see gradual improvement, and we now expect segment revenue to increase sequentially through the balance of the year.

Operating income for the first quarter of 2010 declined 15.7% year-over-year to $22.9 million, compared to $27.2 million in the first quarter of last year. Operating margins for the first quarter of 2010 were 11.2% compared to 14.1% in the first quarter of 2009 and 11.3% last quarter. Early Development operating margins, excluding facility rationalization costs in the second quarter, are expected to expand sequentially throughout the year.

    Late-Stage Development

    ($ in millions)      1Q10        1Q09        Change
                         ----        ----        ------
    Net Revenues         $276.9       $248.7         11.3%
     Income               $66.2        $56.3         17.6%
    Margin %              23.9%        22.6%

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 first quarter of 2010 grew 11.3% to $276.9 million compared to $248.7 million in the first quarter of 2009. Foreign exchange positively impacted revenue growth in the quarter by approximately 380 basis points. Sequentially, revenues declined $5.0 million due to lower than expected central laboratory revenues from the slower commencement of new trials and the negative impact of the strengthening dollar. In the second quarter, an anticipated sequential increase in central laboratory revenues is not expected to offset lower clinical development revenue resulting from three large study delays. As a result, we now anticipate 2010 Late-Stage Development revenue growth to be in the mid-single-digit range.

Operating income for the first quarter of 2010 increased 17.6% to $66.2 million compared to $56.3 million in the first quarter of the prior year. Stronger than expected profitability in central laboratory services and clinical development led to operating margins of 23.9% for the first quarter of 2010 compared to 22.6% in the first quarter of last year and 22.6% last quarter. Operating margin is expected to be approximately 300 basis points lower than the first quarter level in the next two quarters as headcount in clinical development will be underutilized due primarily to the delay of three large trials.

Corporate Information

The Company's backlog at March 31, 2010 grew 8.4% year-over-year to $4.79 billion compared to $4.42 billion at March 31, 2009 and $4.87 billion at year-end. Foreign exchange negatively impacted sequential backlog growth by approximately $37 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $490 million in the first quarter of 2010.

Corporate expenses totaled $36.3 million in the first quarter of 2010 compared to $32.0 million last quarter and $27.5 million in the first quarter of last year. In 2010, corporate expenses are expected to be approximately 7% of revenue.

Cash and cash equivalents at March 31, 2010 were $268 million compared to $289 million at December 31, 2009 and $190 million at March 31, 2009. The Company remains debt free.

Free cash flow (defined as operating cash flow less capital expenditures) for the first quarter of 2010 was negative $10 million, consisting of operating cash flow of $20 million (which includes the payment of annual bonuses) less capital expenditures of $30 million. In 2010, we expect free cash flow to be approximately $120 million, net of capital expenditures of approximately $170 million. The free cash flow target for 2010 assumes net Days Sales Outstanding (DSO) at 40 days.

Net DSO were 42 days at March 31, 2010 compared to 40 days at December 31, 2009 and 39 days at March 31, 2009.

We continue to experience a lower effective tax rate primarily from a shift in the geographic mix of earnings. The effective tax rate was 25.2% in the first quarter. Our 2010 EPS target assumes an effective tax rate of approximately 25% to 26%.

The Company's investor conference call will be webcast on April 29 at 9:00 am EDT. Management's commentary and presentation slides will be available through

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 $1.8 billion, global operations in more than 20 countries, and more than 10,000 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at

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, fluctuations in currency exchange rates, 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.
             FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
                (Dollars in thousands, except per share data)

                                                        Three Months Ended
                                                             March 31
                                                        2010            2009
                                                        ----            ----

    Net revenues                                    $481,924        $441,236
    Reimbursable out-of-pocket expenses               23,095          27,221
         Total revenues                              505,019         468,457
                                                     -------         -------

    Costs and expenses:
      Cost of revenue                                332,516         301,725
      Reimbursable out-of-pocket expenses             23,095          27,221
      Selling, general and administrative             71,800          63,954
      Depreciation and amortization                   24,744          19,614
            Total costs and expenses                 452,155         412,514
                                                     -------         -------

    Income from operations                            52,864          55,943

    Other expense (income), net:
      Interest income, net                               (65)            (83)
      Foreign exchange transaction loss (gain),
       net                                             1,153            (446)
            Other expense (income), net                1,088            (529)
                                                       -----            ----

    Income before taxes and equity investee
     earnings                                         51,776          56,472

    Taxes on income                                   13,054          16,349

    Equity investee earnings                             419             172

    Net income                                       $39,141         $40,295
                                                     =======         =======

    Basic earnings per share                           $0.62           $0.63

    Weighted average shares outstanding - basic   63,443,698      63,586,418

    Diluted earnings per share                         $0.60           $0.63

    Weighted average shares outstanding -
     diluted                                      64,933,313      63,941,413

                             COVANCE INC.
                 MARCH 31, 2010 and DECEMBER 31, 2009
                        (Dollars in thousands)

                                                 March 31        December 31
                                                       2010             2009
                                                       ----             ----
    Current Assets:
      Cash & cash equivalents                      $268,410         $289,469
      Accounts receivable, net                      265,826          285,119
      Unbilled services                             115,414           97,279
      Inventory                                      77,822           80,926
      Deferred income taxes                          32,852           31,512
      Prepaid expenses and other current
       assets                                       100,520           93,367
                                                    -------           ------
          Total Current Assets                      860,844          877,672

    Property and equipment, net                     917,263          921,995
    Goodwill, net                                   127,653          127,653
    Other assets                                     48,527           47,624
                                                     ------           ------
          Total Assets                           $1,954,287       $1,974,944
                                                 ==========       ==========

    Current Liabilities:
      Accounts payable                              $26,425          $36,834
      Accrued payroll and benefits                   81,766          111,365
      Accrued expenses and other current
       liabilities                                   72,774           73,383
      Unearned revenue                              159,661          166,890
      Income taxes payable                           20,341           14,272
                                                     ------           ------
          Total Current Liabilities                 360,967          402,744

    Deferred income taxes                            97,259           98,945
    Other liabilities                                60,851           62,251
                                                     ------           ------
          Total Liabilities                         519,077          563,940
                                                    -------          -------

    Stockholders' Equity:
      Common stock                                      770              764
      Paid-in capital                               600,846          587,995
      Retained earnings                           1,344,592        1,305,451
      Accumulated other comprehensive loss          (28,076)          (5,281)
      Treasury stock                               (482,922)        (477,925)
          Total Stockholders' Equity              1,435,210        1,411,004
                                                  ---------        ---------
          Total Liabilities and Stockholders'
           Equity                                $1,954,287       $1,974,944
                                                 ==========       ==========

                                COVANCE INC.
             FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
                           (Dollars in thousands)

                                                          Three Months Ended
                                                               March 31

                                                          2010           2009
                                                          ----           ----
    Cash flows from operating activities:
      Net income                                       $39,141        $40,295
      Adjustments to reconcile net income to net
       cash provided by
        operating activities:
        Depreciation and amortization                   24,744         19,614
        Non-cash compensation expense associated with
         employee benefit
           and stock compensation plans                  7,501          5,879
        Deferred income tax provision                   (3,233)        (1,840)
        Loss on sale of property and equipment             104            166
        Equity investee earnings                          (419)          (172)
        Changes in operating assets and liabilities,
         net of business
           Accounts receivable                          19,293        (29,151)
           Unbilled services                           (18,135)         9,808
           Inventory                                     3,104         (6,401)
           Accounts payable                            (10,409)           944
           Accrued liabilities                         (30,208)       (36,361)
           Unearned revenue                             (7,229)         8,214
           Income taxes payable                          6,393          9,535
           Other assets and liabilities, net           (10,247)       (11,301)
    Net cash provided by operating activities           20,400          9,229
                                                        ------          -----

    Cash flows from investing activities:
      Capital expenditures                             (30,394)       (40,302)
      Acquisition of business, net of cash acquired          -        (18,620)
      Other, net                                            48             12
    Net cash used in investing activities              (30,346)       (58,910)
                                                       -------        -------

    Cash flows from financing activities:
      Stock issued under employee stock purchase and
       option plans                                      5,032          3,028
      Purchase of treasury stock                        (4,997)        (2,103)
      Net borrowings under revolving credit facility         -         30,000
      Payment of debt assumed upon acquisition of
       business                                              -         (5,431)
    Net cash provided by financing activities               35         25,494
                                                           ---         ------
    Effect of exchange rate changes on cash            (11,148)        (6,965)
                                                       -------         ------
    Net change in cash and cash equivalents            (21,059)       (31,152)

    Cash and cash equivalents, beginning of period     289,469        221,334
                                                       -------        -------

    Cash and cash equivalents, end of period          $268,410       $190,182
                                                      ========       ========

SOURCE Covance Inc.