Covance
Covance Reports Earnings Growth of 30% to $0.54/Share and Increases FY2006 Earnings Target to at Least $2.19/Share

- 14.0% Net Revenue Growth; $555 Million in Net Orders Drives Backlog Growth of 31.2% -

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PRINCETON, N.J., July 24 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its second quarter ended June 30, 2006 of $0.54/diluted share, including stock-based compensation expense of $0.04 per diluted share related to SFAS 123(R). This represents year-over-year EPS growth of 29.8% with both periods including stock-based compensation expense.

"Covance delivered another strong financial performance, including net revenue growth of 14.0% and operating margins of 14.0%. In the second quarter, we also achieved record net orders of $555 million driving our backlog up 31.2% to $1.97 billion. Our continued strong order performance positions us well for future growth," said Joe Herring, Chairman and Chief Executive Officer. "Early Development net revenue growth accelerated to 11.4% and operating margins were a healthy 25.1%. In Late-Stage Development, outstanding performances in both central laboratory and commercialization services were partially offset by weakness in clinical development, resulting in year-over-year revenue growth of 16.4% and operating margins of 15.9%."

"Repeat business and the development of strategic client relationships continue to spur new order growth. Included in the second quarter's record net orders was the previously announced expanded dedicated capacity contract which secures toxicology space for a client through 2013, adding $150 million to our second quarter backlog. In addition, we experienced a robust flow of new orders in Late-Stage Development, where our book-to-bill exceeded 1.35:1. On May 31, we completed the acquisition of eight early clinical sites from Radiant Research and are encouraged by the large number of requests for proposals we are seeing for Phase I/IIa projects."

"As a result of our strong operating, financial, and order performance through the first half of the year, we are raising our 2006 earnings target from at least $2.16 per diluted share to at least $2.19 per diluted share."

    Consolidated Results


    Three Months Ended June 30
    ($ in millions except EPS)
                                 2Q06     2Q05      2Q05      2Q05     Change
                                           as     SFAS 123     Pro
                                        reported   Expense    Forma

    Net Revenues                $335.2   $294.0               $294.0    14.0%
      Reimbursable Out-of-
       Pockets                   $21.9    $13.4                $13.4
    Total Revenues              $357.1   $307.4               $307.4
    Costs and Expenses          $288.2   $252.1      $4.5     $256.6    12.3%
      Reimbursable Out-of-
       Pockets                   $21.9    $13.4                $13.4
    Total Costs and Expenses    $310.1   $265.5      $4.5     $270.0
    Operating Income             $47.0    $41.9     ($4.5)     $37.4    25.7%
      Operating Margin %         14.0%    14.3%     (1.6%)     12.7%
    Net Income                   $35.0    $29.6     ($3.1)     $26.5    32.2%
    Diluted EPS                  $0.54    $0.46    ($0.05)     $0.42    29.8%


    Six Months Ended June 30
    ($ in millions except EPS)
                                 2006     2005      2005       2005    Change
                                  YTD      YTD       YTD        YTD
                                           as      SFAS 123     Pro
                                        reported   Expense     Forma

    Net Revenues                $655.7   $575.2               $575.2    14.0%
      Reimbursable Out-of-
       Pockets                   $35.1    $25.0                $25.0
    Total Revenues              $690.8   $600.2               $600.2
    Costs and Expenses          $562.8   $492.4      $9.4     $501.8    12.2%
      Reimbursable Out-of-
       Pockets                   $35.1    $25.0                $25.0
    Total Costs and Expenses    $597.9   $517.4      $9.4     $526.8
    Operating Income             $92.9    $82.8     ($9.4)     $73.4    26.6%
      Operating Margin %         14.2%    14.4%     (1.6%)     12.8%
    Net Income                   $68.4    $58.4     ($6.4)     $52.0    31.5%
    Diluted EPS                  $1.06    $0.92    ($0.10)     $0.82    29.9%


    Operating Segment Results

    Early Development


    ($ in millions)     2Q06      2Q05  Change   2006 YTD   2005 YTD  Change
    Net Revenues      $155.7    $139.8   11.4%    $298.2     $270.7   10.2%
    Operating Income   $39.1     $33.7   16.1%     $74.6      $65.7   13.6%
    Margin %           25.1%     24.1%             25.0%      24.3%

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, clinical pharmacology services, and research products. Early Development net revenues for the second quarter of 2006 grew 11.4% year- on-year to $155.7 million, compared to $139.8 million in the second quarter of 2005, and were up a strong $13.3 million or 9.3% sequentially. Net revenue growth in the quarter was broad-based. Year-to-date, net revenues are up 10.2% to $298.2 million compared to $270.7 million in the first half of the prior year. We expect the continued ramp up of new toxicology capacity and further increases in sales of research products to drive mid-teens revenue growth in this segment in the third quarter.

Operating income for the second quarter of 2006 increased 16.1% to $39.1 million compared to $33.7 million for the second quarter of last year. Operating margins for the second quarter of 2006 expanded to 25.1% versus 24.1% in the second quarter of the prior year. Toxicology and chemistry services were the primary drivers of the year-on-year operating margin expansion. Year-to-date, operating margins increased to 25.0% from 24.3% in the prior year.

    Late-Stage Development


    ($ in millions)     2Q06      2Q05  Change  2006 YTD   2005 YTD  Change
    Net Revenues      $179.5    $154.2   16.4%    $357.6     $304.5   17.4%
    Operating Income   $28.5     $26.9    6.1%     $60.5      $52.5   15.2%
    Margin %           15.9%     17.4%             16.9%      17.3%

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 revenues for the second quarter of 2006 grew 16.4% to $179.5 million compared to $154.2 million in the second quarter of 2005. Central laboratory and commercialization services were the strongest contributors to this quarter's growth. Year-to-date, net revenues grew 17.4% to $357.6 million compared to $304.5 million in the prior year.

Operating income for the second quarter of 2006 increased 6.1% to $28.5 million compared to $26.9 million in the second quarter of the prior year. Operating margins for the second quarter of 2006 were 15.9% versus 17.4% in the second quarter of 2005. Year-to-date, operating margins were 16.9% compared to 17.3% in the prior year. Strong performances in central laboratories and commercialization services were partially offset by results in clinical development which were impacted by the previously announced delay of three large studies and somewhat slower conversion of backlog to revenue. Of the three delayed studies, one initiated in June, another in July, and the third is scheduled to begin by the end of the year.

Corporate Information

The Company's backlog at June 30, 2006 grew 31.2% year-over-year to $1.97 billion compared to $1.50 billion at June 30, 2005. Net orders in the second quarter of 2006 were $555 million, up 55.8% over the $356 million reported in the second quarter of 2005.

Corporate expenses, which totaled $20.6 million in the second quarter of 2006, include $3.8 million of incremental expenses relating to the expensing of stock-based compensation under SFAS 123(R).

Cash and cash equivalents at June 30, 2006 were $137.6 million compared to $191.1 million at March 31, 2006. The Company used $74 million in cash during the second quarter to finance the acquisitions of Signet Laboratories and eight early clinical sites from Radiant Research.

Capital expenditures for the second quarter were $30.2 million and totaled $49.3 million in the first half of 2006. Free cash flow (cash from operations less capital spending) was $16.1 million in the quarter and $29.5 million year to date. We continue to expect 2006 capital spending to be approximately $125 million and 2006 free cash flow to be approximately $90 million.

Net Days Sales Outstanding (DSO) were 57 days at June 30, 2006 versus 56 days at March 31, 2006 and 60 days at June 30, 2005.

The Company's investor conference call will be webcast on July 25 at 9:00 am EDT. Management's commentary and presentation slides will be available through http://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 billion, global operations in more than 20 countries, and greater than 7,900 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at http://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, difficulties or delays in integrating the business of Radiant and achieving anticipated efficiencies and synergies, 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.

Statement Regarding Adoption of SFAS 123(R)

Prior to 2006, Covance followed the disclosure-only provisions of SFAS123 as it related to expensing of stock options. Accordingly, the Company had accounted for stock awards granted under its equity plans under the recognition and measurement principles of APB25, which provide that no expense is recorded for stock options issued with an exercise price equal to the fair market value of the underlying stock on the date of grant. Covance reflected the expense associated with the fair value of stock option grants in its required pro forma footnote disclosure under SFAS123 in its SEC filings. Beginning January 1, 2006, Covance adopted SFAS123(R). Under SFAS123(R), all share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based upon their fair values. Management believes that it may be useful for investors in evaluating current period financial performance to compare to 2005 results that include stock option expense computed in accordance with SFAS 123. Management does not assert that such pro forma numbers are superior to the 2005 "as reported" results; however, the pro forma numbers may help investors compare results including stock option expense across both periods. Although the Company has begun to use the Lattice-Binomial valuation method for valuing stock options granted beginning in 2006 (whereas previously the Company had used the Black- Scholes Merton valuation method), management believes that the Lattice- Binomial and the Black-Scholes Merton valuation methods, with the assumptions used by the Company, result in fair values which are substantially similar in all material respects. As a result, the Company believes that the 2006 "as reported" amounts under SFAS123(R) are comparable to the 2005 "pro forma" amounts as previously disclosed under SFAS123.



                                 COVANCE INC.

                        CONSOLIDATED INCOME STATEMENTS

          FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

                (Dollars in thousands, except per share data)

                                 (UNAUDITED)

                                  Three Months Ended       Six Months Ended
                                       June 30                 June 30
                                 2006 (1)    2005 (2)    2006 (1)    2005 (2)

    Net revenues                 $335,240    $293,963    $655,749    $575,228
    Reimbursable out-of-
     pockets                       21,934      13,449      35,063      24,967
         Total revenues           357,174     307,412     690,812     600,195

    Costs and expenses:
      Cost of revenue             222,723     195,714     436,383     382,486
      Reimbursed out-of-pocket
       expenses                    21,934      13,449      35,063      24,967
      Selling, general and
       administrative              51,312      44,490      99,598      86,626
      Depreciation and
       amortization                14,165      11,833      26,884      23,334
            Total costs and
             expenses             310,134     265,486     597,928     517,413

    Income from operations         47,040      41,926      92,884      82,782

    Other (income) expense,
     net:
      Interest income, net         (1,682)       (975)     (3,495)     (1,987)
      Foreign exchange
       transaction (gain)
       loss, net                     (195)        369          67         951
            Other income, net      (1,877)       (606)     (3,428)     (1,036)

    Income before taxes and
     equity investee earnings      48,917      42,532      96,312      83,818

    Taxes on income                14,407      13,041      28,663      25,759

    Equity investee earnings          510          59         760         355

    Net income                    $35,020     $29,550     $68,409     $58,414

    Basic earnings per share        $0.55       $0.47       $1.08       $0.93

    Weighted average shares
     outstanding - basic       63,626,078  62,506,556  63,399,226  62,630,820

    Diluted earnings per share      $0.54       $0.46       $1.06       $0.92

    Weighted average shares
     outstanding - diluted     64,849,638  63,651,043  64,623,847  63,820,766


    (1) 2006 financial results include stock-based compensation expense as
    measured under SFAS 123R.

    (2) 2005 financial results reflect stock-based compensation expense as
    measured under APB 25 and, accordingly, do not include stock-based
    compensation expense as measured under SFAS 123.



                                 COVANCE INC.

                         CONSOLIDATED BALANCE SHEETS

                     JUNE 30, 2006 and DECEMBER 31, 2005

                            (Dollars in thousands)

                                                 June 30          December 31
                                                   2006               2005
                                                (UNAUDITED)
    ASSETS
    Current Assets:
       Cash & cash equivalents                    $137,638          $160,717
       Accounts receivable, net                    205,315           206,098
       Unbilled services                           100,723            88,297
       Inventory                                    43,533            40,293
       Deferred income taxes                         5,245             2,062
       Prepaid expenses and other current
        assets                                      66,353            49,243
           Total Current Assets                    558,807           546,710

    Property and equipment, net                    442,914           410,665
    Goodwill, net                                  118,827            61,262
    Other assets                                    46,439            37,966

           Total Assets                         $1,166,987        $1,056,603

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
       Accounts payable                            $29,322           $26,975
       Accrued payroll and benefits                 61,555            64,226
       Accrued expenses and other current
        liabilities                                 50,752            48,298
       Unearned revenue                             95,189            96,987
       Income taxes payable                         11,677            16,242
           Total Current Liabilities               248,495           252,728

    Deferred income taxes                           41,430            45,545
    Other liabilities                               29,463            26,559
           Total Liabilities                       319,388           324,832

    Stockholders' Equity:
       Common stock                                    729               718
       Paid-in capital                             396,780           350,678
       Retained earnings                           681,220           612,811
       Cumulative translation adjustment            23,374            13,367
       Treasury stock                             (254,504)         (245,803)
           Total Stockholders' Equity              847,599           731,771

           Total Liabilities and
            Stockholders' Equity                $1,166,987        $1,056,603



                                 COVANCE INC.

                    CONSOLIDATED STATEMENTS OF CASH FLOWS

               FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

                            (Dollars in thousands)

                                 (UNAUDITED)

                                                    Six Months Ended June 30

                                                     2006              2005
    Cash flows from operating activities:
      Net income                                   $68,409           $58,414
      Adjustments to reconcile net income
       to net cash provided by
       operating activities:
        Depreciation and amortization               26,884            23,334
        Non-cash compensation expense
         associated with employee benefit
         and stock compensation plans               14,331             6,913
        Deferred income tax provision                 (697)           (2,018)
        Other                                         (713)              185
        Changes in operating assets and
         liabilities, net of businesses
         acquired:
           Accounts receivable                       6,466           (14,942)
           Unbilled services                       (12,426)          (10,859)
           Inventory                                (2,826)            4,484
           Accounts payable                          2,223             3,538
           Accrued liabilities                      (2,691)          (13,973)
           Unearned revenue                         (4,121)          (13,478)
           Income taxes payable                       (386)           18,247
           Other assets and liabilities,
            net                                    (15,658)           (8,129)
    Net cash provided by operating
     activities                                     78,795            51,716

    Cash flows from investing activities:
      Capital expenditures                         (49,335)          (54,892)
      Acquisition of businesses                    (74,323)             (873)
      Other, net                                       586                44
    Net cash used in investing activities         (123,072)          (55,721)

    Cash flows from financing activities:
      Stock issued under employee stock
       purchase and option plans                    27,603            23,980
      Purchase of treasury stock                    (8,701)          (54,963)
    Net cash provided by (used in)
     financing activities                           18,902           (30,983)

    Effect of exchange rate changes on
     cash                                            2,296           (10,210)

    Net change in cash and cash
     equivalents                                   (23,079)          (45,198)

    Cash and cash equivalents, beginning
     of period                                     160,717           177,712

    Cash and cash equivalents, end of
     period                                       $137,638          $132,514