Covance
Covance Reports Record Revenue and Earnings

- $432 Million in Net Orders Drive Backlog Growth of 31.8% -

- 15.6% Net Revenue Growth; EPS Growth of 23.6% -

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PRINCETON, N.J., Oct. 25 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported earnings for its third quarter ended September 30, 2006 of $0.59 per diluted share, including a $0.04 per diluted share gain from the favorable resolution of several income tax matters during the third quarter. Excluding the income tax gain, earnings were $0.55 per diluted share, representing year-over-year EPS growth of 23.6%, with both periods including stock-based compensation expense.

"In the third quarter, Covance achieved strong results, reaching new highs in EPS, net revenues, operating income, free cash flow, and backlog. We are particularly pleased to report an increase in net revenue growth to 15.6%, a sequential 40 basis point increase in operating margin, and robust net orders of $432 million," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, net revenue growth accelerated to 19.1% and operating margins were a healthy 24.1%. In Late-Stage Development, revenue grew 12.4% and operating margins increased 160 basis points sequentially to 17.5%. On the commercial front, net orders of $432 million, which represents a book-to- bill of 1.27:1, drove backlog up 31.8% year-on-year to $2.07 billion. Robust net orders in our central laboratory and clinical development service offerings drove our Late-Stage Development book-to-bill ratio in excess of 1.5:1.

"We continue to deliver service solutions that help our clients accelerate the development of new products. An example is our Program Management capability, which provides integrated IND-enabling services. We currently manage 128 molecules for 72 different clients, representing growth of approximately 50% over this time last year. We also see increasing demand for integrated service solutions across Late-Stage Development where Covance is well-positioned to deliver differentiated and valuable services for our clients.

"Looking forward to 2007, based upon our strong performance again this quarter and our expanding backlog, we are targeting revenue growth in the low- to mid-teens range and earnings per share growth of 20% over our 2006 target of at least $2.19 per diluted share (excluding the third quarter income tax gain)."

    Consolidated Results

    Three Months Ended Sept. 30
     ($ in millions
     except EPS)              3Q06       3Q05        3Q05      3Q05   Change
                                     as reported   SFAS 123  Pro Forma
                                                    Expense
    Net Revenues             $341.5    $295.4                $295.4   15.6%
      Reimbursable
       Out-of-Pockets         $14.7     $11.7                 $11.7
    Total Revenues           $356.2    $307.1                $307.1

    Costs and Expenses       $292.4    $251.3        $4.2    $255.5   14.4%
      Reimbursable
       Out-of-Pockets         $14.7     $11.7                 $11.7
    Total Costs and
     Expenses                $307.1    $263.0        $4.2    $267.2
    Operating Income          $49.0     $44.1       ($4.2)    $39.9   22.7%
      Operating Margin %      14.4%     14.9%       (1.4%)    13.5%
    Net Income                $38.3     $31.2       ($2.8)    $28.4   34.8%
    Diluted EPS               $0.59     $0.49      ($0.04)    $0.45   32.2%

      Income Tax Gain          $2.5         -           -         -
    Net Income excluding
     tax gain                 $35.8     $31.2       ($2.8)    $28.4   26.1%
    Diluted EPS excluding
     tax gain                 $0.55     $0.49      ($0.04)    $0.45   23.6%


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

    Net Revenues             $997.2    $870.6                $870.6   14.5%
      Reimbursable
       Out-of-Pockets         $49.8     $36.7                 $36.7
    Total Revenues         $1,047.0    $907.3                $907.3

    Costs and Expenses       $855.3    $743.7       $13.6    $757.3   12.9%
      Reimbursable
       Out-of-Pockets         $49.8     $36.7                 $36.7
    Total Costs and
     Expenses                $905.1    $780.4       $13.6    $794.0
    Operating Income         $141.9    $126.9      ($13.6)  $113.3   25.2%
      Operating Margin %      14.2%     14.6%       (1.6%)   13.0%
    Net Income               $106.7     $89.6       ($9.2)   $80.4   32.7%
    Diluted EPS               $1.65     $1.41      ($0.14)   $1.27   30.7%

      Income Tax Gain          $2.5         -           -         -       -
    Net Income excluding
     tax gain                $104.2     $89.6       ($9.2)   $80.4   29.6%
    Diluted EPS excluding
     tax gain                 $1.61     $1.41      ($0.14)   $1.27   26.7%


    Operating Segment Results

    Early Development

    ($ in millions)      3Q06     3Q05  Change  2006 YTD  2005 YTD  Change
    Net Revenues        $167.4  $140.5   19.1%   $465.6   $411.2   13.2%
    Operating Income     $40.3   $36.6   10.1%   $115.0   $102.3   12.3%
    Margin %             24.1%   26.1%            24.7%    24.9%

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 2006 grew 19.1% year- on-year to $167.4 million, compared to $140.5 million in the third quarter of 2005. Net revenue growth in the quarter was driven by exceptionally strong performances in our global toxicology and chemistry services. Year-to-date, net revenues increased 13.2% to $465.6 million compared to $411.2 million in the first nine months of the prior year.

Operating income for the third quarter of 2006 increased 10.1% to $40.3 million compared to $36.6 million for the third quarter of last year. Operating margins for the third quarter of 2006 were 24.1% versus 26.1% in the third quarter of the prior year. Our North American toxicology and chemistry had outstanding operating performance, fueled by our new toxicology capacity and improving results in bioanalytical chemistry. The year-on-year reduction in operating margins in the third quarter is almost entirely attributable to dilution resulting from the acquisition of Radiant Research. Year-to-date, operating margins were 24.7% compared to 24.9% in the prior year.

    Late-Stage Development

    ($ in millions)       3Q06    3Q05  Change  2006 YTD 2005 YTD Change
    Net Revenues        $174.1  $154.9   12.4%   $531.7   $459.4   15.7%
    Operating Income     $30.4   $24.3   25.2%    $90.9   $ 76.8   18.4%
    Margin %             17.5%   15.7%            17.1%    16.7%

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 third quarter of 2006 grew 12.4% to $174.1 million compared to $154.9 million in the third quarter of 2005. Central laboratory and clinical development services were the primary drivers of this quarter's growth. Year-to-date, net revenues grew 15.7% to $531.7 million compared to $459.4 million in the prior year.

Operating income for the third quarter of 2006 increased 25.2% to $30.4 million compared to $24.3 million in the third quarter of the prior year. Operating margins for the third quarter of 2006 expanded to 17.5% versus 15.7% in the third quarter of 2005. Clinical development and central laboratory services were the primary drivers of the year-on-year operating margin expansion. Year-to-date, operating margins were 17.1% compared to 16.7% in the prior year.

Corporate Information

The Company's backlog at September 30, 2006 grew 31.8% year-over-year to $2.07 billion compared to $1.57 billion at September 30, 2005. Net orders in the third quarter of 2006 were $432 million, up 17.5% over the $368 million reported in the third quarter of 2005.

Corporate expenses, which totaled $21.7 million in the third 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 September 30, 2006 was a record $210.1 million compared to $137.6 million at June 30, 2006. Capital expenditures for the third quarter were $22.4 million and totaled $71.8 million for the first nine months of 2006. Free cash flow (cash from operations less capital spending) was $64.1 million in the quarter and $93.6 million year to date. We expect full-year 2006 capital spending to be in the range of $130 to $140 million and 2006 free cash flow to be approximately $95 million.

Net Days Sales Outstanding (DSO) decreased to 55 days at September 30, 2006 compared to 57 days at June 30, 2006 and 63 days at September 30, 2005.

The Company's investor conference call will be webcast on October 26 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 more than 8,000 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 SFAS 123 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 SFAS 123 in its SEC filings. Beginning January 1, 2006, Covance adopted SFAS 123(R). Under SFAS 123(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 SFAS 123(R) are comparable to the 2005 "pro forma" amounts as previously disclosed under SFAS 123.



                                   COVANCE INC.

                          CONSOLIDATED INCOME STATEMENTS

         FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

                  (Dollars in thousands, except per share data)

                                   (UNAUDITED)

                                  Three Months Ended      Nine Months Ended
                                     September 30            September 30
                                 2006 (1)    2005 (2)    2006 (1)    2005 (2)

    Net revenues                 $341,478    $295,368    $997,227    $870,596
    Reimbursable out-of-
     pockets                       14,681      11,759      49,744      36,726
         Total revenues           356,159     307,127   1,046,971     907,322

    Costs and expenses:
      Cost of revenue             223,662     194,823     660,045     577,309
      Reimbursed out-of-pocket
       expenses                    14,681      11,759      49,744      36,726
      Selling, general and
       administrative              54,196      44,673     153,794     131,299
      Depreciation and
       amortization                14,584      11,758      41,468      35,092
            Total costs and
             expenses             307,123     263,013     905,051     780,426

    Income from operations         49,036      44,114     141,920     126,896

    Other (income) expense,
     net:
      Interest income, net         (1,693)       (723)     (5,188)     (2,710)
      Foreign exchange
       transaction (gain)
       loss,  net                     (95)         (2)        (28)        949
            Other income, net      (1,788)       (725)     (5,216)     (1,761)

    Income before taxes and
     equity investee earnings      50,824      44,839     147,136     128,657

    Taxes on income                12,726      13,685      41,389      39,444

    Equity investee earnings          178          78         938         433

    Net income                    $38,276     $31,232    $106,685     $89,646


    Basic earnings per share        $0.60       $0.50       $1.68       $1.43

    Weighted average shares
     outstanding - basic       63,827,555  62,498,313  63,542,002  62,586,651

    Diluted earnings per share      $0.59       $0.49       $1.65       $1.41

    Weighted average shares
     outstanding - diluted     64,965,380  63,696,805  64,758,456  63,757,590

    -------------------------------------------------------------------------

    Excluding the impact of
     the $2.5 million income
     tax gain:

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

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

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

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

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

    (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

                    SEPTEMBER 30, 2006 and DECEMBER 31, 2005

                             (Dollars in thousands)


                                                September 30      December 31
                                                    2006              2005
                                                (UNAUDITED)
    ASSETS
    Current Assets:
       Cash & cash equivalents                    $210,080          $160,717
       Accounts receivable, net                    212,802           206,098
       Unbilled services                            95,661            88,297
       Inventory                                    44,794            40,293
       Deferred income taxes                         5,468             2,062
       Prepaid expenses and other current
        assets                                      62,278            49,243
           Total Current Assets                    631,083           546,710

    Property and equipment, net                    455,753           410,665
    Goodwill, net                                  119,730            61,262
    Other assets                                    47,463            37,966
           Total Assets                         $1,254,029        $1,056,603

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
       Accounts payable                            $27,824           $26,975
       Accrued payroll and benefits                 75,270            64,226
       Accrued expenses and other current
        liabilities                                 50,693            48,298
       Unearned revenue                            100,991            96,987
       Income taxes payable                         19,573            16,242
           Total Current Liabilities               274,351           252,728

    Deferred income taxes                           41,696            45,545
    Other liabilities                               31,145            26,559
           Total Liabilities                       347,192           324,832

    Stockholders' Equity:
       Common stock                                    731               718
       Paid-in capital                             412,499           350,678
       Retained earnings                           719,496           612,811
       Cumulative translation adjustment            28,619            13,367
       Treasury stock                             (254,508)         (245,803)
           Total Stockholders' Equity              906,837           731,771
           Total Liabilities and
            Stockholders' Equity                $1,254,029        $1,056,603



                                  COVANCE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

                             (Dollars in thousands)

                                   (UNAUDITED)

                                                Nine Months Ended September 30

                                                    2006              2005
    Cash flows from operating activities:
      Net income                                  $106,685           $89,646
      Adjustments to reconcile net income
       to net cash provided by
       operating activities:
        Depreciation and amortization               41,468            35,092
        Non-cash compensation expense
         associated with employee benefit
         and stock compensation plans               21,990            10,257
        Deferred income tax (benefit)
         provision                                    (658)           (2,349)
        Other                                       (1,125)              116
        Changes in operating assets and
         liabilities, net of businesses acquired:
           Accounts receivable                        (998)          (24,042)
           Unbilled services                        (7,364)          (17,210)
           Inventory                                (4,087)             (964)
           Accounts payable                            725            (1,937)
           Accrued liabilities                      10,003            (1,855)
           Unearned revenue                          1,978            (5,956)
           Income taxes payable                      8,274            23,234
           Other assets and liabilities, net       (11,558)           (4,495)
    Net cash provided by operating
     activities                                    165,333            99,537

    Cash flows from investing activities:
      Capital expenditures                         (71,755)          (94,338)
      Acquisition of businesses                    (74,561)           (6,627)
      Other, net                                       699               115
    Net cash used in investing activities         (145,617)         (100,850)

    Cash flows from financing activities:
      Stock issued under employee stock
       purchase and option plans                    34,901            29,675
      Purchase of treasury stock                    (8,705)          (55,213)
    Net cash provided by (used in)
     financing activities                           26,196           (25,538)

    Effect of exchange rate changes on
     cash                                            3,451           (10,461)
    Net change in cash and cash
     equivalents                                    49,363           (37,312)

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

    Cash and cash equivalents, end of
     period                                       $210,080          $140,400