Covance Reports Second Quarter Revenue of $466M and EPS of $0.66

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PRINCETON, N.J., July 29 /PRNewswire-FirstCall/ -- Covance Inc. (NYSE: CVD) today reported GAAP earnings for its second quarter ended June 30, 2009 of $0.67 per diluted share, inclusive of a $0.01 per share gain related to the sale of its centralized ECG business in 2007. Excluding the gain on sale, earnings were $0.66 per diluted share.

"On a consolidated basis, second quarter net revenues grew 6.7% year-on-year (13.1% excluding the impact of foreign exchange), operating margin expanded sequentially to 12.9%, and EPS of $0.66 exceeded our second quarter expectation," said Joe Herring, Chairman and Chief Executive Officer. "In Early Development, revenues grew 3.8% from the first quarter and operating margins were 13.6%, despite toxicology results declining sequentially as we previously forecasted. Toxicology results are on track for sequential improvement in the third quarter, based upon scheduled backlog. In Late-Stage Development, very strong demand led to accelerated revenue growth of 19.0% in the quarter (26.4% excluding the impact of foreign exchange) and operating margin of 24.6%, a 200 basis point increase above last quarter's record high.

"On the commercial front, adjusted net orders in the second quarter were $516 million, representing an adjusted book-to-bill ratio of 1.11 to 1. On a trailing twelve month basis, our Late-Stage Development adjusted book-to-bill was 1.5 to 1. Consolidated backlog grew 55% year on year to $4.66 billion. The $145 million minimum contract commitment associated with the pending acquisition of Merck's genomics laboratory is included in backlog, but is excluded from adjusted net orders.

"To reflect the weakening of the US dollar and a slightly lower tax rate, we are upwardly adjusting our 2009 revenue growth target to the mid- to upper-single digits and our earnings per share target to a range of $2.60 to $2.80 per share (excluding gains on the sales of our centralized ECG and IVRS service lines and using June 30 exchange rates), versus our previous targets of single-digit revenue growth and earnings of $2.50 to $2.70 per share."

    Consolidated Results


    ($in millions except EPS) 2Q09    2Q08   Change   1H09    1H08    Change
                              ----    ----   ------   ----    ----    ------
    Total Revenues          $489.2   $461.8          $957.7  $895.9
    Less: Reimbursable
     Out-of-Pockets          $23.2    $24.9           $50.4   $46.5
    Net Revenues            $466.0   $436.9     6.7% $907.3  $849.4     6.8%
    Operating Income         $60.0    $67.5  (11.1)% $115.9  $130.2   (10.9)%
     Operating Margin %       12.9%    15.4%           12.8%   15.3%
    Net Income               $43.0    $50.9  (15.5)%  $83.3  $100.0   (16.7)%
    Diluted EPS              $0.67    $0.80  (16.0)%  $1.30   $1.56   (16.7)%
                             -----    -----  ------   -----   -----   ------
    Gain on Sale, net of
     tax                      $0.4     $0.6            $0.4    $2.6
    Net Income Excluding
     Gain on Sale            $42.6    $50.3  (15.3)%  $82.9   $97.4   (14.9)%
    Diluted EPS Excluding
     Gain on Sale            $0.66    $0.79  (15.9)%  $1.29   $1.52   (14.9)%
                             -----    -----  ------   -----   -----   ------

    Operating Segment Results

    Early Development

     ($in millions)         2Q09    2Q08  Change    1H09   1H08    Change
                            ----    ----  ------    ----   ----    ------
    Net Revenues          $199.8  $213.1    (6.3)% $392.3  $415.2    (5.5)%
    Operating Income       $27.1   $54.2   (50.0)%  $54.2  $104.8   (48.2)%
    Margin %                13.6%   25.4%            13.8%   25.2%
                            ----    ----             ----    ----

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 2009 were $199.8 million compared to $213.1 million in the second quarter of 2008 and $192.5 million in the first quarter of 2009. Lower demand in toxicology drove the year-on-year decline in revenue. Sequential growth was driven by a rebound in demand for clinical pharmacology, analytical chemistry, and research products. In the quarter, foreign exchange negatively impacted year-on-year revenue growth by 540 basis points.

Operating income for the second quarter of 2009 declined 50.0% year-over-year to $27.1 million, compared to $54.2 million in the second quarter of last year. Operating margins for the second quarter of 2009 were 13.6% compared to 25.4% in the second quarter of 2008 and 14.1% last quarter. Second quarter operating margins were impacted by a lower level of study activity, costs related to the staffing and validating of the new preclinical drug development facility in Chandler, and severance related to the retirement of a building on the Vienna, Virginia campus. In addition, the company continued to maintain staffing levels above current needs at our five other preclinical campuses to support expected increases in revenue generation in the second half of the year.

    Late-Stage Development

    ($in millions)        2Q09    2Q08  Change    1H09   1H08     Change
                          ----    ----  ------    ----   ----     ------
    Net Revenues        $266.3  $223.8    19.0%  $515.0  $434.2    18.6%
    Operating Income     $65.5   $43.0    52.4%  $121.8   $81.9    48.8%
    Margin %              24.6%   19.2%            23.7%   18.9%
                          ----    ----             ----    ----

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 second quarter of 2009 grew 19.0% to $266.3 million compared to $223.8 million in the second quarter of 2008. Sequentially, revenues grew $17.6 million, or 7.1% from last quarter. The sequential and year-on-year growth was led by the continued exceptional performance of our central laboratory as well as strong performances in our Clinical Development and Commercialization services. Foreign exchange negatively impacted year-on-year revenue growth in the quarter by 740 basis points.

Operating income for the second quarter of 2009 increased 52.4% to $65.5 million compared to $43.0 million in the second quarter of the prior year. Record profitability in central laboratory and clinical development services led to exceptional operating margins of 24.6% for the second quarter of 2009 compared to 19.2% in the second quarter of last year and 22.6% last quarter. Operating margin in Late-Stage Development is expected to moderate closer to first quarter 2009 levels in the back half of the year.

Corporate Information

The Company's backlog at June 30, 2009 grew 54.7% year-over-year to $4.66 billion compared to $3.01 billion at June 30, 2008 and $4.42 billion at March 31, 2009. Foreign exchange positively impacted sequential backlog growth by $85 million. Adjusted net orders (net orders adjusted for dedicated capacity contracts) were $516 million in the second quarter of 2009.

Corporate expenses totaled $32.6 million in the second quarter of 2009 compared to $27.5 million last quarter and $29.8 million in the second quarter of last year. We continue to make investments that will improve our ability to provide strategic partnering and integrated services as well as investments in infrastructure to enhance our ability to manage future growth.

Cash and cash equivalents at June 30, 2009 were $204 million compared to $190 million at March 31, 2009 and $196 million at June 30, 2008. At June 30, 2009, short-term debt totaled $58 million, a reduction of $22 million from last quarter.

Free cash flow (defined as operating cash flow less capital expenditures) for the second quarter of 2009 was $19 million, consisting of operating cash flow of $49 million less capital expenditures of $30 million. Free cash flow year to date was negative $12 million, consisting of operating cash flow of $59 million less capital expenditures of $71 million. In 2009, we now expect free cash flow to be approximately $85 million, consisting of operating cash flow of approximately $255 million less capital expenditures of approximately $170 million. The free cash flow target for 2009 assumes net Days Sales Outstanding (DSO) at 40 days.

Net Days Sales Outstanding (DSO) were 41 days at June 30, 2009 compared to 39 days at both March 31, 2009 and June 30, 2008.

The effective tax rate in the second quarter was 27.0%, down from the 29.0% rate last quarter, due primarily to a shift in the geographic mix of our earnings. We expect that the effective tax rate will be in the 28.0% range on a prospective basis.

The Company's investor conference call will be webcast on July 30 at 9:00 am ET. 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 $1.7 billion, global operations in more than 25 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 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 closings of the acquisition of Merck's genomics laboratory and the divestiture of the company's IVRS service offering, 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.

                              CONSOLIDATED INCOME STATEMENTS

                FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008

                  (Dollars in thousands, except per share data)

                                       (UNAUDITED)

                          Three Months Ended June 30 Six Months Ended June 30
                          -------------------------- ------------------------
                              2009         2008         2009         2008
                              ----         ----         ----         ----

    Net revenues           $466,049     $436,912     $907,285     $849,344
    Reimbursable
     out-of-pockets          23,226       24,911       50,447       46,516
                             ------       ------       ------       ------
        Total revenues      489,275      461,823      957,732      895,860
                            -------      -------      -------      -------

    Costs and expenses:
      Cost of revenue       313,210      286,884      614,935      560,214
      Reimbursable
       out-of-pocket
       expenses              23,226       24,911       50,447       46,516
      Selling, general and
       administrative        69,569       65,242      133,523      124,259
      Depreciation
       and amortization      23,273       17,331       42,887       34,679
                             ------       ------       ------       ------
        Total costs
         and expenses       429,278      394,368      841,792      765,668
                            -------      -------      -------      -------

    Income from operations   59,997       67,455      115,940      130,192

    Other expense (income), net:
      Interest expense
       (income), net            160       (1,501)          77       (4,097)
      Foreign exchange
       transaction
       loss (gain), net       1,241         (481)         795       (1,546)
      Gain on sale of
       business                (655)        (949)        (655)      (3,927)
                               ----         ----         ----       ------
        Other expense
         (income), net          746(a)    (2,931)(b)      217(a)    (9,570)(c)
                                ---       ------          ---       ------

    Income before
     taxes and equity
     investee earnings       59,251(a)    70,386(b)   115,723(a)   139,762(c)

    Taxes on income          16,051(a)    20,330(b)    32,400(a)    41,053(c)

    Equity investee
     (loss) earnings           (210)         817          (38)       1,266
                            -------      -------      -------       -------
    Net income              $42,990(a)   $50,873(b)   $83,285(a)   $99,975(c)
                            =======       =======     =======       =======

    Basic earnings per share  $0.67(a)     $0.81(b)     $1.31(a)     $1.59(c)

    Weighted average shares
     outstanding - basic 63,823,792   62,825,444   63,705,105   63,069,018

    Diluted earnings
     per share                $0.67(a)     $0.80(b)     $1.30(a)     $1.56(c)

    Weighted average
     shares outstanding
     - diluted           64,193,664   63,756,789   64,024,143   64,058,649

    (a) Includes the impact of a $655 gain on sale of Cardiac Safety Services
        ($426 net of tax) during the second quarter of 2009.
    (b) Includes the impact of a $949 gain on sale of Cardiac Safety Services
        ($617 net of tax) during the second quarter of 2008.
    (c) Includes the impact of a $3,927 gain on sale of Cardiac Safety
        Services ($2,553 net of tax) during the first six months of 2008.



    Excluding the impact of the gain on sale of business:
    -----------------------------------------------------

    Income before taxes and
     equity investee
     earnings               $58,596      $69,437     $115,068     $135,835

    Taxes on income         $15,822      $19,998      $32,171      $39,679

    Net income              $42,564      $50,256      $82,859      $97,422

    Basic earnings per share  $0.67        $0.80        $1.30        $1.54

    Diluted earnings per
     share                    $0.66        $0.79        $1.29        $1.52



                                 COVANCE INC.

                          CONSOLIDATED BALANCE SHEETS

                      JUNE 30, 2009 and DECEMBER 31, 2008

                            (Dollars in thousands)


                                                   June 30    December 31
                                                        2009         2008
                                                        ----         ----
                                                 (UNAUDITED)
    ASSETS
    Current Assets:
      Cash & cash equivalents                       $204,351     $221,334
      Accounts receivable, net                       281,362      228,951
      Unbilled services                              105,417      112,719
      Inventory                                       75,962       68,206
      Deferred income taxes                           16,767       15,029
      Prepaid expenses and other current assets      102,735       91,451
                                                     -------       ------
          Total Current Assets                       786,594      737,690

    Property and equipment, net                      907,185      860,957
    Goodwill, net                                    123,663      105,486
    Other assets                                      49,654       48,955
                                                      ------       ------
          Total Assets                            $1,867,096   $1,753,088
                                                  ==========   ==========

    LIABILITIES and STOCKHOLDERS'
     EQUITY
    Current Liabilities:
      Accounts payable                               $31,940      $41,887
      Accrued payroll and benefits                    80,664      104,607
      Accrued expenses and other current
       liabilities                                    79,389       86,521
      Unearned revenue                               174,552      162,556
      Short-term debt                                 58,000       50,000
      Income taxes payable                            29,693       14,224
                                                      ------       ------
          Total Current Liabilities                  454,238      459,795

    Deferred income taxes                             52,121       51,385
    Other liabilities                                 50,746       47,059
                                                      ------       ------
          Total Liabilities                          557,105      558,239
                                                     -------      -------

    Stockholders' Equity:
      Common stock                                       761          754
      Paid-in capital                                570,243      551,598
      Retained earnings                            1,212,854    1,129,569
      Accumulated other comprehensive income
       (loss)                                          1,546      (13,975)
      Treasury stock                                (475,413)    (473,097)
                                                    --------     --------
          Total Stockholders' Equity               1,309,991    1,194,849
                                                   ---------    ---------
          Total Liabilities and Stockholders'
           Equity                                 $1,867,096   $1,753,088
                                                  ==========   ==========



                              COVANCE INC.

                  CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008

                         (Dollars in thousands)

                               (UNAUDITED)

                                                          Six Months Ended
                                                               June 30
                                                          ----------------

                                                             2009      2008
                                                             ----      ----
    Cash flows from operating activities:
      Net income                                          $83,285   $99,975
      Adjustments to reconcile net income to net cash
       provided by operating activities:
        Depreciation and amortization                      42,887    34,679
        Non-cash compensation expense associated With
         employee benefit and stock compensation plans     13,238    12,540
        Deferred income tax benefit                        (1,387)   (2,277)
        Gain on sale of business                             (655)   (3,927)
        Loss on sale of property and equipment                264       253
        Equity investee loss (earnings)                        38    (1,266)
        Changes in operating assets and liabilities,
         net of business acquired:
           Accounts receivable                            (51,478)   (6,775)
           Unbilled services                                8,468   (17,914)
           Inventory                                       (7,756)   (6,544)
           Accounts payable                               (10,040)   (5,512)
           Accrued liabilities                            (32,000)  (12,331)
           Unearned revenue                                11,111      (942)
           Income taxes payable                            15,694     2,565
           Other assets and liabilities, net              (13,033)   (6,676)
                                                          -------    ------
    Net cash provided by operating activities              58,636    85,848
                                                           ------    ------

    Cash flows from investing activities:
      Capital expenditures                                (70,911) (143,163)
      Acquisition of business, net of cash acquired       (18,620)        -
      Proceeds from sale of business                          655     3,927
      Other, net                                               15        96
                                                               --        --
    Net cash used in investing activities                 (88,861) (139,140)
                                                          -------  --------

    Cash flows from financing activities:
      Net borrowings under revolving credit facility        8,000    35,000
      Payment of debt assumed upon acquisition of
       business                                            (5,431)        -
      Stock issued under employee stock purchase and
       option plans                                         5,189    14,691
      Purchase of treasury stock                           (2,316) (130,427)
                                                           ------  --------
    Net cash provided by (used in) financing activities     5,442   (80,736)
                                                            -----   -------
    Effect of exchange rate changes on cash                 7,800    10,198
                                                            -----    ------
    Net change in cash and cash equivalents               (16,983) (123,830)

    Cash and cash equivalents, beginning of period        221,334   319,485
                                                          -------   -------

    Cash and cash equivalents, end of period             $204,351  $195,655
                                                         ========  ========