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Covance Reports Record EPS, Revenue, And Backlog
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OM% at 12.9%; Cash Balance Grows $61M in Q4; Backlog Grows $44M Sequentially
2004 Earnings Target Raised to at least $1.43 Per Share


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Princeton, New Jersey, January 26, 2004 — Covance Inc. ( NYSE: CVD ) today reported earnings for its fourth quarter ended December 31, 2003 of $0.32/diluted share and full-year earnings of $1.21/diluted share, 30% growth over full-year 2002.

"Covance's strong and balanced performance led to record levels of earnings, revenue, backlog, and free cash flow," said Chris Kuebler , Covance's Chairman and CEO. "This quarter's results were led by Early Development, which recorded its second straight quarter of operating margins exceeding 20%. Top-line growth in the segment was 11.5%, as strong demand was experienced across the segment's service offerings. In Late-Stage Development, operating margins increased on a sequential basis to 15.3%. Revenue in the quarter was down slightly versus last year as a result of below target net order generation in the first half of 2003. However, Late-Stage Development orders, led by a strong performance in central laboratories, grew significantly both sequentially and year-over-year. Cash flows in the quarter were robust as our cash balances grew by $61 million to a record $172 million. The $44 million sequential growth in backlog leads us to raise our 2004 earnings target from at least $1.41 per share to at least $1.43 per share."

"The focused efforts of our expanded sales team helped lift proposal volumes and orders for the third consecutive quarter, and fourth quarter net orders set an all-time record. Strong performance on client projects also contributed to our backlog growth, as we continued to see an increase in repeat business with key clients," said Joe Herring, Covance's President and COO. "Our focus on operational excellence continued to deliver productivity gains across the company for the second year in a row, as evidenced by an increase in our revenue per employee, which was up 10% in 2003, and operating margin per employee, which was up 27%. We expect process efficiencies to continue to drive increased operating margins in 2004 as programs, such as Six Sigma, resource management, laboratory automation, and the outsourcing of our information technology infrastructure to IBM, are fully implemented."

Consolidated Results


($ in millions except EPS) 4Q03 4Q02 Change FY 2003 FY 2002* Change
Net Revenues $241.1 $234.3 2.9% $940.3 $883.1 6.5%
  Reimbursable Out-of-Pockets $7.9 $11.4   $33.9 $41.6  
Total Revenues $249.0 $245.7   $974.2 $924.7  
Costs and Expenses $210.1 $206.1 1.9% $823.7 $788.4 4.5%
  Reimbursable Out-of-Pockets $7.9 $11.4   $33.9 $41.6  
  Total Costs and Expenses $218.0 $217.5   $857.6 $830.0  
Operating Income $31.0 $28.2 10.2% $116.6 $94.7 23.1%
Operating Margin % 12.9% 12.0%   12.4% 10.7%  
Net Income $20.5 $17.0 20.2% $76.1 $57.3 32.9%
Diluted EPS $0.32 $0.27 18.5% $1.21 $0.93 30.1%


* 2002 net income and diluted EPS amounts have been reduced to exclude the $6.5 million ($0.11/diluted share) favorable income tax reserve reversal reported during the third quarter of 2002.

Net revenues for the fourth quarter of 2003 increased to $241.1 million compared to $234.3 million in the fourth quarter of 2002. Full year 2003 net revenues increased 6.5% to $940.3 million compared to $883.1 million in the prior year.

Costs and expenses for the fourth quarter of 2003 increased to $210.1 million compared to $206.1 million in the fourth quarter of 2002. Full year 2003 costs and expenses increased 4.5% to $823.7 million compared to $788.4 million in the prior year.

Consolidated operating income for the fourth quarter of 2003 increased to $31.0 million compared to $28.2 million in the fourth quarter of 2002. Operating margin for the fourth quarter of 2003 was 12.9% compared to 12.0% for the fourth quarter of last year. Full year 2003 operating income increased 23.1% to $116.6 million compared to $94.7 million in the prior year. Full year operating margin increased 170 basis points to 12.4% in 2003.

Net income for the fourth quarter of 2003 increased 20.2% to $20.5 million or $0.32/diluted share compared to $17.0 million or $0.27/diluted share for the fourth quarter of last year. Full year 2003 net income increased 32.9% to $76.1 million or $1.21/diluted share compared to $0.93/diluted share for the same period in 2002.


Operating Segment Results
Early Development
($in millions) 4Q03 4Q02 Change FY 2003 FY 2002 Change
Net Revenues $108.1 $97.0 11.5% $411.4 $367.5 11.9%
Operating Income $22.0 $17.4 26.2% $83.3 $66.7 24.9%
Margin % 20.3% 18.0%   20.3% 18.1%  


The Company's Early Development segment includes preclinical toxicology, analytical chemistry, and Phase I clinical trial services. Early Development net revenues for the fourth quarter of 2003 grew 11.5% to $108.1 million compared to $97.0 million in the fourth quarter of 2002. Top line growth was driven by strong performance in our North American and European toxicology, chemistry, and bioanalytical services. For the full year 2003, net revenues grew 11.9% to $411.4 million compared to $367.5 million in the prior year.

Operating income for the fourth quarter of 2003 increased 26.2% to $22.0 million compared to $17.4 million for the fourth quarter of last year. Operating margin for the fourth quarter of 2003 was 20.3% versus 18.0% in the fourth quarter of the prior year. Despite the impact of relocating our North American Phase I clinic during the quarter, operating margins exceeded 20% for the second consecutive quarter. Operating margin improvement was broad-based, including strong profitability in our North American and European toxicology, chemistry, and bioanalytical services. Full year operating margins were 20.3% compared to 18.1% in the prior year. Early Development's full-year operating margins are expected to continue to increase in 2004.


Late-Stage Development
($in millions) 4Q03 4Q02 Change FY 2003 FY 2002 Change
Net Revenues $133.1 $137.4 -3.1% $528.9 $515.5 2.6%
Operating Income $20.3 $24.2 -16.0% $79.2 $73.0 8.6%
Margin % 15.3% 17.6%   15.0% 14.2%  

The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, commercialization services (Phase IV studies and health economic and outcomes services), and central diagnostic services. Late-Stage Development net revenues for the fourth quarter of 2003 were $133.1 million compared to $137.4 million in the fourth quarter of 2002. Full year revenues were $528.9 million compared to $515.5 million in the prior year. Strong improvement in central laboratories net order generation and a more encouraging sales environment were experienced during the quarter. Revenue growth in the near term is expected to continue to be impacted by low central laboratory net order generation experienced in the first half of 2003. Continued strong order flows should increase top line growth in the second half of 2004.

Operating income for the fourth quarter of 2003 was $20.3 million compared to $24.2 million in the fourth quarter of the prior year. For the fourth quarter of 2003, operating margin was 15.3%, versus 17.6% for the fourth quarter last year and 14.8% reported last quarter. The sequential increase in profitability is attributable to improved margins in clinical development, central laboratory, and central diagnostic services. Full year operating margins grew to 15.0% from 14.2% in the prior year. The year-over-year improvement was driven by increased profitability in clinical development and central laboratories. In 2004, full year operating margins are expected to continue to increase.

Corporate Information

The Company's backlog increased to a record $1,134 million at December 31, 2003 compared to $1,090 million at September 30, 2003 and $1,121 million at December 31, 2002. Central laboratories was the strongest contributor to the $44 million sequential increase in backlog.

The Company reported an increase of $60.7 million in cash and cash equivalents in the quarter to a record $171.6 million at December 31, 2003 from $110.9 million at September 30, 2003 and continues to have no debt outstanding.

For the year, operating cash flows were a record at $140.2 million and capital spending was $62.6 million, resulting in free cash flow (cash from operations less capital spending) of $77.6 million. In 2004, we expect capital spending to be in the range of $60 million to $70 million and free cash flow to be in the range of $85 million to $95 million.

Net Days Sales Outstanding (DSO) improved to 45 days at December 31, 2003 from 49 days at September 30, 2003.

Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with 2003 net revenues of $940 million, global operations in 18 countries, and approximately 6,500 employees worldwide. Much more informtaion about Covance can be found throughout the site, including our products and services, other recent press releases , and SEC filings .


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 profitability of its clinical development services and to increase order volume in central laboratory and commercialization services, continued growth in demand for bioanalytical services and Covance's ability to provide these services on a large scale basis, 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.

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