Covance Inc. Q1 2010 Earnings Call Transcript
Covance Inc. (CVD)
Q1 2010 Earnings Call Transcript
April 29, 2010 9:00 am ET
Executives
Paul Surdez – VP, IR
Bill Klitgaard – Corporate SVP and CFO
Joe Herring – Chairman and CEO
Analysts
Ross Muken – Deutsche Bank
John Kreger – William Blair
Greg Bolan – Wells Fargo
Eric Lo – Banc of America/Merrill Lynch
Dave Windley – Jefferies & Company
Eric Coldwell – Robert W. Baird
Todd Van Fleet – First Analysis
Steve Unger – Lazard Capital Markets
Douglas Tsao – Barclays Capital
Andy Schenker – Morgan Stanley
Derik De Bruin – UBS
Tycho Peterson – JP Morgan
Presentation
Operator
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Good day and welcome to the Covance first quarter 2010 investor conference call. This call is being recorded. At this time, for opening remarks, I would like to turn the conference over to the Vice President of Investor Relations, Mr. Paul Surdez. Please go ahead, sir.
Paul Surdez
Thanks, operator.
Good morning, and thank you for joining us for Covance's first quarter 2010 earnings teleconference and webcast. Today Joe Herring, Covance's Chairman and Chief Executive Officer, and Bill Klitgaard, Covance's Chief Financial Officer, will be presenting our first quarter financial results.
Following our opening comments, we will host a Q&A session. In addition to the press release, 19 slides corresponding to the commentary you are about to hear are available on our website at www.covance.com.
Before we begin the commentary, I would like to remind you that statements made during today's conference call and webcast, which are not historical facts, might be considered forward-looking statements. Such statements may include comments regarding future financial results and are subject to a number of risks and uncertainties; certain of which are beyond Covance's control. Actual results could differ materially from such statements due to a variety of facts, including the ones outlined in our SEC filings.
Now I will turn it over to Bill for a review of our financial performance, which begins on page four of the slide show.
Bill
Klitgaard
Thank you, Paul, and good morning, everyone. Net revenue for the first quarter was $482 million, an increase of 9.2% over the first quarter of last year or 6.2% at constant exchange rate. Sequentially, net revenue declined $3 million, but increased $4 million at constant exchange rate. Operating margin was 11% in the first quarter versus 12.7% in the first quarter of 2009.
Net income in the first quarter was $39 million, which was down 2.9% in the first quarter of last year. Earnings per share in the first quarter were $0.60 versus $0.63 in the first quarter of last year. We continued to enjoy the benefit of a lower effective tax rate resulting primarily from a shift in the geographic mix of earnings towards our foreign operations were tax rates are lower. The effective tax rate in the first quarter was 25.2%, and we now expect our 2010 effective tax rate to be in the 25% to 26% range versus our prior expectation of 26.5%.
Please turn to slide five. In the first quarter of 2010, Early Development contributed 43% of our net revenue and Late-Stage 57%. And in the first quarter, 56% of our revenue came from the United States, 14% from Switzerland, 12% from the UK, 6% from countries within the Euro zone, and the remaining 11% from the rest of the world.
Now please turn to page six to discuss segment results. In Early Development, in the first quarter, net revenues grew 6.5% year-on-year to $205 million, and that represented an increase of $2 million sequentially, primarily from growth in clinical pharmacology. Global toxicology revenues were essentially flat from the fourth quarter level. Market conditions for our Early Development services appear to be firming up, and we now expect sequential revenue growth from this point forward.
Just to claim [ph] this, the Early Development revenue rose sequentially $2 million a quarter for the remainder of the year as it did this quarter that would translate into a 5% year-on-year growth rate for the lower end of our current growth expectation. First quarter Early Development operating margins were 11.2% versus 11.3% last quarter and 14.1% in the first quarter of last year. Looking forward, Early Development operating margins, excluding the facility rationalization costs in the second quarter, are expected to expand sequentially throughout the year.
Turning now to Late-Stage Development, net revenues in the first quarter were $277 million, which was up 11.3% over last year. On a sequential basis, revenues were down $5 million in reported dollars, but flat at constant exchange rate. And $11 million decline in Central Labs revenue is the primary reason for this drop. We anticipate Central Labs revenues to retain sequential growth in the second quarter. However, this increase is not expected to offset lower Q2 revenues in clinical development, where we expect a reduced level of revenue due to delays in the commencement of three large clinical trials.
In terms of our full year outlook, we now anticipate year-on-year segment revenue growth in the mid-single digit range in 2010. This compares to our previous expectation of mid-teens revenue growth. Operating margins in Late-Stage Development were 23.9% compared to 22.6% both last quarter and first quarter of last year. Operating margins in the quarter benefited from the efficiencies recognized in a number of projects in clinical development and in Central Labs to a shift in mix to lower price but high margin automated kit.
Looking forward to the next two quarters, Late-Stage operating margin is expected to be approximately 300 basis points below the Q1 level due primarily to the under utilization of headcount and clinical development resulting from a delay in the three large trials just mentioned. For the full year, we now expect operating margins in the 22% range.
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