Q2 2012 Earnings Call
July 26, 2012 9:00 am ET
Alison Cornell - Chief Financial Officer and Corporate Vice President
Joseph L. Herring - Chairman and Chief Executive Officer
William E. Klitgaard - Chief Information Officer, Corporate Senior Vice President and Treasurer
John Kreger - William Blair & Company L.L.C., Research Division
Timothy C. Evans - Wells Fargo Securities, LLC, Research Division
Stephan Stewart - Goldman Sachs Group Inc., Research Division
Tycho W. Peterson - JP Morgan Chase & Co, Research Division
Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division
Ross Muken - ISI Group Inc., Research Division
Andrew Schenker - Morgan Stanley, Research Division
Garen Sarafian - Citigroup Inc, Research Division
David H. Windley - Jefferies & Company, Inc., Research Division
Todd Van Fleet - First Analysis Securities Corporation, Research Division
Stephen S. Unger - Lazard Capital Markets LLC, Research Division
Lauren Migliore - Morningstar Inc., Research Division
Douglas D. Tsao - Barclays Capital, Research Division
Good day, ladies and gentlemen, and welcome to the Covance Second Quarter 2012 Investor Conference Call. This call is being recorded.
At this time, for opening remarks and introductions, I'd like to turn the call over to the Vice President of Investor Relations, Mr. Paul Surdez.
Please go ahead, sir.
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Good morning, and thank for joining us for Covance's second quarter 2012 earnings teleconference and webcast. Today, Joe Herring, Covance's Chairman and Chief Executive Officer; and Alison Cornell, Covance's Chief Financial Officer, will be presenting our second quarter financial results. Following their opening comments, we will host a Q&A session.
In addition, the press release, 20 slides corresponding to our prepared comments are available on our website at www.covance.com.
Before we begin the discussion, 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.
Certain of the financial measures we will discuss on this call are non-GAAP measures, which exclude the effects of events we consider to be outside of our normal operations. We believe that providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. For a reconciliation of GAAP to pro forma results, please refer to the supplemental schedules included in our press release issued last night.
Now, I will turn it over to Alison for a review our financial performance, which begins on Page 4 of the slideshow.
Thank you, Paul, and good morning, everyone. As all of you know, I was named CFO of Covance in early May. I joined Covance back in 2004 after a 19-year career at AT&T and have worked very closely with Joe, Bill and our operational teams across the company over the course of my tenure here.
I'm very excited to be in this role at a time when I believe there are significant opportunities ahead of us. Since my appointment, I've met with a number of our shareholders and covering analysts and look forward to meeting many more of you in the coming months.
Now let's get to the detailed results. First, let me begin by talking about the special items included in our GAAP results that we have excluded in arriving at our pro forma results this quarter. First, we've excluded revenue of $4.3 million and operating losses up $3.8 million from 3 facilities we began closing. One is our Chandler, Arizona preclinical facility, which we announced during our first quarter earnings call; two is our Phase I clinic in Honolulu, Hawaii; and three is our Phase I clinic in Basel, Switzerland pending completion of customary employee consultations.
The second special item is a $9.7 million in costs associated with the restructuring action.
The third special item is the above-the-line asset impairment charges totaling $38.7 million; $17.9 million, which relates to the write-off of goodwill associated with our Basel clinic and $20.8 million, which relates to the write-off of excess preclinical inventory resulting from a reassessment of toxicology demand in light of current and expected future market conditions.
Finally, we have written off the remaining $7.4 million book value of our investment in a toxicology research product supply company.
My commentary, which follows will focus on our pro forma results, which exclude the impact of these items. You may find the GAAP to pro forma reconciliation is in the release we issued last night and the presentation we are reviewing today.
Now for the results. Pro forma net revenue to the second quarter were $538 million, an increase of 3.9% over the second quarter of last year. On a constant exchange rate basis, year-on-year growth was 6.1%. Sequentially, the stronger U.S. dollar resulted in a $4.5 million foreign exchange translation headwind. Pro forma operating income in the second quarter was $48.3 million, resulting in a pro forma operating margin of 9%. This is a 30 basis point sequential increase although down 130 basis points year-on-year. Pro forma diluted earnings per share was $0.65, up $0.05 from last quarter and down $0.01 year-on-year. The sequential increase in earnings per share was primarily driven by the full quarter benefit of our share repurchase program. The pro forma effective tax rate for the quarter was 21.5%. We expect a similar effective tax rate as we look ahead to the rest of 2012.
Please turn to Slide 5 of the presentation. In the second quarter, Early Development contributed 40% of net revenues and Late-Stage contributed 60%. 52% of our revenue came from the U.S., 14% from Switzerland, 12% from the U.K., 9% from countries in the eurozone and the remaining 13% from the rest of the world.
Now to Slide 6 and 7 where I'll discuss the segment results for the quarter. In Early Development, pro forma net revenue was $215 million. This represents a $3.7 million sequential increase on a rebound in discovery support and clinical pharmacology, which more than offset a decline in research products and toxicology. Continuing operations in toxicology, it is when excluding Chandler in both periods, was up sequentially. This is a 7.1% year-on-year reduction, driven by a decline in revenues in toxicology, research products and foreign exchange headwinds as well as the exclusion of revenues from the 3 facilities for which closure activities have commenced in 2012.