Covance Q3 2010 Earnings Call Transcript

Covance (CVD)

Q3 2010 Earnings Call

November 04, 2010 9:00 am ET

Executives

Joseph Herring - Chairman and Chief Executive Officer

William Klitgaard - Chief Financial Officer, Principal Accounting Officer, Corporate Senior Vice President and Treasurer

Paul Surdez - VP of IR

Analysts

Rafael Tejada

Robert Jones - UBS

Ross Muken - Deutsche Bank AG

Ricky Goldwasser - Morgan Stanley

Douglas Tsao - Barclays Capital

Stephen Unger - Lazard Capital Markets LLC

Tycho Peterson - JP Morgan Chase & Co

Eric Coldwell - Robert W. Baird & Co. Incorporated

John Kreger - William Blair & Company L.L.C.

David Windley - Jefferies & Company, Inc.

Greg Bolan - Wells Fargo Securities, LLC

Todd Van Fleet - First Analysis Securities Corporation

Presentation

Operator

Compare to:
Previous Statements by CVD
» Covance Inc. Q2 2010 Earnings Call Transcript
» Covance Inc. Q1 2010 Earnings Call Transcript
» Covance Inc. Q4 2009 Earnings Call Transcript

Good day, everyone, and welcome to the Covance Third Quarter 2010 Investor Earnings Call. [Operator Instructions] Now for opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Mr. Paul Surdez. Please go ahead, sir.

Paul Surdez

Good morning, and thank you for joining us for Covance's third 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 third quarter financial results. Following our opening comments, we will host the Q&A session.

In addition to the press release, 18 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 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 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. Now I will turn it over to Bill for a review of our financial performance which begins on Page 4 of the slide show.

William Klitgaard

Thank you, Paul, and good morning everyone. Consolidated results in the third quarter met our expectations, with revenues of $477 million and earnings per share of $0.50 excluding special items, which I'll talk about in a moment. Adjusted net orders were a solid 1.15:1. Cash generation in the third quarter was very strong with free cash flow of $75 million and an increase in our cash balances by roughly $100 million since June 30.

So with those headlines aside, let me turn to special items in Q3. First the weakening of demand for toxicology services in the third quarter caused us to reassess our capacity. This was opened in a decision to consolidate our North American toxicology services by closing our Vienna site and decision not to build an East Coast preclinical facility on the Manhattan Virginia site we acquired several years ago. We've also taken an asset impairment charge in the third quarter of $119 million or $1.16 per share. Of this, $103 million relates to our Chandler, Arizona facility and the remainder of it is in Manhattan site.

The impairment charge results from accounting assessment of net book value compared to fair value. It's important to highlight that this is solely a non-cash accounting charge, and that Chandler will continue to remain open for operations with its current level of debt. The second special item relates to income taxes. In the third quarter, our income taxes included a benefit of $10.4 million, resulting primarily from the favorable resolution of a tax incurred.

Now the results. Net revenues for the third quarter were $477 million, an increase of 24% over the third quarter of last year. Operating margin was 8.9% in the quarter versus 12.2% in the third quarter of last year. Included in this figure is $1.3 million of costs associated with the closure and consolidation of our Kalamazoo facility. GAAP EPS in the third quarter was a loss of $0.49. If you exclude the impairment charge and the favorable tax item I mentioned a moment ago, EPS was $0.50 on a pro forma basis. This compares to $0.49 the second quarter of 2010 and $0.67 in the third quarter of 2009.

The tax rate for the quarter on a pro forma basis, excluding the favorable tax item were 23%, reflecting a go-forward impact of the favorable resolution of the tax inquiry, coupled with the further shift in the mix of earnings towards countries with more people tax rate. We expect the tax rate for the company to be in the 23% range in the fourth quarter.

In the third quarter of 2010, further development contributed 43% of our net revenues and Late-Stage 57%. Also 56% of our revenue came from the United States, 14% from Switzerland, 12% from the U.K., 6% from countries within the Euro Zone and remaining 12% from the rest of the world.

Please turn to Pages 6 to discuss segment results. In Early Development in the third quarter net revenues grew 5.1% year-on-year to $206 million. Sequentially, revenue decreased $1.7 million. The sequential decline in revenues was steeper than expected, as production in toxicology revenue more than offset growth in Chemistry and Clinical Pharmacology.

Third quarter Early Development operating margins, excluding the $119 million impairment charge and the $1.3 million of cost from the closure of the Kalamazoo facility were 10.7%. And that compares to 14% last quarter. Margins reflect the softening of the toxicology market in the third quarter.

Read the rest of this transcript for free on seekingalpha.com