Covance (CVD)

Q4 2011 Earnings Call

January 26, 2012 9:00 am ET


Joseph L. Herring - Chairman and Chief Executive Officer

William E. Klitgaard - Chief Financial Officer, Corporate Senior Vice President and Treasurer

Paul Surdez -


Todd Van Fleet - First Analysis Securities Corporation, Research Division

Ross Muken - Deutsche Bank AG, Research Division

Garen Sarafian - Citigroup Inc, Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

Lauren Migliore - Morningstar Inc., Research Division

Stephen S. Unger - Lazard Capital Markets LLC, Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

John Kreger - William Blair & Company L.L.C., Research Division

James J. Kumpel - BB&T Capital Markets, Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division



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Good day, and welcome to the Covance Fourth Quarter 2011 Investor Conference Call. This call is being recorded. At this time, for opening remarks, I'd like to turn the call over to 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 Fourth Quarter 2011 Earnings Conference and Webcast. Today, Joe Herring, Covance's Chairman and Chief Executive Officer; and Bill Klitgaard, Covance's Chief Financial Officer, will be presenting our fourth quarter financial results. Following our opening comments, we'll host the Q&A session.

In addition to the press release, 24 slides corresponding to the commentary you are about to hear are available on our website at

Before we begin the commentary, I'd 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 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, such as costs associated with restructuring or special charges, as well as the impact of the resolution of certain income tax matters. 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 Bill for a review of our financial performance, which begins on Page 4 of the slide show.

William E. Klitgaard

Thank you, Paul, and good morning, everyone. Before I get into the detailed results, let me talk about 3 special items which impacted the fourth quarter. Included in the fourth quarter results is approximately $31 million or $0.41 per share in diluted -- in charges that hit the EPS. Approximately $8.7 million or $0.10 per share relates to the completion of the previously announced restructuring action where we've been incurring costs all year. The remaining $22.4 million or $0.31 per share has 2 components. The first relates to the termination of the inventory supply agreement and related rationalization of research product inventory levels, which resulted in a charge of $10.3 million or $0.11 per share.

The second component is a charge of $12.1 million or $0.20 per share which recognized an impairment in the carrying value of an equity investment and the supplier of Research Products. Finally, in the quarter, we recognized a gain of approximately $0.03 per share of unfavorable income tax development.

My commentary which follows will focus on the results excluding the impact of these items. Now on the results. Net revenue for the fourth quarter was $532 million, an increase of 8.3% over the fourth quarter of last year, or 7.3% on a constant currency basis. Sequentially, a strong U.S. dollar led to a $12.4 million headwind in FX, which is the primary driver of the $10.8 million sequential decline in net revenue.

For the full year, net revenue was $2.1 billion, which is up 8.8% year-on-year or 5.4% on a constant currency. Operating income on a GAAP basis in the fourth quarter was $39 million and on a pro-forma basis was $57.9 million.

Pro-forma operating margin this quarter was 10.9%, which was up 50 basis points sequentially and 130 basis points year-on-year. On a full-year basis, operating income was $180.6 million and on a GAAP basis was $215.3 million on a pro forma basis.

Fourth quarter EPS on a GAAP basis was $0.35 per share and on a pro-forma basis, was $0.73 per share. Full-year GAAP was $2.16 and pro-forma was $2.70. The pro-forma effective tax rate for the quarter was 22.4%, consistent with last quarter, and we currently expect our full-year 2012 tax rate to be approximately in this range. Excluding the impact of any one-time items or settlements or resolutions for the various tax authorities in the jurisdictions in which we operate.

Now please turn to Slide 5. In the fourth quarter, Early Development contributed 44% of net revenue, in Late Stage, 56%. In the fourth quarter, 52% of our revenue came from the U.S., 14% from Switzerland, 12% from the U.K., 9% from countries in eurozone and the remaining 13% from the rest of the world.

Now please turn to Slide 6 to discuss segment results. In Early Development, in the fourth quarter, net revenues were $24 million or 6.3% increase year-on-year, net of a minor 10 basis points headwind from foreign exchange. While we experienced year-over-year growth in most service areas, the leading drivers of the increase were robust growth in our Clinical Pharmacology services and the inclusion of our full quarter results from our Alnwick, U.K., Portugal -- Alnwick, U.K, and Portugal, France sites in the quarter compared to only 2 months of operations in 2010.

Sequentially, revenues declined $5.7 million, with FX accounting for 40% of the decline. Strong sequential growth in Discovery Support Services was more than offset by a sharp decline in Research Product revenues, and to a lesser extent, a decline in our legacy European Toxicology services. North American Toxicology services were flat sequentially.

Fourth quarter GAAP operating income was $17.7 million, while pro-forma operating income was $32.6 million, or 13.9% of net revenue. This compares with 14.6% last quarter.

In our third quarter earnings call, we said that we expected operating margins in Early Development to expand in the fourth quarter. However, the sharp decline in revenue for Research Products broke [ph] an unexpected operating loss on both the GAAP and pro-forma basis in the quarter, and that was the primary factor causing the miss of the expectations this quarter.

Now turning to Late-Stage Development. Net revenues in the fourth quarter were $298 million which is up 10% from the fourth quarter of last year, or 8.1% excluding foreign exchange. Year-on-year growth was led by the continued very strong performance of our Clinical Development services and solid growth in our market access services, which offset a decline in Central Lab revenue.

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