Covance (CVD) Q3 2011 Earnings Call November 03, 2011 9:00 am ET Executives Joseph L. Herring - Chairman and Chief Executive Officer William E. Klitgaard - Chief Financial Officer, Principal Accounting Officer, Corporate Senior Vice President and Treasurer Paul Surdez - VP of IR Analysts Todd Van Fleet - First Analysis Securities Corporation, Research Division Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division Garen Sarafian - Citigroup Inc, Research Division Alexander Y. Draper - Raymond James & Associates, Inc., Research Division Stephen S. Unger - Lazard Capital Markets LLC, Research Division Vijay Kumar - Deutsche Bank AG, Research Division David H. Windley - Jefferies & Company, Inc., Research Division John Kreger - William Blair & Company L.L.C., 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 Presentation Operator
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 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 outside of our normal operations, such as costs associated with restructuring or 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. Net revenues for the third quarter were $543 million, an increase of 13.9% over the third quarter of last year. Growth was 8.7% on a constant-dollar basis. Sequentially, net revenues increased $25 million. Operating income on a GAAP basis in the third quarter was $51 million and on a pro forma basis was $56.3 million. Pro forma operating margin this quarter was 10.4% of net revenue, a 10-basis-point increase from last quarter, despite the impact of merit increases, which went into effect on July 1. EPS on a GAAP basis was $0.67 per share and on a pro forma basis was $0.71 per share. Sequentially, pro forma EPS increased $0.05. The pro forma effective tax rate for the quarter was 22.4%, and we expect our tax rate to remain in this range as we look ahead to the fourth quarter of 2011.
Now please turn to Slide 5. In the third quarter, Early Development contributed 44% of net revenue and a Late-Stage contributed 56%. Also, 53% of our revenue came from the U.S., 15% from Switzerland, 11% from the U.K., 9% from countries in the eurozone and the remaining 12% from the rest of the world.Now turn to Slide 6, please. In Early Development, in the third quarter, net revenues were $240 million, a 16.3% increase year-on-year or 14.9% net of the impact of foreign exchange. The year-on-year increase was driven by the addition of our Alnwick, U.K. and Porcheville, France sites, as well as strong growth in our Clinical Pharmacology, Analytical Chemistry and North American Toxicology services. Sequentially, revenues increased $8.4 million on growth in Clinical Pharmacology, Discovery Support services and Research Products operations, partially offset by a slight decline in Toxicology. Third quarter operating income on a GAAP basis was $33.2 million and on a pro forma basis was $35 million or 14.6% of revenue. OM increased 40 basis points sequentially on margin expansion in Discovery Support, Clinical Pharmacology and North American Toxicology services. Turning to Late-Stage Development. Net revenues in the third quarter was $303 million, up $17 million sequentially, and up 12% from the third quarter of last year or 4%, excluding the impact of foreign exchange. Growth in both periods was driven by continued strong performance of our Clinical Development services. Late-Stage Development operating income on a GAAP basis was $56.3 million and on a pro forma basis was $58.4 million or 19.3% of revenue, and that compares to 20% last quarter and 20.4% in the prior year. The sequential decline in profitability was partly -- or primarily, actually, due to normal seasonal factors coupled with significant increases in staffing levels in Clinical Development, which offset a sequential increase in margins in Central Labs.
Now please turn to Slide 7 to recap order and backlog numbers. Adjusted net orders in the third quarter were $597 million, which represents an adjusted net book-to-bill of 1.1:0 -- 1.1:1, excuse me. Backlog on September 30 grew 1% year-on-year to $6.1 billion. Sequentially, the significant strengthening of the U.S. dollar in the back half of the third quarter decreased the value of our backlog by approximately $133 million.Read the rest of this transcript for free on seekingalpha.com