Hospira (HSP)

Q4 2011 Earnings Call

February 14, 2012 9:00 am ET


Karen King -

Thomas E. Werner - Chief Financial Officer and Senior Vice President of Finance

Sumant Ramachandra - Chief Scientific Officer and Senior Vice President of Research & Development & Medical Affairs


Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Ami Fadia - UBS Investment Bank, Research Division

Louise A. Chen - Collins Stewart LLC, Research Division

Marshall Urist - Morgan Stanley, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Christopher Schott - JP Morgan Chase & Co, Research Division

Matthew Taylor - Barclays Capital, Research Division



Welcome to Hospira's Fourth Quarter and Full Year 2011 Conference Call. [Operator Instructions] I will now turn the call over to Karen King, Vice President of Investor Relations. Karen, you may now begin your conference.

Karen King

Thank you. Good morning, everyone, and welcome to our conference call and webcast regarding Hospira's financial results for the fourth quarter and full year 2011, as well as our projections for 2012. Participating in today's call are Mike Ball, Chief Executive Officer of Hospira; Tom Werner, Senior Vice President of Finance and Chief Financial Officer; and Sumant Ramachandra, Senior Vice President and Chief Scientific Officer.

We will be making some forward-looking statements today which are subject to risks and uncertainties and other factors that may cause actual results to differ materially from those indicated. A discussion of these factors is included in the risk factors and MD&A sections in Hospira's latest annual report on Form 10-K and subsequent Form 10-Qs on file with the SEC. We undertake no obligation to release publicly any revisions the forward-looking statements as a result of subsequent events or developments.

On today's conference call, non-GAAP financial measures will be used to help investors understand Hospira's base business performance. These non-GAAP financial measures are reconciled to the comparable GAAP financial measures in the press release and Form 8-K issue this morning, and are also available on the Presentation page on the Investor Relations section of our website.

Also posted on our website is a presentation of complementary materials that summarize the points of today's call. While we will not be speaking directly to the materials, it is posted on the Presentation page at www.hospira.investor.com. The material is for your reference to use as an enhanced communication tool.

Finally, we will be ending the call at the top of the hour this morning. In order to allow as many of you as possible to ask a question, we're limiting each person to 1 question. We ask for your cooperation in this respect.

And with that, I'll now turn the call over to Mike.

Thomas E. Werner

Thanks, Mike. Good morning, everyone. First, I'd take you to a brief review of the income statement for the fourth quarter and 2011.

Adjusted gross margin as a percentage of sales in the quarter was 34.0%, down from 39.1% in the fourth quarter of 2010. This was due primarily to inventory losses in certain quality actions. For the full year, adjusted gross margin finished at 38.5% which was in line with our revised guidance for the year.

Research and development expense in the fourth quarter was $67 million or 6.6% of revenue. For the full year, R&D expense was 6.4% of revenue.

SG&A expense in the fourth quarter was $167 million or 16.5% of revenue. And for the full year, SG&A as a percentage of revenue was 15.7%.

Adjusted operating income was $111 million compared to $142 million in the fourth quarter of last year. For the full year, adjusted operating margin was within our revised guidance range at 16.5%.

Our adjusted effective tax rate in the quarter was 15.2%. This was due to a lower amount of taxable income in higher tax rate jurisdictions, and this brought our year-to-date effective tax rate to 20.5%, which was consistent with the effective tax rate last year.

Finally, adjusted diluted earnings per share for the fourth quarter was $0.51 compared to $0.77 last year. And full year 2011 adjusted EPS on a diluted basis was $3.04.

Turning to cash flow. Cash flow from operations for the full year was $434 million compared to $315 million generated in 2010. The increase this year is a result of lower comparative investments in working capital, which primarily reflect the timing of receivables collections and charge-back payments related to U.S. sales of oxaliplatin, as well as a discretionary pension contribution that we made in 2010.

Capital spending was $291 million compared to $209 million in 2010. The increase reflects investments we are making relative to capacity expansion efforts, primarily at our pharmaceutical plant under construction in Visag, India.

Our cash balance at December 31 was $598 million, up from $527 million at September 30, but down slightly from $604 million at the end of last year.

Finally, on goodwill impairment. Although we perform our goodwill impairment test annually, as of September 30, the decrease in our stock price in the fourth quarter and updated projections for 2012, triggered an interim goodwill impairment test during the fourth quarter of 2011. As a result, we recognized additional goodwill impairment charges for the EMEA and APAC reporting segments.

Now before moving to guidance, Sumant will provide a brief update to our drug pipeline as we traditionally do at this time of the year. Sumant?

Sumant Ramachandra

Thanks, Tom. Good morning, everyone. You may recall that on Investor Day in September of 2011, we revised how we present the pipeline to better reflect our strategy of globally expanding Hospira's portfolio. Instead of counting only the launches in limited major markets, as we previously did, we are now including all countries where the compounds in our pipeline are expected to launch. So for today's update, which is based on our pipeline as of December 31, 2011, is relative to the pipeline we discussed with you on Investor Day which was as of June 30, 2011.

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