On July 28, 2020 LabCorp (or the Company) (NYSE: LH) reported results for the second quarter ended June 30, 2020 (Press release, LabCorp, JUL 28, 2020, View Source [SID1234562428]).
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"We continue to bring the full power of our combined diagnostics and drug development capabilities against this virus, applying our scientific expertise and ingenuity across all aspects of testing, treatments, and vaccines," said Adam Schechter, chairman and CEO, LabCorp. "During the second quarter, we delivered solid performance across the company despite the impact of the pandemic. I continue to be impressed with how quickly our teams have rallied to confront each and every challenge put before them, and I want to thank our 65,000 employees, as their efforts have been heroic during this difficult time."
Consolidated Results
Second Quarter Results
Revenue for the quarter was $2.77 billion, a decrease of (3.9%) from $2.88 billion in the second quarter of 2019. The decrease in revenue was due to a (5.4%) decline of organic revenue, (0.3%) from the disposition of a business, and (0.1%) from unfavorable foreign currency translation, partially offset by 1.9% from acquisitions. The (5.4%) decline of organic revenue was due to the pandemic, which reduced the Company’s organic Base Business by (20.9%), partially offset by COVID-19 Testing of 15.4%. "Base Business" includes the Company’s business operations except for molecular and serology COVID-19 testing ("COVID-19 Testing"). The decline in organic Base Business includes the lower Medicare and Medicaid pricing as a result of PAMA of (0.5%).
Operating income for the quarter was $297.7 million, or 10.8% of revenue, compared to $335.7 million, or 11.6%, in the second quarter of 2019. The decrease in operating income and margin was primarily due to the reduction in the Base Business (due to the pandemic and ($14.0) million from PAMA) and higher personnel costs (primarily driven by merit increases), partially offset by COVID-19 Testing and LaunchPad savings. The Company recorded restructuring charges, special items, and amortization, which together totaled $83.0 million in the quarter, compared to $111.2 million during the same period in 2019. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $380.7 million, resulting in a 13.8% adjusted operating margin, compared to $446.9 million, or 15.5%, in the second quarter of 2019. The ($66.1) million decline in adjusted operating income and (180) basis point decline in adjusted operating margin were primarily due to the reduction in the Base Business (due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings.
Net earnings for the quarter were $231.6 million, compared to $190.4 million in the second quarter of 2019. Diluted EPS were $2.37 in the quarter, an increase of 22.8% over $1.93 in the same period in 2019. The increase in net earnings and diluted EPS in the quarter was primarily due to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Emergency Funding, which increased net earnings and diluted EPS by $55.9 million and $0.42 per share, respectively. Adjusted EPS (excluding amortization, restructuring charges, and special items) were $2.57 in the quarter, a decrease of (12.3%) compared to $2.93 in the second quarter of 2019 due to the pandemic. Adjusted EPS exclude the impact from the CARES Act Emergency Funding.
Operating cash flow for the quarter was $370.7 million, compared to $253.5 million in the second quarter of 2019. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital. For the second quarter of 2020, cash earnings included the CARES Act and benefited from income and payroll tax deferrals, while working capital was negatively impacted by an increase in COVID-19 Testing related supplies and accounts receivable. Capital expenditures totaled $98.5 million, compared to $85.2 million a year ago. This increase was driven by expenditures associated with the increase in COVID-19 Testing capacity of $20.1 million. As a result, free cash flow (operating cash flow less capital expenditures) was $272.2 million, up from $168.3 million in the second quarter of 2019.
At the end of the quarter, the Company’s cash balance and total debt were $557.0 million and $6.2 billion, respectively. During the quarter, the Company invested $11.3 million on acquisitions.
Year-To-Date Results
Revenue was $5.59 billion, a decrease of (1.4%) from $5.67 billion in the first half of last year. The decrease in revenue was due to a (3.6%) decline of organic revenue, (0.4%) from the disposition of a business, and (0.1%) from unfavorable foreign currency translation, partially offset by 2.6% from acquisitions. The (3.6%) decline of organic revenue was due to the pandemic, which reduced the Company’s organic Base Business by (11.7%), partially offset by COVID-19 Testing of 8.1%. The decline in the organic Base Business includes the negative impact from PAMA of (0.6%).
Operating income was $105.1 million, or 1.9% of revenue, compared to $653.9 million, or 11.5%, in the first half of 2019. The decrease in operating income and margin was primarily due to the pandemic (including the impairments to goodwill and other assets), higher personnel costs (primarily driven by merit increases and one additional payroll day), and ($33.0) million from PAMA, partially offset by LaunchPad savings. The Company recorded restructuring charges, special items, impairments, and amortization, which together totaled $641.5 million in the first half of 2020, compared to $204.4 million during the same period in 2019. This increase includes COVID-19 related impairments on goodwill and other assets of $437.4 million, or approximately 3.7% of the Company’s total goodwill and intangible assets that the Company recorded in the first quarter of 2020. In addition, the Company recorded $34.0 million of other COVID-19 related costs. Adjusted operating income (excluding amortization, restructuring charges, special items, and impairments) for the first half of 2020 was $746.6 million, resulting in a 13.3% adjusted operating margin, compared to $858.3 million, or 15.1%, in the first half of 2019. The ($111.7) million decline in adjusted operating income and (180) basis point decline in adjusted operating margin were primarily due to the reduction in the Base Business (due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings.
Net losses in the first half of 2020 were ($85.6) million, compared to net earnings of $376.0 million in the first half of 2019. Diluted EPS were ($0.88) in the first half of 2020 compared to $3.79 in the same period in 2019. Net losses and diluted EPS in the first six months of 2020 include the CARES Act Emergency Funding, which improved net losses and diluted EPS by $55.9 million and $0.42 per share, respectively. Adjusted EPS (excluding amortization, restructuring charges, special items, and impairments) were $4.94 in the first half of 2020, a decrease of (11.0%) compared to $5.55 in the first half of 2019 due to the pandemic. Adjusted EPS exclude the impact from the CARES Act Emergency Funding.
Operating cash flow was $574.5 million, compared to $419.3 million in the first half of 2019. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital. For the first six months of 2020, cash earnings included the CARES Act and benefited from income and payroll tax deferrals, while working capital was negatively impacted by an increase in COVID-19 Testing related supplies and accounts receivable. Capital expenditures totaled $205.1 million, compared to $179.4 million during the same period in 2019. This increase was primarily driven by expenditures associated with the increase in COVID-19 Testing capacity of $22.5 million. As a result, free cash flow (operating cash flow less capital expenditures) was $369.4 million, compared to $239.9 million in the first half of 2019.
Second Quarter Segment Results
The following segment results exclude amortization, restructuring charges, special items, and unallocated corporate expenses.
LabCorp Diagnostics
Revenue for the quarter was $1.69 billion, a decrease of (3.9%) from $1.76 billion in the second quarter of 2019. The decrease in revenue was due to a (4.9%) decline in organic revenue and (0.1%) from unfavorable foreign currency translation, partially offset by 1.1% from acquisitions. The (4.9%) decline in organic revenue was due to a (30.1%) decline of the organic Base Business (due to the pandemic), partially offset by 25.2% from COVID-19 Testing. The (30.1%) decline of the organic Base Business includes a (0.8%) negative impact from PAMA and a (1.2%) reduction due to the September 2019 non-renewal of the BeaconLBS – UnitedHealthcare contract pertaining to the Florida market.
Total volume (measured by requisitions) decreased by (19.5%) as organic volume declined by (20.7%), partially offset by acquisition volume of 1.2%. The decline in organic volume includes a (35.3%) reduction in the Base Business (due to the pandemic), partially offset by increased demand for COVID-19 Testing of 14.6%. The organic Base Business volumes improved throughout the quarter, while at the same time COVID-19 Testing demand continued to grow. For June, daily organic volume increased approximately 6% as compared to the prior year, as the (17%) decline in the organic Base Business was more than offset by COVID-19 Testing volume of approximately 23%. While total volume declined (19.5%), price / mix increased by 15.6% due to COVID-19 Testing of 10.7% and the Base Business of 4.9%. The Base Business price includes the negative impact from PAMA of (0.8%) and the non-renewal of the BeaconLBS contract of (1.2%).
Adjusted operating income for the quarter was $308.8 million, or 18.2% of revenue, compared to $345.4 million, or 19.6%, in the second quarter of 2019. The ($36.6) million decline in adjusted operating income and (140) basis point decline in adjusted operating margin were primarily due to the reduction in the Base Business (due to the pandemic) and higher personnel costs, partially offset by the increase in COVID-19 Testing and LaunchPad savings. The Company remains on track to deliver approximately $200 million of net savings from its three-year Diagnostics LaunchPad initiative by the end of 2021.
Covance Drug Development
Revenue for the quarter was $1.09 billion, a decrease of (2.9%) from $1.13 billion in the second quarter of 2019. The decrease in revenue was due to a (5.2%) decline in organic revenue, (0.7%) from the disposition of a business, and (0.1%) from unfavorable foreign currency translation, partially offset by a 3.1% benefit from an acquisition. The decline in organic revenue was primarily due to the negative impact from the pandemic, partially offset by a 1.1% increase from molecular COVID-19 testing through its Central Laboratories business. The pandemic continues to cause delays in clinical trial progression and associated testing, reductions in investigator site access, as well as interruptions to the supply chain particularly impacting the nonclinical business unit.
Adjusted operating income for the quarter was $112.7 million, or 10.3% of revenue, compared to $141.7 million, or 12.6%, in the second quarter of 2019. The ($29.0) million decrease in adjusted operating income and (230) basis point decrease in adjusted operating margin were primarily due to the negative impact from the pandemic and higher personnel costs, partially offset by molecular COVID-19 testing and LaunchPad savings. The Company remains on track to deliver approximately $150 million of net savings from its three-year Drug Development LaunchPad initiative by the end of 2020.
Net orders and net book-to-bill during the trailing twelve months were $6.11 billion and 1.32, respectively. Backlog at the end of the quarter was $11.79 billion compared to $11.30 billion last quarter, and the Company expects approximately $4.0 billion of its backlog to convert into revenue in the next twelve months.
Outlook for 2020
Given the continued unpredictability pertaining to the COVID-19 pandemic and the corresponding government restrictions and customer behavior, there are a wide-range of feasible financial outcomes. As a result, the Company continues to not provide 2020 guidance. While LabCorp’s Base Business continues to be negatively impacted by the COVID-19 pandemic, the Company’s outlook has improved across the enterprise.
In LabCorp Diagnostics, demand for its Base Business continues to be below the Company’s historical levels; however, this business has been steadily recovering from its trough in April, while at the same time COVID-19 Testing continues to grow. To date, LabCorp has performed more than 8.5 million molecular COVID-19 tests as well as more than 2 million serology COVID-19 tests. The Company’s current molecular COVID-19 testing capacity is approximately 180,000 tests per day and growing.
In Covance Drug Development, while it is expected that the pandemic will continue to negatively impact its business, this impact is expected to subside throughout the year through continuing to work on projects supporting global vaccine and treatment development, with additional support from growth of COVID-19 Testing.
As previously announced, the Company instituted numerous actions to help mitigate the financial impact from the COVID-19 pandemic, which included furloughs, reduced hours, and the suspension of discretionary merit adjustments and 401(k) contributions. In response to LabCorp’s improved outlook, the Company has been resuming regular work schedules and is proceeding with merit adjustments and will retroactively reinstate 401(k) contributions.
Use of Adjusted Measures
The Company has provided in this press release and accompanying tables "adjusted" financial information that has not been prepared in accordance with GAAP, including adjusted net income, adjusted EPS (or adjusted net income per share), adjusted operating income, adjusted operating margin, free cash flow, and certain segment information. The Company believes these adjusted measures are useful to investors as a supplement to, but not as a substitute for, GAAP measures, in evaluating the Company’s operational performance. The Company further believes that the use of these non-GAAP financial measures provides an additional tool for investors in evaluating operating results and trends, and growth and shareholder returns, as well as in comparing the Company’s financial results with the financial results of other companies. However, the Company notes that these adjusted measures may be different from and not
directly comparable to the measures presented by other companies. Reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the tables accompanying this press release.
The Company today is providing an investor relations presentation with additional information on its business and operations, which is available in the investor relations section of the Company’s website at View Source Analysts and investors are directed to the website to review this supplemental information.
A conference call discussing LabCorp’s quarterly results will be held today at 9:00 a.m. EDT and is available by dialing 877-898-8036 (720-634-2811 for international callers). The access code is 2597361. A telephone replay of the call will be available through August 11, 2020, and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 2597361. A real-time webcast of LabCorp’s quarterly conference call on July 28, 2020, will be available at LabCorp Investor Relations website beginning at 9:00 a.m. EDT. This webcast will be archived and accessible through July 14, 2021.