On February 18, 2016 Laboratory Corporation of America Holdings (LabCorp or the "Company") (NYSE: LH) reported results for the fourth quarter and year ended December 31, 2015 and 2016 guidance (Press release, LabCorp, FEB 18, 2016, View Source;p=RssLanding&cat=events&id=5215848 [SID:1234509089]).
Schedule your 30 min Free 1stOncology Demo!
Discover why more than 1,500 members use 1stOncology™ to excel in:
Early/Late Stage Pipeline Development - Target Scouting - Clinical Biomarkers - Indication Selection & Expansion - BD&L Contacts - Conference Reports - Combinatorial Drug Settings - Companion Diagnostics - Drug Repositioning - First-in-class Analysis - Competitive Analysis - Deals & Licensing
Schedule Your 30 min Free Demo!
"The year was transformative for LabCorp," said David P. King, chairman and chief executive officer. "We significantly expanded the Company’s capabilities, global presence and avenues for future growth while reinforcing our position as the world’s leading healthcare diagnostics company. We concluded the year with strong fourth quarter results including continued organic volume growth in LabCorp Diagnostics, accelerated revenue growth in Covance Drug Development, double-digit adjusted EPS growth, and robust free cash flow."
Consolidated Results
Fourth Quarter Results
Net revenue for the quarter was $2.24 billion, an increase of 48.4% over last year’s $1.51 billion. The acquisition of Covance contributed $669.5 million in net revenue during the quarter, driving 44.3% year-over-year growth. The remainder of the increase of $62.6 million, or 4.1%, was driven by organic volume growth, price, mix and tuck-in acquisitions, partially offset by currency. Organic revenue growth in the quarter, excluding currency, was 3.9%.
Operating income for the quarter was $243.5 million, compared to $219.0 million in the fourth quarter of 2014. The Company recorded restructuring charges and special items of $86.4 million during the fourth quarter of 2015, compared to $15.6 million during the same period in 2014. Adjusted operating income (excluding amortization of $38.3 million, restructuring and special items) for the quarter was $368.2 million, or 16.4% of net revenue, compared to $250.0 million, or 16.5%, in the fourth quarter of 2014. The increase in adjusted operating income was primarily due to the Covance acquisition, organic volume growth, productivity, price and mix, partially offset by personnel costs. The decline in margin was due to the mix impact from the acquisition of Covance.
The Company recorded net earnings in the quarter of $114.2 million, or $1.11 per diluted share, compared to $119.6 million, or $1.39 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $1.98 in the quarter, an increase of 20.0% compared to $1.65 in the fourth quarter of 2014.
Operating cash flow for the fourth quarter was $384.6 million, compared to $213.7 million in the fourth quarter of 2014. The increase in operating cash flow was due to the acquisition of Covance as well as favorable working capital. Capital expenditures totaled $85.1 million, compared to $46.3 million in the fourth quarter of 2014. As a result, free cash flow (operating cash flow less capital expenditures) was $299.5 million, compared to $167.4 million in the fourth quarter of 2014.
At the end of the quarter, the Company’s cash balance and total debt were $716.4 million and $6.4 billion, respectively. During the quarter, the Company invested $43.3 million in tuck-in acquisitions and paid down $250.0 million of debt. The Company’s liquidity at the end of the quarter was approximately $1.7 billion, consisting of cash and available credit.
Full Year Results
The following full year consolidated results of the Company include Covance as of February 19, 2015; prior to February 19, 2015, these consolidated results exclude Covance.
Net revenue was $8.51 billion, an increase of 41.5% over last year’s $6.01 billion. The acquisition of Covance contributed $2.20 billion from the February 19, 2015 closing date, driving 36.7% year over year net revenue growth. The remainder of the increase of $289.5 million, or 4.8%, was due to strong organic volume growth, tuck-in acquisitions, price, and mix, partially offset by currency. Organic revenue growth in 2015, excluding currency, was 4.6%.
Operating income for 2015 was $1,002.9 million, compared to $910.4 million in 2014. Operating income was reduced by $279.5 million in restructuring charges and special items (primarily costs associated with the acquisition of Covance and Project LaunchPad, the Company’s enterprise-wide business process improvement initiative) recorded during 2015, compared to $41.2 million in 2014. Adjusted operating income (excluding amortization of $164.5 million, restructuring and special items) was $1.45 billion, or 17.0% of net revenue, compared to $1.03 billion, or 17.1%, in 2014. The increase in adjusted operating income was primarily due to the acquisition of Covance, organic volume growth, price, mix and productivity, partially offset by currency and personnel costs. The decline in margin was due to the mix impact from the acquisition of Covance.
The Company’s pre-tax earnings were reduced by restructuring and special items of $334.4 million ($279.5 million impacted operating income, $52.6 million impacted interest expense, and $2.3 million impacted other, net), or $245.7 million after-tax. As a result, the Company recorded net earnings in 2015 of $436.9 million, or $4.34 per diluted share, compared to $511.2 million, or $5.91 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $7.91 in 2015, an increase of 16.3% compared to $6.80 in 2014.
Operating cash flow for 2015 was $982.4 million, compared to $739.0 million in 2014, driven by the Covance acquisition and improved earnings. Capital expenditures totaled $255.8 million, compared to $203.5 million in 2014, due to the Covance acquisition. As a result, free cash flow (operating cash flow less capital expenditures) was $726.6 million, compared to $535.5 million last year. Free cash flow in 2015 was negatively impacted by approximately $110 million in net non-recurring items relating to the acquisition of Covance. Excluding these items, free cash flow would have been $836.6 million in 2015.
The following segment results are presented on a pro forma basis for all periods as if the acquisition of Covance closed on January 1, 2014 and exclude amortization, restructuring, special items and unallocated corporate expenses. In the fourth quarter of 2015, the Company refined its methodology for the calculation of unallocated corporate expenses, which impacts segment results and has been applied to prior periods for comparative purposes. As a result, LabCorp Diagnostics’ operating expenses increased by $8.5 million in the quarter, and would have increased by $7.6 million in the fourth quarter of 2014. In addition, unallocated corporate expenses were reduced by $8.5 million in the quarter, and would have been reduced by $7.6 million in the fourth quarter of 2014. Reconciliations of segment results to historically reported results are included in the Condensed Pro Forma Segment Information tables and notes.
Fourth Quarter Pro Forma Segment Results
LabCorp Diagnostics
Net revenue for the quarter was $1.55 billion, an increase of 4.3% over $1.49 billion for the fourth quarter of 2014. The increase in net revenue was the result of organic volume growth (measured by requisitions), Beacon LBS, price, mix and tuck-in acquisitions, partially offset by currency. The increase in net revenue of 4.3% includes the benefit from Beacon LBS of 1.1%, and unfavorable foreign currency translation of 0.8%. Total volume (measured by requisitions) increased by 1.8% (organic volume of 1.6% and acquisition volume of 0.2%). Revenue per requisition increased by 2.2%.
Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $293.3 million, or 18.9% of net revenue, compared to adjusted operating income of $273.3 million, or 18.4% of net revenue, in the fourth quarter of 2014. The increase was primarily due to volume, price, mix, and productivity, partially offset by personnel costs. Improvement in productivity was driven by Project LaunchPad, which generated approximately $20 million in net benefits during the quarter.
Covance Drug Development
Net revenue for the quarter was $691.4 million, an increase of 4.7% over $660.1 million for the fourth quarter of 2014. The stronger U.S. Dollar negatively impacted year-over-year revenue growth by approximately 230 basis points. Excluding currency, net revenue increased 7.0% year-over-year due to increased demand.
Adjusted operating income (excluding amortization, restructuring and special items) was $110.4 million, or 16.0% of net revenue, compared to adjusted operating income of $89.8 million, or 13.6% of net revenue, in the fourth quarter of 2014. The increase was primarily due to demand, productivity and cost synergies, partially offset by personnel costs. The Company generated approximately $15 million in cost synergies during the quarter.
Net orders (gross orders less cancellations and reductions) in the quarter were $816 million, representing a net book-to-bill of 1.18. Backlog at December 31, 2015 was approximately $6.7 billion.
Outlook for 2016
The following guidance assumes foreign exchange rates effective as of January 31, 2016 for the full year.
Net revenue growth of 7.5% to 9.5% over 2015 net revenue of $8.51 billion, which includes the impact from approximately 100 basis points of negative currency.
Net revenue growth in LabCorp Diagnostics of 3.5% to 5.5% over 2015 pro forma revenue of $6.21 billion, which includes the impact from approximately 50 basis points of negative currency.
Net revenue growth in Covance Drug Development of 2% to 5% over 2015 pro forma revenue of $2.63 billion. Excluding the impact from approximately 200 basis points of negative currency and the anticipated expiration of the Sanofi site support agreement, net revenue is expected to increase 6.6% to 9.6%.
Adjusted EPS of $8.45 to $8.85, an increase of approximately 7% to 12% over the prior year.
Free cash flow (operating cash flow less capital expenditures) of $900 million to $950 million, an increase of approximately 24% to 31% over the prior year.
"We are enthusiastic about our prospects for 2016," Mr. King added. "We are focused on improving health and improving lives through execution of our strategic priorities: delivering world class diagnostics, bringing innovative medicines to patients faster, and changing the way care is provided. This focus will drive top-line growth and margin expansion, resulting in attractive year-over-year EPS growth and free cash flow."
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 EPS, Adjusted Operating Income, 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 furnishing a Current Report on Form 8-K that will include additional information on its business and operations. This information will also be available in the investor relations section of the Company’s website at www.labcorp.com. Analysts and investors are directed to the Current Report on Form 8-K and the website to review this supplemental information.