On April 25, 2016 Laboratory Corporation of America Holdings (LabCorp) (NYSE: LH) reported results for the quarter ended March 31, 2016 (Press release, LabCorp, APR 25, 2016, View Source;p=RssLanding&cat=news&id=2160874 [SID:1234511377]).
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"We are off to a terrific start to the year, highlighted by robust organic revenue growth and double-digit adjusted EPS growth in the quarter," said David P. King, chairman and chief executive officer. "Broad-based demand for the services of LabCorp Diagnostics and Covance Drug Development is evidence of our customers’ enthusiasm for our differentiated offering. We continue to carry out our mission to improve health and improve lives through focus on three key strategic objectives – delivering world class diagnostics, bringing innovative medicines to patients faster and changing the way care is provided."
Consolidated Results
Net revenue for the quarter was $2.30 billion, an increase of 29.5% over last year’s $1.77 billion. The Covance acquisition contributed $687.3 million in net revenue during the quarter, compared to $267.2 million in the first quarter of 2015 following the date of closing on February 19, 2015, driving an increase of 23.7% year over year due to strong demand and the inclusion of Covance’s financial results for the entire quarter. LabCorp Diagnostics contributed the remainder of the increase of $102.8 million, or 5.8%, primarily due to solid organic growth and tuck-in acquisitions, partially offset by the impact from currency.
Operating income for the quarter was $301.9 million, compared to $132.4 million in the first quarter of 2015. The Company recorded restructuring charges and special items of $29.3 million in the quarter, compared to $138.7 million during the same period in 2015. Adjusted operating income (excluding amortization of $44.3 million, restructuring and special items) for the quarter was $375.5 million, or 16.4% of net revenue, compared to $302.2 million, or 17.1%, in the first quarter of 2015. The increase in adjusted operating income was primarily due to strong revenue growth and productivity, partially offset by personnel costs and bad debt. The decline in margin was primarily due to the mix impact from the inclusion of Covance’s financial results for the entire quarter.
Net earnings in the quarter were $160.2 million, or $1.55 per diluted share, compared to $3.1 million, or $0.04 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $2.02 in the quarter, an increase of 14.8% compared to $1.76 in the first quarter of 2015. The Company’s results included a net gain in the quarter of $0.05 per diluted share on the sale of investment securities from its venture fund.
Operating cash flow for the quarter was $123.0 million, compared to negative $86.9 million last year. The Company’s operating cash flow in the first quarter of 2015 was negatively impacted by $153.5 million in non-recurring items relating to the acquisition of Covance. Excluding these items, operating cash flow was $66.6 million last year. The increase in operating cash flow was primarily due to improved earnings. Capital expenditures totaled $71.4 million, compared to $33.8 million in the first quarter of 2015. As a result, free cash flow (operating cash flow less capital expenditures) was $51.6 million, compared to negative $120.7 million in the first quarter of 2015. Excluding non-recurring items, free cash flow was $32.8 million last year.
At the end of the quarter, the Company’s cash balance and total debt were $696.3 million and $6.4 billion, respectively. During the quarter, the Company invested $93.3 million in tuck-in acquisitions.
The following segment results are presented on a pro forma basis for all periods as if the acquisition of Covance closed on January 1, 2015 and exclude amortization, restructuring, special items and unallocated corporate expenses. Reconciliations of segment results to historically reported results are included in the Condensed Pro Forma Segment Information tables and notes.
Pro Forma Segment Results
LabCorp Diagnostics
Net revenue for the quarter was $1.59 billion, an increase of 7.2% over $1.48 billion for the first quarter of 2015. 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 7.2% includes the benefit from Beacon LBS of 1.0%, and unfavorable foreign currency translation of 0.6%. Total volume (measured by requisitions) increased by 4.0% (organic volume of 3.4% and acquisition volume of 0.6%). Revenue per requisition increased by 2.7%.
Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $310.3 million, or 19.5% of net revenue, compared to $289.6 million, or 19.5% of net revenue, in the first quarter of 2015. The increase was primarily due to volume, price, mix and productivity, partially offset by personnel costs and bad debt. Improvement in productivity was driven by Project LaunchPad, the Company’s business process improvement initiative, which remains on track to deliver net savings of $150 million through the three-year period ending in 2017.
Covance Drug Development
Net revenue for the quarter was $703.1 million, an increase of 12.6% over $624.6 million for the first quarter of 2015 due to broad-based demand. The stronger U.S. dollar negatively impacted year-over-year revenue growth by approximately 160 basis points. Excluding the impact from currency and the expiration of the Sanofi site support agreement, net revenue increased 17.9% year over year.
Adjusted operating income (excluding amortization, restructuring and special items) was $103.3 million, or 14.7% of net revenue, compared to $74.2 million, or 11.9% of net revenue, in the first quarter of 2015. The increase was primarily due to demand, productivity and cost synergies, partially offset by the expiration of the Sanofi site support agreement and personnel costs. The Company remains on track to deliver cost synergies of $100 million related to the acquisition of Covance through the three-year period ending in 2017.
During the quarter, net orders (gross orders less cancellations and reductions) were $830 million, representing a net book-to-bill of 1.18.
Outlook for 2016
The following updated guidance assumes foreign exchange rates effective as of March 31, 2016 for the remainder of the year.
Net revenue growth of 8.5% to 10.5% over 2015 net revenue of $8.51 billion, which includes the impact from approximately 40 basis points of negative currency. This is an increase from prior guidance of 7.5% to 9.5%, which included approximately 100 basis points of negative currency.
Net revenue growth in LabCorp Diagnostics of 4.0% to 5.5% over 2015 pro forma revenue of $6.21 billion, which includes the impact from approximately 20 basis points of negative currency. This is an increase from prior guidance of 3.5% to 5.5%, which included approximately 50 basis points of negative currency.
Net revenue growth in Covance Drug Development of 6.0% to 9.0% over 2015 pro forma revenue of $2.63 billion, which includes the impact from approximately 50 basis points of negative currency. This is an increase from prior guidance of 2.0% to 5.0%, which included approximately 200 basis points of negative currency. Excluding the impact from currency and the expiration of the Sanofi site support agreement, net revenue is expected to increase approximately 9% to 12%.
Adjusted EPS of $8.55 to $8.95, versus prior guidance of $8.45 to $8.85, and as compared to $7.91 last 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, unchanged from prior guidance.
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, and Free Cash Flow. 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 its Current Report on Form 8-K that will include additional information on its business and operations. This information will also be available on 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.