On October 26, 2016 Laboratory Corporation of America Holdings (LabCorp) (NYSE: LH) reported results for the quarter ended September 30, 2016 (Press release, LabCorp, OCT 26, 2016, View Source [SID1234516021]).

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"The Company delivered another quarter of solid revenue and adjusted EPS growth, despite some headwinds," said David P. King, chairman and chief executive officer. "We continued to execute on our strategy to deliver world class diagnostics, bring innovative medicines to patients faster and change the way care is provided. We remain confident in our outlook for the balance of the year and our positioning for long-term profitable growth, as we deliver proprietary solutions that address our customers’ greatest needs, and improve the health and lives of patients around the globe."

Consolidated Results

Third Quarter Results
Net revenue for the quarter was $2.37 billion, an increase of 4.5% over last year’s $2.27 billion. The increase in net revenue was due to organic growth and acquisitions, partially offset by the negative impact of foreign currency translation of approximately 50 basis points. Organic revenue growth in the quarter, excluding the impact of currency, was 3.6%.

Operating income for the quarter was $324.0 million, or 13.7% of net revenue, compared to $308.1 million, or 13.6%, in the third quarter of 2015. The increase in operating income and margin were primarily due to price, mix, the Company’s LaunchPad business process improvement initiative and cost synergies related to the acquisition of Covance, partially offset by personnel costs. The Company recorded restructuring charges and special items of $38.9 million in the quarter, compared to $31.2 million during the same period in 2015. Adjusted operating income (excluding amortization of $41.1 million, restructuring and special items) for the quarter was $404.0 million, or 17.0% of net revenue, compared to $384.2 million, or 16.9%, in the third quarter of 2015.

Net earnings in the quarter were $179.5 million, compared to $154.7 million in the third quarter of 2015. Diluted EPS were $1.71 in the quarter, an increase of 14.0% compared to $1.50 last year. Adjusted EPS (excluding amortization, restructuring and special items) were $2.25 in the quarter, an increase of 8.7% compared to $2.07 in the third quarter of 2015. The Company’s results in the quarter included two special items — a benefit of $0.02 per diluted share from the early adoption in the third quarter of the new FASB pronouncement relating to tax benefits of stock compensation, and a loss of $0.02 per diluted share from the impairment of an investment in its venture fund. In addition, the Company incurred a loss of $0.01 per diluted share in the quarter from the acquisition of Sequenom, which closed on September 7, 2016.

Operating cash flow for the quarter was $249.9 million, compared to $288.0 million last year. The decline in operating cash flow was primarily due to fees tied to the acquisition of Sequenom, and greater working capital requirements, including an advance payment as part of an exclusive strategic alliance that enhanced the global specimen tracking and data management solutions of the Company’s central laboratory business. Capital expenditures totaled $66.2 million, compared to $67.8 million in the third quarter of 2015. As a result, free cash flow (operating cash flow less capital expenditures) was $183.7 million, compared to $220.2 million in the third quarter of 2015.

At the end of the quarter, the Company’s cash balance and total debt were $567.6 million and approximately $6.2 billion, respectively. During the quarter, the Company invested $252.7 million in acquisitions and acquired $130.0 million of debt from the acquisition of Sequenom, which was retired in October.

Year-To-Date Results
The following year-to-date consolidated results of the Company include Covance as of February 19,
2015; prior to February 19, 2015, the consolidated results exclude Covance.

Net revenue was $7.05 billion, an increase of 12.6% over last year’s $6.26 billion. The increase was primarily due to the inclusion of Covance’s financial results for the entire first nine months of the year as well as solid organic growth and acquisitions, partially offset by the negative impact of foreign currency translation.

Operating income was $989.0 million, or 14.0% of net revenue, compared to $760.3 million, or 12.1%, in the first nine months of 2015. The increase in operating income and margin were primarily due to strong revenue growth, and a decline in restructuring charges and special items (costs primarily associated with the acquisition of Covance), partially offset by personnel costs. The Company recorded restructuring charges and special items of $82.7 million in the first nine months of 2016, compared to $193.1 million during the same period in 2015. Adjusted operating income (excluding amortization of $130.7 million, restructuring and special items) was $1.2 billion, or 17.1% of net revenue, compared to $1.1 billion, or 17.2%, in the first nine months of 2015.

Net earnings in the first nine months of 2016 were $547.7 million, or $5.25 per diluted share, compared to $327.6 million, or $3.29 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $6.67, compared to $5.94 in the first nine months of 2015. The Company’s year-to-date results included a benefit of $0.11 per diluted share from the early adoption of the new FASB pronouncement relating to tax benefits of stock compensation, and a net gain of $0.03 per diluted share from its venture fund.

Operating cash flow was $727.0 million, compared to $597.8 million in the first nine months of 2015. The Company’s operating cash flow was negatively impacted by $153.5 million last year due to non-recurring items relating to the acquisition of Covance. Excluding these items, operating cash flow was $751.3 million last year. Capital expenditures totaled $204.6 million, compared to $170.7 million in the first nine months of 2015. As a result, free cash flow (operating cash flow less capital expenditures) was $522.4 million, compared to $427.1 million in the first nine months of 2015. Excluding non-recurring items, free cash flow was $580.6 million during the first nine months of 2015.

The following segment results 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.

Segment Results

LabCorp Diagnostics
Net revenue for the quarter was $1.67 billion, an increase of 4.4% over last year’s $1.60 billion. The increase in net revenue was the result of price, mix and acquisitions, partially offset by organic volume (measured by requisitions) and the negative impact of foreign currency translation of 0.1%. Total volume (measured by requisitions) increased 0.3% year over year, as organic volume declined 0.3% and acquisition volume increased 0.6%. Revenue per requisition increased by 4.2%.

Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $341.8 million, or 20.4% of net revenue, compared to $318.5 million, or 19.9%, in the third quarter of 2015. The increase was primarily due to price, mix, the LaunchPad initiative and acquisitions, partially offset by personnel costs. LaunchPad 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 $701.1 million, an increase of 4.8% over last year’s $669.0 million. The increase in net revenue was primarily due to broad-based demand, partially offset by the negative impact of foreign currency translation of approximately 150 basis points. Excluding the impact from currency and the expiration of the Sanofi site support agreement, net revenue increased 9.5% year over year.

Adjusted operating income (excluding amortization, restructuring and special items) was $95.5 million, or 13.6% of net revenue, compared to $96.9 million, or 14.5%, in the third quarter of 2015. The decline was primarily due to the expiration of the Sanofi site support agreement, an unusually high level of rework in the clinical business, and personnel costs, including investments in clinical research associates (CRAs) and the sales force, partially offset by demand and cost synergies. 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 $755 million, representing a net book-to-bill of 1.08, and a trailing twelve month net book-to-bill of 1.14.

Outlook for 2016
The following updated guidance assumes foreign exchange rates effective as of September 30, 2016 for the remainder of the year:

• Net revenue growth of 10.0% to 11.0% over 2015 net revenue of $8.51 billion, which includes the impact from approximately 60 basis points of negative currency. This is an increase from prior guidance of 9.5% to 10.5%, primarily due to the acquisition of Sequenom.

• Net revenue growth in LabCorp Diagnostics of 5.0% to 6.0% over 2015 pro forma revenue of $6.21 billion, which includes the impact from approximately 30 basis points of negative currency. This is an increase from prior guidance of 4.5% to 5.5%, primarily due to the acquisition of Sequenom.

• Net revenue growth in Covance Drug Development of 7.5% to 9.0% over 2015 pro forma revenue of $2.63 billion, which includes the impact from approximately 110 basis points of negative currency. This is an update from prior guidance of 7.0% to 9.0%. Excluding the impact from currency and the expiration of the Sanofi site support agreement, net revenue is expected to increase 11.2% to 12.7%.

• Adjusted EPS of $8.70 to $8.90, versus prior guidance of $8.60 to $8.95, and as compared to $7.91 last year.

• Free cash flow (operating cash flow less capital expenditures) of $840 million to $880 million, an increase of approximately 17% to 24% over the prior year. This is an update from prior guidance of $900 million to $950 million.

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.