On July 28, 2015 Laboratory Corporation of America Holdings (LabCorp or the "Company") (NYSE: LH) reported results for the quarter ended June 30, 2015 (Press release, LabCorp, JUL 28, 2015, View Source;p=RssLanding&cat=news&id=2071567 [SID:1234506723]).

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Consolidated Results

Second Quarter Results

Net revenue for the quarter was $2.22 billion, an increase of 46.3% over last year’s $1.52 billion. The acquisition of Covance contributed $620.8 million in net revenue during the quarter, driving 40.9% year over year net revenue growth. The remainder of the increase of $81.5 million, or 5.4%, was primarily due to strong organic volume growth and tuck-in acquisitions, partially offset by currency. Organic revenue growth in the quarter, excluding currency, was 5.4%, of which Beacon LBS, the Company’s technology-enabled solution providing point-of-care decision support, contributed 1.1%.

Operating income for the quarter was $321.3 million, compared to $246.7 million in the second quarter of 2014. The Company recorded restructuring charges and special items of $23.1 million during the second quarter of 2015, compared to $6.7 million during the same period in 2014. Adjusted operating income (excluding amortization of $46.6 million, restructuring and special items) for the quarter was $391.0 million, or 17.6% of net revenue, compared to $275.4 million, or 18.2%, in the second quarter of 2014. The increase in adjusted operating income was due to the Covance acquisition, organic volume growth and productivity, partially offset by currency.

The Company recorded net earnings in the quarter of $168.4 million, or $1.64 per diluted share, compared to $141.3 million, or $1.64 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $2.09 in the quarter, compared to $1.84 in the second quarter of 2014.

"We are extremely pleased with our results this quarter, in which we began to see the power of our combined businesses," said David P. King, Chairman and Chief Executive Officer. "We delivered impressive growth, as well as record revenue, earnings and free cash flow to our shareholders. We remain focused on executing our long-term growth strategy, and delivering on our mission of improving health and improving lives."

Operating cash flow for the second quarter was $396.7 million, compared to $207.4 million in the second quarter of 2014. The increase in operating cash flow was due to the acquisition of Covance as well as improved earnings and working capital. Capital expenditures totaled $69.1 million, compared to $48.1 million in the second quarter of 2014. As a result, free cash flow (operating cash flow less capital expenditures) was $327.6 million, compared to $159.3 million in the second quarter of 2014.

At the end of the quarter, the Company’s cash balance and total debt were $619.0 million and $6.8 billion, respectively. During the quarter, the Company invested $62.2 million in tuck-in acquisitions and paid down $145.0 million of debt. The Company’s liquidity at the end of the quarter was approximately $1.6 billion, consisting of cash and available credit.

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, these consolidated results exclude Covance.

Net revenue was $3.99 billion, an increase of 35.4% over last year’s $2.95 billion. The acquisition of Covance contributed $888.0 million from the date of closing on February 19, 2015, driving 30.1% year over year net revenue growth. The remainder of the increase of $155.9 million, or 5.3%, was due to strong organic volume growth and tuck-in acquisitions, partially offset by price, mix and currency. Organic revenue growth in the first half of the year, excluding currency, was 5.2%, of which Beacon LBS contributed 0.5%.

Operating income was $452.4 million, compared to $450.0 million in the first half of 2014. The Company recorded $161.8 million in restructuring charges and special items (costs associated with the acquisition of Covance and Project LaunchPad) during the first half of 2015, compared to $14.3 million during the same period in 2014. Adjusted operating income (excluding amortization of $79.0 million, restructuring and special items) was $693.2 million, or 17.4% of net revenue, compared to $507.3 million, or 17.2%, in the first half of 2014. The increase in adjusted operating income was due to the acquisition of Covance, organic volume growth and productivity gains, partially offset by price, mix and currency.

The Company’s earnings were reduced by restructuring and special items of $214.4 million ($161.8 million impacted operating income and $52.6 million impacted interest expense), or $154.8 million after-tax. As a result, the Company recorded net earnings in the first half of 2015 of $169.7 million, or $1.73 per diluted share, compared to $254.4 million, or $2.94 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $3.85, compared to $3.35 in the first half of 2014.

Operating cash flow for the first half of 2015 was $309.8 million, compared to $349.7 million in the first half of 2014, as the Company’s operating cash flow was negatively impacted by $153.5 million in non-recurring items relating to the acquisition of Covance. Excluding these items, operating cash flow was $463.3 million, with the year-on-year increase driven by improved earnings, partially offset by seasonal working capital requirements. Capital expenditures totaled $102.9 million, compared to $104.6 million in the first half of 2014. As a result, free cash flow (operating cash flow less capital expenditures) was $206.9 million, compared to $245.1 million in the first half of 2014. Excluding non-recurring items, free cash flow was $360.4 million during the first half of 2015.

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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. 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 $1.58 billion, an increase of 5.4% over net revenue of $1.49 billion for the second quarter of 2014. The increase in net revenue was the result of organic volume growth, measured by requisitions, Beacon LBS and tuck-in acquisitions, partially offset by currency. The increase in net revenue of 5.4% includes the benefit from Beacon LBS of 1.1%, and unfavorable foreign currency translation of 0.7%. Total volume (measured by requisitions) increased by 4.7% (organic volume of 4.3% and acquisition volume of 0.4%). Revenue per requisition increased by 0.2%.

Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $347.1 million, or 22.0% of net revenue, compared to adjusted operating income of $308.9 million, or 20.7% of net revenue, in the second quarter of 2014. The increase was primarily due to strong volume growth and productivity. Improvement in productivity was driven, in part, by Project LaunchPad, the Company’s enterprise-wide business process improvement initiative. The Company is on track to deliver approximately $50 million of net savings in 2015 through Project LaunchPad.

Covance Drug Development

Net revenue for the quarter was $643.7 million, a decrease of 2.7% from revenue of $661.3 million for the second quarter of 2014. The strengthening U.S. Dollar negatively impacted year-over-year revenue growth by approximately 450 basis points. Excluding currency, net revenue increased 1.8% year-over-year, on increased volume, partially offset by mix.

Adjusted operating income (excluding amortization, restructuring and special items) was $89.9 million, or 14.0% of net revenue, compared to adjusted operating income of $84.7 million, or 12.8% of net revenue, in the second quarter of 2014. The increase was primarily due to higher volume, cost synergies and lower depreciation expense, partially offset by the impact of currency and mix. The Company is on track to deliver acquisition-related cost synergies in 2015 of approximately $35 million.

Net orders (gross orders less cancellations and reductions) in the quarter were $737 million, representing a net book-to-bill of 1.15. Backlog at June 30, 2015 was approximately $6.6 billion.

Outlook for 2015

The Company’s updated guidance for 2015 includes the following:

Net revenue growth (assuming foreign exchange rates effective as of June 30, 2015) of 40% to 42%, after the impact from approximately 190 basis points of negative currency. Net revenue growth in LabCorp Diagnostics of 3.5% to 5.5%, after the impact from approximately 70 basis points of negative currency. The change in net revenue in Covance Drug Development is expected to be -1.5% to 0.5% versus full year 2014 revenue after the impact of approximately 320 basis points of negative currency.

Adjusted EPS of $7.75 to $8.00, versus prior guidance of $7.55 to $7.90, and as compared to $6.80 last year.
Operating cash flow of $990 million to $1,015 million, capital expenditures of $270 million to $295 million, and free cash flow of $695 million to $745 million. The Company expects free cash flow in 2015 to be negatively impacted by approximately $120 million of net non-recurring items related to the Covance acquisition. Excluding these items, the Company expects free cash flow to be $815 million to $865 million versus $536 million last year.
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 relation’s 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.