On April 30, 2019 LabCorp (or the Company) (NYSE: LH) reported results for the first quarter ended March 31, 2019, and increased 2019 earnings guidance (Press release, LabCorp, APR 30, 2019, View Source;p=RssLanding&cat=news&id=2396213 [SID1234535647]).
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"During the quarter we delivered strong performance in both businesses, translating into solid revenue and earnings in light of the outsized impact of price reductions due to PAMA on our results," said David P. King, chairman and CEO of LabCorp. "Our Diagnostics business delivered a solid performance in light of PAMA, with organic growth in revenue and volume. Covance grew revenue on a constant currency basis, expanded margins and continued to drive earnings. We deployed capital to share repurchase and several strategic acquisitions, further demonstrating our commitment to returning capital to shareholders and providing clients with innovative solutions that deliver value today and in the future. The value of our combination is increasingly apparent and we are well-positioned to drive growth in 2019 and the years to come."
Consolidated Results
First Quarter Results
Revenue for the quarter was $2.79 billion, a decrease of 2.0% from $2.85 billion in the first quarter of 2018. The decline in revenue was primarily due to the negative impact from the disposition of businesses of 1.8% and foreign currency translation of approximately 0.9%, partially offset by acquisitions of 0.5% and organic growth of 0.2% (which includes the negative impact from PAMA of 0.9%).
Operating income for the quarter was $318.2 million, or 11.4% of revenue, compared to $305.4 million, or 10.7%, in the first quarter of 2018. The increase in operating income and margin was primarily due to increased demand, LaunchPad business process improvement initiatives, and fewer restructuring charges and special items, partially offset by lower pricing as a result of PAMA and higher personnel costs. The Company recorded restructuring charges, special items, and amortization, which together totaled $93.2 million in the quarter, compared to $130.3 million during the same period in 2018. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $411.4 million, or 14.7% of revenue, compared to $435.7 million, or 15.3%, in the first quarter of 2018. The decrease in adjusted operating income and margin was primarily due to lower pricing as a result of PAMA and higher personnel costs, partially offset by demand and LaunchPad savings.
Net earnings in the quarter were $185.6 million, compared to $173.2 million in the first quarter of 2018. Diluted EPS were $1.86 in the quarter, an increase of 11.4% compared to $1.67 in the same period in 2018. Adjusted EPS (excluding amortization, restructuring charges, and special items) were $2.62 in the quarter, a decrease of 5.8% compared to $2.78 in the first quarter of 2018.
Operating cash flow for the quarter was $165.8 million, compared to $179.7 million in the first quarter of 2018. The decrease in operating cash flow was due to lower cash earnings, partially offset by favorable working capital. Capital expenditures totaled $94.2 million, compared to $72.5 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $71.6 million, compared to $107.2 million in the first quarter of 2018.
At the end of the quarter, the Company’s cash balance and total debt were $348.8 million and $6.0 billion, respectively. During the quarter, the Company invested $47.3 million in acquisitions and repurchased $100.0 million of stock, representing approximately 0.8 million shares. The Company had $1.25 billion of authorization remaining under its share repurchase program at the end of the quarter.
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The following segment results exclude amortization, restructuring charges, special items, and unallocated corporate expenses.
First Quarter Segment Results
LabCorp Diagnostics
Revenue for the quarter was $1.72 billion, a decrease of 2.7% from $1.77 billion in the first quarter of 2018. The decrease in revenue was primarily driven by the negative impact from the disposition of businesses of 2.9% and foreign currency translation of 0.3%, partially offset by organic revenue growth of 0.4%. Excluding the negative impact from PAMA of 1.5%, organic revenue for the quarter would have increased by 1.9%.
Total volume (measured by requisitions) excluding the disposition of businesses increased by 0.8% due to organic growth. Volume includes the unfavorable impact of managed care contract changes and one fewer revenue day, partially offset by the favorable impact from weather. Excluding the disposition of businesses, revenue per requisition decreased by 0.4%, including the negative impact from PAMA of 1.5%.
Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $310.4 million, or 18.0% of revenue, compared to $364.0 million, or 20.6%, in the first quarter of 2018. The decline in adjusted operating income and margin was primarily due to the negative impact from PAMA of approximately $27 million or 120 basis points, disposition of businesses, personnel costs, and cybersecurity expenses, partially offset by LaunchPad initiatives. 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 $1.07 billion, a decrease of 0.4% compared to $1.08 billion in the first quarter of 2018. The decrease in revenue was due to the negative impact from foreign currency translation of approximately 210 basis points, which was partially offset by acquisitions of 1.2% and organic growth of 0.5%. Excluding pass-throughs, organic revenue grew consistent with the Company’s full year guidance range of 5.0% to 9.0%.
Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $138.0 million, or 12.8% of revenue, compared to $108.0 million, or 10.0%, in the first quarter of 2018. The increase in adjusted operating income and margin was primarily due to organic demand, LaunchPad savings, acquisitions, and currency translation, partially offset by personnel costs. The Company is on track to deliver $150 million of net savings from its three-year Covance LaunchPad initiative by the end of 2020, and $30 million of cost synergies from the integration of Chiltern by the end of 2019.
Net orders and net book-to-bill during the trailing twelve months were $5.32 billion and 1.24, respectively. Backlog at the end of the quarter was $9.95 billion compared to $9.76 billion last quarter, and the Company expects approximately $3.9 billion of its backlog to convert into revenue in the next twelve months.
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Outlook for 2019
The following guidance assumes foreign exchange rates effective as of March 31, 2019, for the remainder of the year and includes the estimated impact from capital allocation, including share repurchases and acquisitions.
Revenue growth of 0.5% to 2.5% over 2018 revenue of $11.33 billion, unchanged from prior guidance. This guidance includes the negative impact from the 2018 disposition of businesses of approximately 1.2% and foreign currency translation of approximately 0.5%.
Revenue in LabCorp Diagnostics is expected to be -4.0% to -2.0% as compared to 2018 revenue of $7.03 billion, unchanged from prior guidance. This guidance includes the negative impact from the 2018 disposition of businesses of approximately 2% and foreign currency translation of approximately 0.2%.
Revenue growth in Covance Drug Development of 5.0% to 9.0% over 2018 revenue of $4.31 billion, unchanged from prior guidance. This guidance includes the negative impact from foreign currency translation of approximately 0.9%. Organic revenue growth excluding pass-throughs is also expected to be 5.0% to 9.0% over 2018.
Adjusted EPS of $11.05 to $11.45, an increase of 0% to 4% as compared to $11.02 in 2018. This is an increase over prior guidance of $11.00 to $11.40.
Free cash flow (operating cash flow less capital expenditures) of $950 million to $1.05 billion, compared to $925.6 million in 2018, 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 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." target="_blank" title="View Source." rel="nofollow">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 844-634-1444 (615-247-0253 for international callers). The access code is 7459328. A telephone replay of the call will be available through May 14, 2019, and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 7459328. A live online broadcast of LabCorp’s quarterly conference call on April 30, 2019, will be available at View Source or at View Source beginning at 9:00 a.m. EDT. This webcast will be archived and accessible through April 24, 2020.