On July 25, 2018 LabCorp (or the Company) (NYSE: LH) reported results for the second quarter ended June 30, 2018, and updated 2018 guidance (Press release, LabCorp, JUL 25, 2018, View Source;p=RssLanding&cat=news&id=2359858 [SID1234527857]).

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"We delivered another quarter of strong growth and disciplined capital deployment across our integrated enterprise, with double-digit increases in revenue and adjusted EPS over last year," said David P. King, chairman and CEO. "The Drug Development business drove continued organic revenue growth and strong margin improvement, while winning and expanding strategic partnerships that will contribute to future study awards. The Diagnostics business expanded opportunities with key partners, and achieved solid results despite the negative impact from the implementation of PAMA. As a global leader in the expanding life sciences industry, our differentiated offering strengthens our ability to overcome segment-specific challenges, and create significant value for stakeholders now and for years to come."

Effective January 1, 2018, the Company adopted the FASB-issued converged standard on revenue recognition (ASC 606), using the full retrospective method. Unless otherwise indicated, all financial results in 2017 and comparisons to financial results in 2017 have been restated in this press release as if the Company had adopted ASC 606 on January 1, 2017.

Consolidated Results

Second Quarter Results

Revenue for the quarter was $2.87 billion, an increase of 13.4% compared to $2.53 billion in the second quarter of 2017. The increase in revenue was due to growth from acquisitions of 10.5%, organic growth of 2.1%, and the benefit from foreign currency translation of approximately 80 basis points.

Operating income for the quarter was $369.2 million, or 12.9% of revenue, compared to $329.8 million, or 13.0%, in the second quarter of 2017. The increase in operating income was primarily due to acquisitions, organic revenue growth, and the Company’s LaunchPad business process improvement initiative, partially offset by lower Medicare pricing as a result of the implementation of PAMA and personnel costs. The Company recorded restructuring charges, special items, and amortization which together totaled $94.3 million in the quarter, compared to $101.3 million during the same period in 2017. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $463.5 million, or 16.2% of revenue, compared to $431.1 million, or 17.1%, in the second quarter of 2017. The decline in adjusted operating margin was due to the implementation of PAMA, and the mix impact from the acquisition of Chiltern.

Net earnings in the quarter were $233.8 million, compared to $184.8 million in the second quarter of 2017. Diluted EPS were $2.27 in the quarter, an increase of 28.0% compared to $1.78 in the same period in 2017. Adjusted EPS (excluding amortization, restructuring charges and special items) were $2.98 in the quarter, an increase of 22.6% compared to $2.43 in the second quarter of 2017.

Operating cash flow for the quarter was $367.2 million, compared to $310.5 million in the second quarter of 2017, due to higher cash earnings and favorable working capital. Capital expenditures totaled $87.2 million, compared to $69.3 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $280.0 million, compared to $241.2 million in the second quarter of 2017.

At the end of the quarter, the Company’s cash balance and total debt were $221.4 million and $6.5 billion, respectively. During the quarter, the Company invested $79.1 million in acquisitions, paid down a net of $310.0 million of debt, and repurchased $75.0 million of stock representing approximately 0.5 million shares. The Company had $993.5 million of authorization remaining under its share repurchase program at the end of the quarter.

Year-To-Date Results

Revenue was $5.71 billion, an increase of 15.6% over last year’s $4.94 billion. The increase in revenue was due to growth from acquisitions of 11.9%, organic growth of 2.6%, and the benefit from foreign currency translation of approximately 110 basis points.

Operating income was $674.6 million, or 11.8% of revenue, compared to $647.9 million, or 13.1%, in the first half of 2017. The increase in operating income was primarily due to acquisitions, organic revenue growth, and the Company’s LaunchPad initiative, partially offset by the implementation of PAMA and personnel costs. The Company recorded restructuring charges, special items, and amortization which together totaled $224.7 million in the first half of the year, compared to $159.9 million during the same period in 2017. This increase was primarily due to higher amortization expense, and the payment of a one-time bonus to non-bonus-eligible employees following the implementation of the Tax Cuts and Jobs Act of 2017 (TCJA). Adjusted operating income (excluding amortization, restructuring charges, and special items) was $899.3 million, or 15.7% of revenue, compared to $807.8 million, or 16.3%, in the first half of 2017. The decline in adjusted operating margin was due to the impact from the implementation of PAMA, and the mix impact from the acquisition of Chiltern.

Net earnings in the first half of 2018 were $407.0 million, or $3.94 per diluted share, compared to $367.8 million, or $3.54 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $5.75, an increase of 25.8% compared to $4.57 in the first half of 2017.

Operating cash flow was $522.0 million, compared to $536.4 million in the first half of 2017. The reduction in operating cash flow was due to the one-time bonus payment related to the TCJA and higher working capital to support growth, partially offset by higher cash earnings. Capital expenditures totaled $159.7 million, compared to $141.5 million during the same period in 2017. As a result, free cash flow (operating cash flow less capital expenditures) was $362.3 million, compared to $394.9 million in the first half of 2017.

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The following segment results reflect the Company’s retrospective adoption of ASC 606 on January 1, 2017, and exclude amortization, restructuring charges, special items and unallocated corporate expenses.

Second Quarter Segment Results

LabCorp Diagnostics

Revenue for the quarter was $1.81 billion, an increase of 5.4% over $1.72 billion in the second quarter of 2017. The increase in revenue was primarily driven by acquisitions, organic volume (measured by requisitions), and the benefit from foreign currency translation of approximately 30 basis points, partially offset by the impact from the implementation of PAMA. Total volume (measured by requisitions) increased by 5.8%, of which organic volume was 2.8% and acquisition volume was 3.0%. Revenue per requisition decreased by 0.7%.

Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $376.0 million, or 20.7% of revenue, compared to $375.5 million, or 21.8%, in the second quarter of 2017. Operating income benefited from organic volume growth and acquisitions, which were essentially offset by the negative impact from PAMA and personnel costs. The decline in operating margin was primarily due to the negative impact from PAMA.

Covance Drug Development

Revenue for the quarter was $1.05 billion, an increase of 30.5% over $808 million in the second quarter of 2017. The increase was primarily due to acquisitions, as well as organic growth and the benefit from foreign currency translation of approximately 180 basis points.

Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $123.4 million, or 11.7% of revenue, compared to $88.5 million, or 11.0%, in the second quarter of 2017. The increase in operating income and margin were primarily due to organic demand, LaunchPad savings and acquisitions, partially offset by personnel costs. The Company expects to deliver $150 million of net savings from LaunchPad 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 $4.87 billion and 1.22, respectively. Backlog at the end of the quarter was $8.97 billion, and the Company expects approximately $3.7 billion of this backlog to convert into revenue in the next twelve months.

Outlook for 2018

In the following guidance, all financial results in 2017 and comparisons to financial results in 2017 have been restated in this press release as if the Company had adopted ASC 606 on January 1, 2017. The guidance assumes foreign exchange rates effective as of June 30, 2018 for the remainder of the year, and includes capital allocation.

Revenue growth of 10.5% to 11.5% over 2017 revenue of $10.31 billion, which includes the benefit of approximately 50 basis points of foreign currency translation. This is in-line with the prior guidance of 10.0% to 12.0%, as the increased revenue guidance in Covance Drug Development is offset by the previously-announced divestiture of the Food Solutions business.
Revenue growth in LabCorp Diagnostics of 3.0% to 4.5% over 2017 revenue of $6.86 billion, which includes the negative impact of PAMA as well as the benefit of approximately 20 basis points of foreign currency translation. This is lower than the prior guidance of 3.5% to 5.5% due to the previously-announced divestiture of the Food Solutions business.
Revenue growth in Covance Drug Development of 23.0% to 26.0% over 2017 revenue of $3.45 billion, which includes the benefit of approximately 110 basis points of foreign currency translation. This is an increase over the prior guidance of 21.0% to 25.0% due to higher investigator and other pass-through revenues, partially offset by the change in foreign currency translation.
Adjusted EPS of $11.35 to $11.65, which is an increase of approximately 22.7% to 25.9% over 2017 adjusted EPS of $9.25, and a narrowing of the range compared to prior guidance of $11.30 to $11.70.
Free cash flow (operating cash flow less capital expenditures) of $1.1 billion to $1.2 billion, compared to $1.1 billion in 2017, 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, 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.

A conference call discussing LabCorp’s quarterly results will be held today at 9:00 a.m. Eastern Time and is available by dialing 844-634-1444 (615-247-0253 for international callers). The access code is 8281087. A telephone replay of the call will be available through August 8, 2018 and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 8281087. A live online broadcast of LabCorp’s quarterly conference call on July 25, 2018, will be available at View Source or at View Source beginning at 9:00 a.m. Eastern Time. This webcast will be archived and accessible through July 18, 2019