On October 24, 2018 LabCorp (or the Company) (NYSE: LH) reported results for the third quarter ended September 30, 2018, and updated its 2018 guidance (Press release, LabCorp, OCT 24, 2018, View Source;p=RssLanding&cat=news&id=2373135 [SID1234530177]).

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"We are pleased with our performance in the quarter, highlighted by excellent results in our Covance Drug Development business and solid results in LabCorp Diagnostics," said David P. King, chairman and chief executive officer. "Covance delivered growth in net orders, a strong book to bill and significant margin expansion, while Diagnostics continued its consistent organic revenue and volume growth. In addition, we made progress on our three strategic objectives, and initiated LaunchPad Phase II in Diagnostics to continue streamlining the business and reducing the fixed cost base. Despite the dynamically changing market, we have two strong businesses, outstanding cash flow and a strong balance sheet, positioning us well to deliver growth for the balance of this year and in the years ahead."

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

Third Quarter Results

Revenue for the quarter was $2.83 billion, an increase of 8.0% compared to $2.62 billion in the third quarter of 2017. The increase in revenue was primarily due to growth from acquisitions of 6.5% and organic growth of 2.8%, partially offset by the negative impact from the disposition of businesses of 1.1% and foreign currency translation of approximately 30 basis points. Revenue growth was negatively impacted by approximately 50 basis points due to the ransomware attack and Hurricane Florence (hereinafter "Business Disruptions") during the quarter.

Operating income for the quarter was $343.4 million, or 12.1% of revenue, compared to $326.7 million, or 12.5%, in the third quarter of 2017. The increase in operating income was primarily due to acquisitions, organic revenue growth, the Company’s LaunchPad business process improvement initiative, and fewer restructuring charges and special items. These drivers were partially offset by lower Medicare pricing as a result of the implementation of PAMA, costs related to the ransomware attack, the disposition of businesses, and personnel costs. The Company recorded restructuring charges, special items, and amortization which together totaled $85.8 million in the quarter, compared to $105.2 million during the same period in 2017. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $429.2 million, or 15.2% of revenue, compared to $431.9 million, or 16.5%, in the third quarter of 2017. The decline in adjusted operating margin was primarily due to the implementation of PAMA, the negative impact from the Business Disruptions, as well as the mix impact from the acquisition of Chiltern.

Net earnings in the quarter were $318.8 million, compared to $171.6 million in the third quarter of 2017. Diluted EPS were $3.10 in the quarter, an increase of 187.9% compared to $1.65 in the same period in 2017. Net earnings and diluted EPS in the quarter benefitted from the net gain on disposition of businesses of $125.3 million and $1.22 per share, respectively. Adjusted EPS (excluding amortization, restructuring charges, special items, and the net gain on disposition of businesses) were $2.74 in the quarter, an increase of 15.6% compared to $2.37 in the third quarter of 2017. The Company’s adjusted earnings in the quarter were reduced by approximately $0.10 per diluted share due to the impact from the Business Disruptions, primarily due to lower volume.

Operating cash flow for the quarter was $251.9 million, down from $350.5 million in the third quarter of 2017, as the benefit of higher cash earnings was more than offset by an increase in working capital, a discretionary pension contribution, and the impact from the Business Disruptions. Capital expenditures totaled $97.9 million, compared to $75.3 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $154.0 million, compared to $275.2 million in the third quarter of 2017.

At the end of the quarter, the Company’s cash balance and total debt were $892.6 million and $6.5 billion, respectively. During the quarter, the Company repurchased $150.0 million of stock representing approximately 0.8 million shares. The Company had $843.5 million of authorization remaining under its share repurchase program at the end of the quarter.

Year-To-Date Results

Revenue was $8.55 billion, an increase of 13.0% over last year’s $7.56 billion. The increase in revenue was due to growth from acquisitions of 10.0%, organic growth of 2.7%, and the benefit from foreign currency translation of approximately 60 basis points, partially offset by the impact from the disposition of businesses of 0.4%.

Operating income was $1,018.0 million, or 11.9% of revenue, compared to $974.7 million, or 12.9%, in the first nine months 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, costs related to the ransomware attack, and personnel costs. The decline in operating margin was primarily due to the implementation of PAMA, the negative impact from the Business Disruptions, as well as the mix impact from the acquisition of Chiltern. The Company recorded restructuring charges, special items, and amortization which together totaled $310.4 million in the first nine months of the year, compared to $265.1 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. Adjusted operating income (excluding amortization, restructuring charges, and special items) was $1.33 billion, or 15.5% of revenue, compared to $1.24 billion, or 16.4%, in the first nine months of 2017.

Net earnings in the first nine months of 2018 were $725.8 million, or $7.04 per diluted share, compared to $539.4 million, or $5.19 per diluted share, last year. Net earnings and diluted EPS in the first nine months of 2018 benefitted from the net gain on disposition of businesses of $125.3 million and $1.22 per share, respectively. Adjusted EPS (excluding amortization, restructuring, special items, and the net gain on disposition of businesses) were $8.50, an increase of 22.7% compared to $6.93 in the first nine months of 2017.

Operating cash flow was $819.0 million, compared to $933.1 million in the first nine months of 2017, as the benefit of higher cash earnings was more than offset by an increase in working capital, a discretionary pension contribution, and the impact from the Business Disruptions. Capital expenditures totaled $257.6 million, compared to $216.8 million during the same period in 2017. As a result, free cash flow (operating cash flow less capital expenditures) was $561.4 million, compared to $716.3 million in the first nine months 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.

Third Quarter Segment Results

LabCorp Diagnostics

Revenue for the quarter was $1.75 billion, a decrease of 0.2% from $1.75 billion in the third quarter of 2017. Revenue benefitted from acquisitions and organic volume (measured by requisitions), offset by the negative impact from the disposition of businesses (described below) and the implementation of PAMA. In addition, foreign currency translation reduced revenue by approximately 20 basis points.

The Company’s Food Solutions business was divested on August 1, 2018, and the Company’s UK-based forensic laboratory testing business was divested on August 7, 2018. These divested businesses contributed $14.6 million in revenue in the quarter, compared to $43.0 million during the third quarter of 2017. Excluding the disposition of businesses, revenue for the quarter would have been $1.74 billion, an increase of 1.4% over $1.71 billion last year.

Excluding the disposition of businesses, revenue per requisition decreased by 0.4% and total volume (measured by requisitions) increased by 2.0%, of which organic volume was 1.3% and acquisition volume was 0.8%. Volume growth was negatively impacted by 0.6% due to the Business Disruptions.

Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $331.5 million, or 18.9% of revenue, compared to $374.3 million, or 21.3%, in the third quarter of 2017. Operating income and margin declined primarily due to the negative impact from PAMA, the ransomware attack, the disposition of businesses, and personnel costs, partially offset by acquisitions and organic volume growth.

Covance Drug Development

Revenue for the quarter was $1.08 billion, an increase of 24.7% over $867 million in the third quarter of 2017. The increase in revenue was primarily due to growth from acquisitions of 17.9%, and organic growth of 7.3%, partially offset by the impact from foreign currency translation of approximately 50 basis points.

Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $131.3 million, or 12.1% of revenue, compared to $93.8 million, or 10.8%, in the third 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 $5.26 billion and 1.25, respectively. Backlog at the end of the quarter was $9.40 billion compared to $8.97 billion last quarter, and the Company expects approximately $3.8 billion of its 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 September 30, 2018 for the remainder of the year, and includes capital allocation.

Revenue growth of 10.5% to 11.0% over 2017 revenue of $10.31 billion, which includes the benefit of approximately 40 basis points of foreign currency translation. This is a narrowing of the range from the prior guidance of 10.5% to 11.5%, and includes the impact from Business Disruptions of 10 basis points, as well as the 10 basis point unfavorable change in currency translation.
Revenue growth in LabCorp Diagnostics of 3.0% to 3.5% over 2017 revenue of $6.86 billion, which includes the negative impact of PAMA as well as the benefit of approximately 10 basis points of foreign currency translation. This is a narrowing of the range from the prior guidance of 3.0% to 4.5%, and now includes the impact from the Business Disruptions of 20 basis points, and the 10 basis point unfavorable change in currency translation.
Revenue growth in Covance Drug Development of 24.0% 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 a narrowing of the range from the prior guidance of 23.0% to 26.0%.
Adjusted EPS of $11.25 to $11.45, which is an increase of approximately 22.3% to 24.4% over 2017 adjusted EPS of $9.20. This is lower than the prior guidance of $11.35 to $11.65 primarily due to the negative impact from the Business Disruptions of $0.10 per share as well as third quarter performance.
Free cash flow (operating cash flow less capital expenditures) of $975 million to $1,025 million, compared to $1.1 billion in 2017. This is lower than the prior guidance of $1.1 billion to $1.2 billion primarily due to the upcoming tax payment of approximately $125 million related to the disposition of the Food Solutions business, which was not included in the 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 View Source." target="_blank" title="View Source." rel="nofollow">View Source 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. EDT and is available by dialing 844-634-1444 (615-247-0253 for international callers). The access code is 7398818. A telephone replay of the call will be available through November 7, 2018, and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 7398818. A live online broadcast of LabCorp’s quarterly conference call on October 24, 2018, 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 October 18, 2019.