On July 25, 2019 LabCorp (or the Company) (NYSE: LH) reported results for the second quarter ended June 30, 2019, and updated 2019 guidance (Press release, LabCorp, JUL 25, 2019, View Source [SID1234537728]).

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"This quarter again highlighted the strength and balance of our businesses," said David P. King, chairman and CEO of LabCorp. "Revenue grew 4.1% excluding non-operational headwinds from PAMA, disposition of businesses, and currency translation. Diagnostics performed well during the quarter, with the LaunchPad business transformation initiative largely offsetting known headwinds, while Drug Development continued to deliver strong top-line growth and margin expansion. We deployed capital to share repurchase and acquisitions, returning capital to shareholders and adding to our repertoire of innovative customer solutions that deliver value our customers want. We remain well-positioned to drive growth in 2019 and the years to come."

Consolidated Results

Second Quarter Results

Revenue for the quarter was $2.88 billion, an increase of 0.5% from $2.87 billion in the second quarter of 2018. The increase in revenue was primarily due to acquisitions of 1.4% and organic growth of 1.7% (which includes the negative impact from PAMA of 0.9%), partially offset by the disposition of businesses of 1.9% and foreign currency translation of 0.7%.

Operating income for the quarter was $335.7 million, or 11.6% of revenue, compared to $369.2 million, or 12.9%, in the second quarter of 2018. The decrease in operating income and margin was primarily due to lower Medicare and Medicaid pricing as a result of PAMA, higher personnel costs, cybersecurity expenses, and higher special items from acquisition and disposition-related costs, partially offset by increased demand and LaunchPad savings. The Company recorded restructuring charges, special items, and amortization, which together totaled $111.2 million in the quarter, compared to $94.3 million during the same period in 2018. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $446.9 million,

or 15.5% of revenue, compared to $463.5 million, or 16.2%, in the second quarter of 2018. The $16.6 million decline in adjusted operating income from 2018 included the negative impact from PAMA of $27.1 million.

Net earnings in the quarter were $190.4 million, compared to $233.8 million in the second quarter of 2018. Diluted EPS were $1.93 in the quarter, a decrease of 15.0% compared to $2.27 in the same period in 2018. Adjusted EPS (excluding amortization, restructuring charges, and special items) were $2.93 in the quarter, a decrease of 1.7% compared to $2.98 in the second quarter of 2018.

Operating cash flow for the quarter was $253.5 million, compared to $387.4 million in the second quarter of 2018. The decrease in operating cash flow was primarily due to higher working capital requirements to support growth. Capital expenditures totaled $85.2 million, compared to $87.2 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $168.3 million, compared to $300.2 million in the second quarter of 2018.

At the end of the quarter, the Company’s cash balance and total debt were $265.4 million and $6.6 billion, respectively. During the quarter, the Company invested $656.4 million in acquisitions and repurchased $199.9 million of stock, representing approximately 1.3 million shares. As of June 30, 2019, the Company had $1.05 billion of authorization remaining under its share repurchase program.

Year-To-Date Results

Revenue was $5.67 billion, a decrease of 0.7% from $5.71 billion in the first half of last year. The decline in revenue was primarily due to the disposition of businesses of 1.9% and foreign currency translation of 0.8%, partially offset by acquisitions of 1.0% and organic growth of 1.0% (which includes the negative impact from PAMA of 1.0%).

Operating income was $653.9 million, or 11.5% of revenue, compared to $674.6 million, or 11.8%, in the first half of 2018. The decrease in operating income and margin was primarily due to lower Medicare and Medicaid pricing as a result of PAMA, personnel costs, disposition of businesses, cybersecurity expense, and a favorable one-time legal settlement in 2018, partially offset by organic demand, the Company’s LaunchPad initiatives, acquisitions, and a decrease in costs related to special items. The Company recorded restructuring charges, special items, and amortization which together totaled $204.4 million in the first half of the year, compared to $224.7 million during the same period in 2018. Adjusted operating income (excluding amortization, restructuring charges, and special items) was $858.3 million, or 15.1% of revenue, compared to $899.3 million, or 15.7%, in the first half of 2018. The $41.0 million decline in adjusted operating income from 2018 included the negative impact from PAMA of $54.1 million.

Net earnings in the first half of 2019 were $376.0 million, or $3.79 per diluted share, compared to $407.0 million, or $3.94 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $5.55, a decrease of 3.5% compared to $5.75 in the first half of 2018.

Operating cash flow was $419.3 million, compared to $567.1 million in the first half of 2018. The decrease in operating cash flow was primarily due to higher working capital requirements to support growth. Capital expenditures totaled $179.4 million, compared to $159.7 million during the same period in 2018. As a result, free cash flow (operating cash flow less capital expenditures) was $239.9 million, compared to $407.4 million in the first half of 2018.

The following segment results exclude amortization, restructuring charges, special items, and unallocated corporate expenses.

Second Quarter Segment Results

LabCorp Diagnostics
Revenue for the quarter was $1.76 billion, a decrease of 2.9% from $1.81 billion in the second quarter of 2018, primarily due to the negative impact from the disposition of businesses of 2.8%, currency translation of 0.2% and lower organic revenue of 0.3% partially offset by acquisitions of 0.4%. The organic revenue decline of 0.3% includes the negative impact of 1.5% from PAMA and 0.6% due to fewer revenue days.

Total volume (measured by requisitions), excluding the disposition of businesses, decreased by 0.9%, as acquisition volume contributed 0.2% and organic volume declined by 1.2%. Organic volume was negatively impacted by approximately 2.5% from the combination of lower consumer genetics demand, managed care contract changes, and fewer revenue days. Excluding the disposition of businesses, revenue per requisition increased by 1.0%, despite the negative impact from PAMA of 1.5%.

Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $345.4 million, or 19.6% of revenue, compared to $376.0 million, or 20.7%, in the second quarter of 2018. The $30.6 million decline in adjusted operating income was primarily due to the negative PAMA impact of $27.1 million. The negative impact from the disposition of businesses, managed care contract changes, cybersecurity expenses, fewer revenue days and personnel expense was predominantly offset by LaunchPad savings, other organic revenue growth, and acquisitions. 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 $1.13 billion, an increase of 6.8% compared to $1.05 billion in the second quarter of 2018. The increase in revenue was primarily due to organic growth of 5.5% and acquisitions of 3.3%, partially offset by foreign currency translation of 1.6% and a business disposition of 0.3%.

Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $141.7 million, or 12.6% of revenue, compared to $123.4 million, or 11.7%, in the second 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 higher personnel costs, cybersecurity investments, and facilities expenses to support the Company’s global expansion. The Company is on track to deliver $150 million of net savings from its three-year Covance LaunchPad initiative by the end of 2020.

Net orders and net book-to-bill during the trailing twelve months were $5.52 billion and 1.26, respectively. Backlog at the end of the quarter was $10.29 billion compared to $9.95 billion last quarter, and the Company expects approximately $4.1 billion of its backlog to convert into revenue in the next twelve months.

Outlook for 2019
The following guidance assumes foreign exchange rates effective as of June 30, 2019, for the remainder of the year and includes the estimated impact from currently anticipated capital allocation.

Revenue growth of 1.0% to 2.0% over 2018 revenue of $11.33 billion, which includes the negative impact from the disposition of businesses of approximately 1.5% and foreign currency translation of 0.5%. This is a narrowing of the range from the prior guidance of 0.5% to 2.5%.

Revenue in LabCorp Diagnostics is expected to be -3.0% to -2.0% as compared to 2018 revenue of $7.03 billion, which includes the negative impact from the disposition of businesses of approximately 2% and foreign currency translation of 0.2%. This is an improvement over the prior guidance of -4.0% to -2.0%.

Revenue growth in Covance Drug Development of 5.5% to 8.5% over 2018 revenue of $4.31 billion, a narrowing of the range as compared to the prior guidance of 5.0% to 9.0%. This guidance includes the negative impact from foreign currency translation of 0.9%.

Adjusted EPS of $11.10 to $11.40, which is an increase of 0.7% to 3.4% over 2018 adjusted EPS of $11.02, and a narrowing of the range as compared to the prior guidance of $11.05 to $11.45.

Free cash flow (operating cash flow less capital expenditures) of $950 million to $1.05 billion, which is an increase of 2.6% to 13.4% over 2018 and unchanged from 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 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 9679477. A telephone replay of the call will be available through August 8, 2019, and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 9679477. A live online broadcast of LabCorp’s quarterly conference call on July 25, 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 July 24, 2020.