On April 25, 2018 LabCorp (or the Company) (NYSE: LH) reported results for the first quarter ended March 31, 2018, and updated 2018 guidance (Press release, LabCorp, APR 25, 2018, View Source;p=RssLanding&cat=news&id=2344448 [SID1234525667]).
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"We delivered another outstanding quarter, with strong results from each of our businesses demonstrating the power of our multi-faceted platform for growth," said David P. King, chairman and CEO. "The Drug Development business had terrific performance, highlighted by organic revenue growth, robust margin improvement, and continued strength in book-to-bill. The Diagnostics business generated industry-leading organic volume growth despite adverse weather, and expanded key partnerships. As we have highlighted, our Diagnostics and Drug Development businesses are individual market leaders and, as an enterprise, we offer a unique ‘beyond-lab, beyond-CRO’ combination to our business partners. We continue to grow as a global leader in life sciences, positioning us to deliver long-term growth and substantial shareholder value."
Adoption of ASC 606
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. This accounting change affects the Company’s Diagnostics and Drug Development businesses differently, as explained in this press release; for the enterprise, the accounting change increases revenue, lowers earnings, and has no impact on cash flow. Tables comparing the full-year financial results in 2017 as well as the first quarter financial results in 2018 and 2017 under ASC 606 to the Company’s results for the applicable periods under the prior revenue recognition accounting standard (ASC 605) appear at the end of this press release. In addition, the Company furnished a Supplemental Financial Information presentation on Form 8-K dated April 25, 2018, which includes quarterly financial results in 2017 and full-year financial results in 2016 under ASC 606.
Consolidated Results
First Quarter Results
Revenue for the quarter was $2.85 billion, an increase of 18.0% compared to $2.41 billion in the first quarter of 2017. The increase in revenue was due to growth from acquisitions of 13.4%, organic growth of 3.2%, and the benefit from foreign currency translation of approximately 150 basis points.
Operating income for the quarter was $305.4 million, or 10.7% of revenue, compared to $318.1 million, or 13.2%, in the first quarter of 2017. The decrease in operating income and margin were primarily due to higher restructuring charges, special items, and amortization which together totaled $130.3 million in the quarter, compared to $58.6 million during the same period in 2017. This change was primarily due to acquisition-related costs, 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) for the quarter was $435.7 million, an increase over last year’s $376.7 million primarily due to acquisitions, organic revenue growth, and the Company’s LaunchPad business process improvement initiative. Adjusted operating margin for the quarter was 15.3% of revenue, down from 15.6% in the first quarter of 2017, due to acquisition mix.
Net earnings in the quarter were $173.2 million, compared to $183.0 million in the first quarter of 2017. Diluted EPS were $1.67 in the quarter, a decrease of 4.6% compared to $1.75 in the same period in 2017. Adjusted EPS (excluding amortization, restructuring charges and special items) were $2.78 in the quarter, an increase of 30.5% compared to $2.13 in the first quarter of 2017.
Operating cash flow for the quarter was $154.7 million, compared to $225.9 million in the first quarter of 2017. The reduction in operating cash flow was driven by the one-time bonus payment related to tax reform and higher working capital to support growth, partially offset by higher cash earnings. Capital expenditures totaled $72.5 million, compared to $72.2 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $82.2 million, compared to $153.7 million in the first quarter of 2017.
At the end of the quarter, the Company’s cash balance and total debt were $361.8 million and $6.8 billion, respectively. During the quarter, the Company repurchased $75.0 million of stock representing approximately 0.4 million shares. On April 24, 2018, the board authorized an increase in the Company’s share repurchase program to a total of $1.0 billion.
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The following segment results have been restated in this press release as if the Company had adopted ASC 606 on January 1, 2017, and exclude amortization, restructuring charges, special items and unallocated corporate expenses.
First Quarter Segment Results
LabCorp Diagnostics
Revenue for the quarter was $1.77 billion, an increase of 8.0% over $1.64 billion in the first 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 lower Medicare reimbursement as a result of the implementation of the Protecting Access to Medicare Act (PAMA), and the impact from adverse weather. Total volume (measured by requisitions) increased by 6.9%, of which organic volume was 3.0% and acquisition volume was 3.9%. Revenue per requisition increased by 0.7%.
Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $364.0 million, or 20.6% of revenue, compared to $341.8 million, or 20.8%, in the first quarter of 2017. The increase in operating income was primarily due to strong revenue growth, as the negative impact of adverse weather was largely offset by a favorable legal settlement. The decline in operating margin was due to the negative impact from PAMA, partially offset by strong revenue growth.
Covance Drug Development
Revenue for the quarter was $1.08 billion, an increase of 39.3% over $0.77 billion in the first quarter of 2017. The increase was primarily due to acquisitions, as well as organic growth and the benefit from foreign currency translation of approximately 390 basis points.
Adjusted operating income (excluding amortization, restructuring charges and special items) for the quarter was $108.0 million, or 10.0% of revenue, compared to $68.1 million, or 8.8%, in the first quarter of 2017. The increase in operating income was due to organic demand, LaunchPad savings and acquisitions. The Company remains on track to deliver $150 million of net savings from LaunchPad and $30 million of cost synergies from the integration of Chiltern by the end of 2020.
Net orders and net book-to-bill during the trailing twelve months were $4.84 billion and 1.29, respectively. Backlog at the end of the quarter was $9.17 billion, and the Company expects approximately $3.7 billion of this backlog to convert into revenue in the next twelve months.
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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 March 31, 2018 for the remainder of the year, and includes capital allocation.
Revenue growth of 10.0% to 12.0% over 2017 revenue of $10.31 billion, which includes the benefit of approximately 90 basis points of foreign currency translation. This is higher than the prior guidance of 9.5% to 11.5% due to strong organic growth, and a favorable change in currency translation.
Revenue growth in LabCorp Diagnostics of 3.5% to 5.5% 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 higher than the prior guidance of 3.0% to 5.0% primarily due to strong organic growth.
Revenue growth in Covance Drug Development of 21.0% to 25.0% over 2017 revenue of $3.45 billion, which includes the benefit of approximately 230 basis points of foreign currency translation. This is higher than the prior guidance of 20.0% to 24.0% due to a favorable change in currency translation.
Adjusted EPS of $11.30 to $11.70, an increase of approximately 22.2% to 26.5% over 2017 adjusted EPS of $9.25. This guidance is unchanged from prior guidance, but now includes the projected negative impact of $0.20 to $0.30 for the full year in 2018 from ASC 606, offset by strong first quarter results and an improved outlook for the remainder of the year.
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 3095857. A telephone replay of the call will be available through May 9, 2018 and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The access code for the replay is 3095857. A live online broadcast of LabCorp’s quarterly conference call on April 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 April 19, 2019.