On February 11, 2021 Labcorp (NYSE: LH), a leading life sciences company, reported results for the fourth quarter and year ended December 31, 2020, and full year 2021 guidance (Press release, LabCorp, FEB 11, 2021, View Source [SID1234574894]).
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"Labcorp’s science and innovation throughout the pandemic led to strong performance in the quarter and for the full year. In addition to our leadership in testing, our capabilities are being leveraged to identify variants to the virus through genetic sequencing and to support biotechnology and pharmaceutical companies in developing new therapies and vaccines to fight COVID-19," said Adam Schechter, chairman and CEO, Labcorp.
"We are encouraged about the future of our base business. In the fourth quarter, our base diagnostics business continued to improve as more people focused on managing their health and chronic conditions. Our drug development business also grew and delivered strong quarterly performance, with a book-to-bill of 1.43 on a trailing twelve-month basis driven by strong demand across therapeutic areas.
I want to thank our over 75,000 employees worldwide who have tirelessly served our clients and patients during the pandemic. We are entering 2021 with a renewed commitment to advancing health on a global basis."
Labcorp made substantial progress on its strategic priorities in 2020, which was a transformational year for the company:
Accelerated growth through the power of our platform: Brought Labcorp’s combined science, technology and innovation capabilities to market quickly. Labcorp was the first to receive an FDA Emergency Use Authorization ("EUA") to launch several COVID-19 PCR tests, including the Pixel by Labcorp at-home COVID-19 specimen collection kit for PCR testing, which also received the first EUA to be available through retail without a prescription, and helped bring multiple treatments and vaccines to market in record time. Our science and technology are also being leveraged to genetically sequence thousands of virus samples each week to identify variants that can inform future vaccines and treatments.
Advanced our leadership position in oncology: Expanded Labcorp’s leadership through strategic partnerships in oncology testing, major customer wins in late-stage clinical trials and the addition of leaders in the field to further build our Enterprise Oncology team.
Integrated artificial intelligence, data, digitization and analytics across our business: Increased COVID-19 testing capacity through the use of robotics and technology, and developed proprietary insight and analytics capabilities for clients to improve their operations, guide patient care and support clinical trials across a larger number of programs and therapeutic areas.
Put customers at the center of all that we do: Broadened access of COVID-19 testing to millions of people through hospitals, pharmacies, employers, physicians, drive thrus, and our Pixel by Labcorp at-home collection kit; responded to customer demand by rapidly increasing testing capacity to 275,000 COVID-19 PCR tests per day; delivered test results quickly and more easily through our websites and patient apps; and made testing affordable, charging no upfront out-of-pocket costs to consumers who needed a COVID-19 test.
Evaluated and executed on high-growth opportunities: Focused on deploying shareholder capital to grow the company’s business in diagnostic testing through targeted lab acquisitions, and accelerated wins in clinical trials with the addition of digital and mobile technology capabilities through the acquisitions of GlobalCare and SnapIOT.
Consolidated Results
Fourth Quarter Results
Revenue for the quarter was $4.49 billion, an increase of 52.0% over $2.95 billion in the fourth quarter of 2019. The increase in revenue was due to organic growth of 50.1%, acquisitions of 0.9%, and favorable foreign currency translation of 1.0%. The 50.1% increase in organic revenue includes a 46.4% contribution from COVID-19 Testing and a 3.7% increase in the company’s organic Base Business. "Base Business" includes the company’s business operations except for PCR and antibody COVID-19 testing ("COVID-19 Testing"). The increase in organic Base Business includes the negative impact from lower Medicare and Medicaid pricing as a result of PAMA of (0.6%).
Operating income for the quarter was $1,293.2 million, or 28.8% of revenue, compared to $336.4 million, or 11.4%, in the fourth quarter of 2019. The increase in operating income and margin was primarily due to COVID-19 Testing, organic Base Business growth, acquisitions, and LaunchPad savings, partially offset by the negative impact from PAMA of ($18.3) million and higher personnel costs. The company recorded amortization, restructuring charges, and special items, which together totaled $136.3 million in the quarter, compared to $85.6 million during the same period in 2019. This increase was primarily due to COVID-19 related costs and increased amortization. Adjusted operating income (excluding amortization, restructuring charges, and special items) for the quarter was $1,429.5 million, or 31.8% of revenue, compared to $422.0 million, or 14.3%, in the fourth quarter of 2019.
Net earnings for the quarter were $938.3 million, compared to $227.1 million in the fourth quarter of 2019. Diluted EPS were $9.54 in the quarter, up from $2.32 in the same period in 2019. Adjusted EPS (excluding amortization, restructuring charges, and special items) were $10.56 in the quarter, up from $2.86 in the fourth quarter of 2019.
Operating cash flow for the quarter was $774.6 million, compared to $569.8 million in the fourth quarter of 2019. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital to support growth. In addition, operating cash flow for the fourth quarter of 2020 was reduced by $132.1 million due to the company’s decision to return the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Provider Relief Funds that the company received during the second and third quarters of 2020. Capital expenditures totaled $99.4 million, down from $128.2 million a year ago, despite the expenditures associated with the increase in COVID-19 Testing capacity. As a result, free cash flow (operating cash flow less capital expenditures) was $675.2 million, up from $441.6 million in the fourth quarter of 2019.
At the end of the quarter, the company’s cash balance and total debt were $1.3 billion and $5.8 billion, respectively. During the quarter, the company invested $58.8 million on acquisitions. As of December 31, 2020, the company had $800.0 million of authorization remaining under its share repurchase program.
Full Year Results
Revenue was $13.98 billion, an increase of 21.0% over $11.55 billion last year. The increase in revenue was due to organic growth of 19.0%, acquisitions of 1.8%, and favorable foreign currency translation of 0.4%, partially offset by the disposition of a business of (0.2%). The 19.0% increase in organic revenue includes the 24.1% contribution from COVID-19 Testing, partially offset by the (5.1%) reduction in the company’s organic Base Business due to the pandemic. The decline in organic Base Business includes the negative impact from PAMA of (0.6%).
Operating income was $2.45 billion, or 17.5% of revenue, compared to $1.33 billion, or 11.5%, in 2019. The increase in operating income and margin was primarily due to COVID-19 Testing and LaunchPad savings, partially offset by the negative impact from the pandemic (including the impairments to goodwill and other assets), higher personnel costs, and ($72.1) million from PAMA. The company recorded amortization, restructuring charges, special items, and impairments, which together totaled $886.5 million, compared to $380.6 million in 2019. This increase includes the $437.4 million of COVID-19 related impairments on goodwill and other assets that the company recorded in the first quarter of 2020. In addition, the company recorded $63.9 million of other COVID-19 related costs. Adjusted operating income (excluding amortization, restructuring charges, special items, and impairments) was $3.33 billion, or 23.8% of revenue, compared to $1.71 billion, or 14.8%, in 2019. The $1.62 billion increase in adjusted operating income and 900 basis point increase in adjusted operating margin were primarily due to the increase in COVID-19 Testing and LaunchPad savings, partially offset by the reduction in the Base Business (due to the pandemic) and higher personnel costs.
Net earnings in 2020 were $1,556.1 million, or $15.88 per diluted share, compared to $823.8 million, or $8.35 per diluted share, in 2019. Adjusted EPS (excluding amortization, restructuring charges, special items, and impairments) were $23.94, an increase of 111.5% over $11.32 in 2019.
Operating cash flow was $2.14 billion, compared to $1.44 billion in 2019. The increase in operating cash flow was due to higher cash earnings, partially offset by higher working capital to support growth. Capital expenditures totaled $381.7 million, down from $400.2 million in 2019, despite the expenditures associated with the increase in COVID-19 Testing capacity. As a result, free cash flow (operating cash flow less capital expenditures) was $1.75 billion, compared to $1.04 billion in 2019.
During the year, the company invested $267.6 million on acquisitions, repurchased $100.0 million of stock representing approximately 0.6 million shares, and paid down $412.2 million of debt.
Fourth Quarter Segment Results
The following segment results exclude amortization, restructuring charges, special items, and unallocated corporate expenses. The segments that are now referred to as Diagnostics and Drug Development were formerly referred to as LabCorp Diagnostics and Covance Drug Development.
Diagnostics
Revenue for the quarter was $3.15 billion, an increase of 79.5% over $1.76 billion in the fourth quarter of 2019. The increase in revenue was due to organic growth of 78.5%, acquisitions of 0.9%, and favorable foreign currency translation of 0.1%. The 78.5% increase in organic revenue was due to a 78.0% contribution from COVID-19 Testing and a 0.5% increase in the Base Business, which includes the negative impact from PAMA of (1.0%). This represents the first quarter of 2020 with organic Base Business revenue growth versus prior year.
Total volume (measured by requisitions) increased by 33.9% as organic volume increased by 33.3% and acquisition volume contributed 0.6%. The organic volume growth was due to the 41.0% contribution from COVID-19 Testing demand, partially offset by a (7.7%) reduction in the Base Business volume due to the pandemic. Price / mix increased by 45.5% primarily due to COVID-19 Testing of 37.0% and organic Base Business of 8.2%, which includes the negative impact from PAMA of (1.0%). In the fourth quarter, Diagnostics achieved its highest contribution from COVID-19 Testing volume, as well as the strongest year-over-year volume in the Base Business since the pandemic began in March 2020.
Adjusted operating income for the quarter was $1,234.4 million, or 39.1% of revenue, compared to $277.1 million, or 15.8%, in the fourth quarter of 2019. The $957.3 million increase in adjusted operating income and 2,340 basis point increase in adjusted operating margin were primarily due to the increase in COVID-19 Testing and LaunchPad savings, partially offset by the negative impact from PAMA of ($18.3) million and higher personnel costs. 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. The company continues to develop and execute new LaunchPad programs to support profitable growth in Diagnostics.
Drug Development
Revenue for the quarter was $1.40 billion, an increase of 16.4% over $1.20 billion in the fourth quarter of 2019. The increase in revenue was due to organic growth of 13.1%, acquisitions of 0.9%, and favorable foreign currency translation of 2.3%. The 13.1% increase in organic revenue was due to an 8.4% increase in the Base Business and a 4.7% contribution from COVID-19 Testing performed through its Central Laboratories business. While continuing to be negatively impacted by the pandemic, Drug Development achieved its highest quarter of organic Base Business growth in 2020, benefiting from broad-based demand across all service lines, including COVID-19 vaccine and therapeutic work.
Adjusted operating income for the quarter was $248.4 million, or 17.8% of revenue, compared to $183.2 million, or 15.2%, in the fourth quarter of 2019. The $65.2 million increase in adjusted operating income and 250 basis point increase in adjusted operating margin were primarily due to COVID-19 Testing, organic Base Business demand, and LaunchPad savings, partially offset by higher personnel costs. The company achieved its goal to deliver approximately $150 million of net savings from its three-year Drug Development LaunchPad initiative. While the target was achieved, the company continues to develop and execute new LaunchPad programs to support profitable growth in Drug Development.
Net orders and net book-to-bill during the trailing twelve months were $6.96 billion and 1.43, respectively. Backlog at the end of the quarter was $13.76 billion, compared to $12.46 billion last quarter, and the company expects approximately $4.5 billion of its backlog to convert into revenue in the next twelve months.
Outlook for 2021
The following guidance assumes foreign exchange rates effective as of December 31, 2020 for the full year. Enterprise level guidance includes the estimated impact from currently anticipated capital allocation, including acquisitions and share repurchases.
(1) 2021 Guidance includes a benefit from foreign currency translation of 0.9%.
(2) Enterprise level revenue is presented net of intersegment transaction eliminations, including Drug Development COVID-19 Testing revenue.
(3) 2021 Guidance includes a benefit from foreign currency translation of 0.1%.
(4) 2021 Guidance includes a benefit from foreign currency translation of 2.2%.
(5) Free Cash Flow consists of operating cash flow less capital expenditures.
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 and an identification of the components that comprise "special items" used for certain adjusted financial information 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 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. ET and is available by dialing 877-898-8036 (720-634-2811 for international callers). The conference ID is 7378794. A telephone replay of the call will be available through Feb. 25, 2021, and can be heard by dialing 855-859-2056 (404-537-3406 for international callers). The conference ID for the replay is 7378794. A live online broadcast of Labcorp’s quarterly conference call on Feb. 11, 2021, will be available at Labcorp Investor Relations website beginning at 9:00 a.m. ET. This webcast will be archived and accessible through Jan. 28, 2022.