Laboratory Corporation of America® Holdings Announces 2016 Second Quarter Results and Raises 2016 Guidance

  • Q2 Net revenue of $2.4 billion, up 7% over last year
  • Q2 Diluted EPS of $1.91; Q2 Adjusted EPS of $2.31, up 11% over last
    year
  • 2016 Adjusted EPS guidance raised to $8.60 – $8.95, up 9% to 13% over
    2015

BURLINGTON, N.C.–(BUSINESS WIRE)–Laboratory Corporation of America® Holdings (LabCorp®)
(NYSE: LH) today announced results for the quarter ended June 30, 2016.

“Continued strong revenue growth and double-digit adjusted EPS growth
demonstrate the soundness of our strategy,” said David P. King, chairman
and chief executive officer. “Our results reflect our customers’ growing
enthusiasm for our differentiated offering as we improve health and
improve lives around the globe by delivering world class diagnostics,
bringing innovative medicines to patients faster and changing the way
care is provided.”

Consolidated Results

Second Quarter Results

Net revenue for the quarter was $2.38 billion, an increase of 7.4% over
last year’s $2.22 billion. The increase in net revenue was primarily due
to solid organic growth in both segments and tuck-in acquisitions,
partially offset by the negative impact of foreign currency translation.
Organic revenue growth in the quarter, excluding currency, was 6.4%.

Operating income for the quarter was $366.9 million, compared to $323.3
million in the second quarter of 2015. The Company recorded
restructuring charges and special items of $14.5 million in the quarter,
compared to $23.1 million during the same period in 2015. Adjusted
operating income (excluding amortization of $45.3 million, restructuring
and special items) for the quarter was $426.7 million, or 17.9% of net
revenue, compared to $391.0 million, or 17.6%, in the second quarter of
2015. The increase in adjusted operating income and margin was primarily
due to strong revenue growth, partially offset by personnel costs.

Net earnings in the quarter were $198.2 million, or $1.91 per diluted
share, compared to $169.8 million, or $1.66 per diluted share, last
year. Adjusted EPS (excluding amortization, restructuring and special
items) were $2.31 in the quarter, an increase of 10.5% compared to $2.09
in the second quarter of 2015.

Operating cash flow for the quarter was $343.6 million, compared to
$396.7 million last year. The decrease in operating cash flow was
primarily due to greater working capital requirements, partially offset
by increased earnings. Capital expenditures totaled $67.0 million,
compared to $69.1 million in the second quarter of 2015. As a result,
free cash flow (operating cash flow less capital expenditures) was
$276.6 million, compared to $327.6 million in the second quarter of 2015.

At the end of the quarter, the Company’s cash balance and total debt
were $639.6 million and $6.1 billion, respectively. During the quarter,
the Company invested $50.8 million in tuck-in acquisitions and paid down
$338.7 million of debt.

Year-To-Date Results

The following year-to-date consolidated results of the Company include
Covance as of February 19, 2015; prior to February 19, 2015, these
consolidated results exclude Covance.

Net revenue was $4.68 billion, an increase of 17.2% over last year’s
$3.99 billion. The increase was primarily due to the inclusion of
Covance’s financial results for the entire first half of the year as
well as solid organic growth in both segments and tuck-in acquisitions.

Operating income was $668.8 million, compared to $455.7 million in the
first half of 2015. The Company recorded restructuring charges and
special items of $43.8 million in the first half of the year, compared
to $161.8 million during the same period in 2015. Adjusted operating
income (excluding amortization of $89.6 million, restructuring and
special items) was $802.2 million, or 17.2% of net revenue, compared to
$693.2 million, or 17.4%, in the first half of 2015. The increase in
adjusted operating income was primarily due to strong revenue growth,
partially offset by personnel costs. The decline in margin was due to
the mix impact from the inclusion of Covance’s financial results for the
entire first half of the year.

Net earnings in the first half of 2016 were $358.4 million, or $3.46 per
diluted share, compared to $172.9 million, or $1.76 per diluted share,
last year. Adjusted EPS (excluding amortization, restructuring and
special items) were $4.33, compared to $3.85 in the first half of 2015.

Operating cash flow was $466.6 million, compared to $309.8 million in
the first half of 2015. The Company’s operating cash flow was negatively
impacted by $153.5 million last year due to non-recurring items relating
to the acquisition of Covance. Excluding these items, operating cash
flow was $463.3 million last year. Capital expenditures totaled $138.4
million, compared to $102.9 million in the first half of 2015. As a
result, free cash flow (operating cash flow less capital expenditures)
was $328.2 million, compared to $206.9 million in the first half of
2015. Excluding non-recurring items, free cash flow was $360.4 million
last year.

***

The following segment results exclude amortization, restructuring,
special items and unallocated corporate expenses. Reconciliations of
segment results to historically reported results are included in the
Condensed Pro Forma Segment Information tables and notes.

Segment Results

LabCorp Diagnostics

Net revenue for the quarter was $1.66 billion, an increase of 5.4% over
last year’s $1.58 billion. The increase in net revenue was the result of
organic volume growth (measured by requisitions), price, mix and tuck-in
acquisitions, partially offset by the negative impact of foreign
currency translation of 0.3%. Total volume (measured by requisitions)
increased by 2.1% (organic volume of 1.2% and acquisition volume of
0.9%). Revenue per requisition increased by 3.5%.

Adjusted operating income (excluding amortization, restructuring and
special items) for the quarter was $356.5 million, or 21.5% of net
revenue, compared to $337.0 million, or 21.4%, in the second quarter of
2015. The increase was primarily due to price, mix, organic volume,
tuck-in acquisitions and the Company’s LaunchPad business process
improvement initiative, partially offset by personnel costs. LaunchPad
remains on track to deliver net savings of $150 million through the
three-year period ending in 2017.

Covance Drug Development

Net revenue for the quarter was $722.4 million, an increase of 12.2%
over last year’s $643.7 million. The increase in net revenue was
primarily due to broad-based demand, partially offset by the negative
impact of foreign currency translation of approximately 70 basis points.
Excluding the impact from currency and the expiration of the Sanofi site
support agreement, net revenue increased 16.4% year over year.

Adjusted operating income (excluding amortization, restructuring and
special items) was $107.7 million, or 14.9% of net revenue, compared to
$89.9 million, or 14.0%, in the second quarter of 2015. The increase was
primarily due to strong revenue growth and cost synergies, partially
offset by the expiration of the Sanofi site support agreement and
personnel costs. The Company remains on track to deliver cost synergies
of $100 million related to the acquisition of Covance through the
three-year period ending in 2017.

During the quarter, net orders (gross orders less cancellations and
reductions) were $818 million, representing a net book-to-bill of 1.13,
and a trailing twelve month net book-to-bill of 1.17.

Outlook for 2016

The following updated guidance assumes foreign exchange rates effective
as of June 30, 2016 for the remainder of the year:

  • Net revenue growth of 9.5% to 10.5% over 2015 net revenue of $8.51
    billion, which includes the impact from approximately 50 basis points
    of negative currency. This is an increase from prior guidance of 8.5%
    to 10.5%, which included approximately 40 basis points of negative
    currency.
  • Net revenue growth in LabCorp Diagnostics of 4.5% to 5.5% over 2015
    pro forma revenue of $6.21 billion, which includes the impact from
    approximately 10 basis points of negative currency. This is an
    increase from prior guidance of 4.0% to 5.5%, which included
    approximately 20 basis points of negative currency.
  • Net revenue growth in Covance Drug Development of 7.0% to 9.0% over
    2015 pro forma revenue of $2.63 billion, which includes the impact
    from approximately 110 basis points of negative currency. This is an
    increase from prior guidance of 6.0% to 9.0%, which included
    approximately 50 basis points of negative currency. Excluding the
    impact from currency and the expiration of the Sanofi site support
    agreement, net revenue is expected to increase approximately 11% to
    13%.
  • Adjusted EPS of $8.60 to $8.95, versus prior guidance of $8.55 to
    $8.95, and as compared to $7.91 last year.
  • Free cash flow (operating cash flow less capital expenditures) of $900
    million to $950 million, an increase of approximately 24% to 31% over
    the prior year, 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,
and Free Cash Flow. 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 its Current Report on Form 8-K that will
include additional information on its business and operations. This
information will also be available on 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 43356831. A
telephone replay of the call will be available through August 3, 2016
and can be heard by dialing 855-859-2056 (404-537-3406 for international
callers). The access code for the replay is 43356831. A live online
broadcast of LabCorp’s quarterly conference call on July 27, 2016 will
be available at http://www.labcorp.com/
or at http://www.streetevents.com/
beginning at 9:00 a.m. Eastern Time. This webcast will be archived and
accessible continuing through August 26, 2016.

About LabCorp®

Laboratory Corporation of America® Holdings (NYSE: LH), an S&P 500
company, is the world’s leading healthcare diagnostics company,
providing comprehensive clinical laboratory and end-to-end drug
development services. With a mission to improve health and improve
lives, LabCorp delivers world-class diagnostic solutions, brings
innovative medicines to patients faster and develops technology-enabled
solutions to change the way care is provided. With net revenue in excess
of $8.5 billion in 2015, LabCorp’s 50,000 employees serve clients in 60
countries. To learn more about LabCorp visit www.labcorp.com
and to learn more about Covance Drug Development visit www.covance.com.

This press release contains forward-looking statements including with
respect to estimated 2016 guidance and the impact of various factors on
operating results. Each of the forward-looking statements is subject to
change based on various important factors, including without limitation,
competitive actions in the marketplace, adverse actions of governmental
and other third-party payers and the results from the Company’s
acquisition of Covance.
Actual results could differ materially
from those suggested by these forward-looking statements. Further
information on potential factors that could affect LabCorp’s operating
and financial results is included in the Company’s Form 10-K for the
year ended December 31, 2015, including in each case under the heading
risk factors, and in the Company’s other filings with the SEC, as well
as in the risk factors included in Covance’s filings with the SEC.
The
information in this press release should be read in conjunction with a
review of the Company’s filings with the SEC including the information
in the Company’s Form 10-K for the year ended December 31, 2015, and
subsequent Forms 10-Q, under the heading MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions, except per share data)
       
 
For the Three Months Ended For the Six Months Ended
June 30 June 30
 
2016 2015 2016 2015
 
Net revenues $ 2,382.0 $ 2,218.7 $ 4,677.2 $ 3,991.0
Reimbursable out-of-pocket expenses   48.7     50.4     121.5     71.3  
Total revenues 2,430.7 2,269.1 4,798.7 4,062.3
 
Net cost of revenues 1,555.2 1,446.0 3,073.1 2,593.2
Reimbursable out-of-pocket expenses   48.7     50.4     121.5     71.3  
Total cost of revenues 1,603.9 1,496.4 3,194.6 2,664.5
 
Gross profit 826.8 772.7 1,604.1 1,397.8
 
Selling, general and administrative expenses 408.0 390.5 819.9 832.8
Amortization of intangibles and other assets 45.3 44.6 89.6 75.7
Restructuring and other special charges   6.6     14.3     25.8     33.6  
 
Operating income 366.9 323.3 668.8 455.7
 
Other income (expense):
Interest expense (53.5 ) (57.9 ) (108.0 ) (162.2 )
Equity method income, net 1.9 2.9 3.3 5.6
Investment income 0.4 0.3 0.9 0.9
Other, net   (2.4 )   (2.3 )   4.3     (1.2 )
 
Earnings before income taxes 313.3 266.3 569.3 298.8
 
Provision for income taxes   114.8     96.2     210.3     125.3  
 
Net earnings 198.5 170.1 359.0 173.5
Less: Net earnings attributable to the noncontrolling
interest   (0.3 )   (0.3 )   (0.6 )   (0.6 )
 
Net earnings attributable to Laboratory Corporation
of America Holdings $ 198.2   $ 169.8   $ 358.4   $ 172.9  
 
 
Basic earnings per common share $ 1.94   $ 1.69   $ 3.52   $ 1.80  
 
Diluted earnings per common share $ 1.91   $ 1.66   $ 3.46   $ 1.76  
 
 
Weighted average basic shares outstanding 102.2 100.7 101.9 96.3
 
Weighted average diluted shares outstanding 103.9 102.5 103.7 98.1
 
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, except per share data)
         
June 30, December 31,
2016     2015
ASSETS
 
Current assets:
Cash and cash equivalents $ 639.6

 

$

716.4
Accounts receivable, net of allowance for
doubtful accounts of $245.3 and $217.0 at June 30,
2016 and December 31, 2015, respectively 1,314.4 1,217.9
Unbilled services 203.3 156.6
Supplies inventory 189.6 191.0
Prepaid expenses and other 297.2   339.3  
Total current assets 2,644.1 2,621.2
 
Property, plant and equipment, net 1,741.9 1,747.4
Goodwill 6,218.3 6,191.9
Intangible assets, net 3,357.9 3,332.4
Joint venture partnerships and equity method investments 61.7 58.2
Deferred income tax assets 2.0 2.3
Other assets, net 173.1   150.0  
Total assets $ 14,199.0  

 

$

14,103.4  
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
Accounts payable $ 443.5

 

$

497.4
Accrued expenses and other 565.4 633.1
Unearned revenue 175.3 146.1
Current portion of long-term debt 87.4   423.9  
Total current liabilities 1,271.6 1,700.5
 
Long-term debt, less current portion 5,967.6 5,940.3
Deferred income taxes and other tax liabilities 1,310.6 1,260.6
Other liabilities 320.3   323.1  
Total liabilities 8,870.1   9,224.5  
 
Commitments and contingent liabilities
Noncontrolling interest 15.9 14.9
 
Shareholders’ equity:
Common stock 12.1 12.0
Additional paid-in capital 2,088.1 1,974.5
Retained earnings 4,581.4 4,223.0
Less common stock held in treasury (1,011.2 ) (978.1 )
Accumulated other comprehensive income (357.4 ) (367.4 )
Total shareholders’ equity 5,313.0   4,864.0  
Total liabilities and shareholders’ equity $ 14,199.0  

 

$

14,103.4  
 

LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
                         
For the For the For the For the
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, June 30, June 30, June 30,

2016

 

2015

 

2016

 

2015

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings

$

198.5

$

170.1

$

359.0

$

173.5

 
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 125.4 117.6 247.8 219.9
Stock compensation 25.8 27.7 57.6 54.0
(Gain) loss on sale of assets 0.5 1.2 (7.9 ) (0.1 )
Accreted interest on zero-coupon subordinated notes 0.4 0.5 0.9 1.0
Cumulative earnings less than (in excess of)
distributions from equity affiliates (0.1 ) (1.4 ) 0.1 (2.6 )
Asset impairment 14.8
Deferred income taxes 25.1 (22.3 ) 43.3 (4.9 )
Change in assets and liabilities:
(Increase) decrease in accounts receivable, net 6.2 (13.5 ) (99.6 ) (53.8 )
(Increase) decrease in unbilled services (35.7 ) 0.8 (50.4 ) (24.7 )
(Increase) decrease in inventories (1.8 ) 5.3 0.6 9.5
Decrease (increase) in prepaid expenses and other 25.9 22.6 3.4 14.9
Increase (decrease) in accounts payable (20.2 ) 15.1 (54.3 ) (33.8 )
Increase (decrease) in unearned revenue 12.9 (11.5 ) 32.7 2.6
Increase (decrease) in accrued expenses and other   (19.3 )   84.5     (66.6 )   (60.5 )
Net cash provided by operating activities   343.6     396.7     466.6     309.8  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (67.0 ) (69.1 ) (138.4 ) (102.9 )
Proceeds from sale of assets 18.8 0.2 21.3 0.5
Proceeds from sale of investments 12.7 8.0
Investments in equity affiliates (7.8 ) (1.2 ) (9.9 ) (4.8 )
Acquisitions of businesses, net of cash acquired   (50.8 )   (62.2 )   (144.1 )   (3,684.4 )
 
Net cash used for investing activities   (106.8 )   (132.3 )   (258.4 )   (3,783.6 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes offerings 2,900.0
Proceeds from term loan 1,000.0
Payments on term loan (85.0 ) (160.0 )
Proceeds from revolving credit facilities 60.0
Payments on revolving credit facilities (60.0 ) (60.0 )
Proceeds from bridge loan 400.0
Payments on bridge loan (400.0 )
Payments on senior notes (325.0 ) (325.0 ) (250.0 )
Payment on zero-coupon subordinated notes (13.7 ) (13.7 )
Debt issuance costs 0.4 (36.7 )
Payments on long-term lease obligations (1.5 ) (1.0 ) (3.0 ) (2.2 )
Noncontrolling interest distributions (0.3 ) (1.6 )
Deferred acquisition costs 4.0 (0.1 ) (5.8 ) (0.1 )
Tax benefit adjustments related to stock based compensation 5.9 1.4 10.5 3.9
Net proceeds from issuance of stock to employees   28.8     25.5     40.7     56.0  
 
Net cash (used for) provided by financing activities   (301.8 )   (118.8 )   (297.9 )   3,510.9  
 
Effect of exchange rate changes on cash and cash equivalents   8.3     27.0     12.9     1.9  
 
Net (decrease) increase in cash and cash equivalents (56.7 ) 172.6 (76.8 ) 39.0
Cash and cash equivalents at beginning of period   696.3     446.4     716.4     580.0  
 
Cash and cash equivalents at end of period

$

639.6

 

$

619.0

 

$

639.6

 

$

619.0

 

 

 

LABORATORY CORPORATION OF AMERICA HOLDINGS
Condensed Combined Non-GAAP Pro Forma Segment Information
(in millions)
       
 
Three Months Ended

June 30,

Six Months Ended

June 30,

2016 2015 2016 2015

LabCorp Diagnostics

Net Revenue $ 1,659.7 $ 1,575.0 $ 3,250.3 $ 3,058.3
 
Adjusted Operating Income $ 356.5 $ 337.0 $ 666.8 $ 626.7
Adjusted Operating Margin 21.5 % 21.4 % 20.5 % 20.5 %
 

Covance Drug Development

Net Revenue $ 722.4 $ 643.7 $ 1,425.5 $ 1,268.3
 
Adjusted Operating Income $ 107.7 $ 89.9 $ 211.0 $ 164.1
Adjusted Operating Margin 14.9 % 14.0 % 14.8 % 12.9 %
 

Consolidated

Net Revenue $ 2,382.0 $ 2,218.7 $ 4,675.6 $ 4,326.7
 
Adjusted Segment Operating Income $ 464.2 $ 426.9 $ 877.8 $ 790.8
Unallocated corporate expense $ (37.5 ) $ (35.9 ) $ (75.6 ) $ (67.3 )
Consolidated Adjusted Operating Income $ 426.7 $ 391.0 $ 802.2 $ 723.5
Adjusted Operating Margin 17.9 % 17.6 % 17.2 % 16.7 %

The Condensed Combined Non-GAAP Pro Forma Segment Information includes
operational information for Covance prior to the acquisition by the
Company, including the period from January 1, 2015 through February 19,
2015. The Covance Drug Development segment amounts as well as the
consolidated amounts are non-GAAP measures. The Consolidated Net Revenue
and Adjusted Segment Operating Income are presented net of inter-segment
transaction eliminations. See the subsequent footnotes for discussion of
the adjustments made for presentation purposes.

Q2 2016 Notes to Condensed Combined Non-GAAP Pro
Forma Segment Information

1) The Condensed Combined Non-GAAP Pro Forma Segment Information for the
periods ended June 30, 2016 and 2015 is presented for the sole purpose
of helping the reader understand the segment presentation of the Company
for the periods ended June 30, 2016 and 2015 as a direct result of its
acquisition of Covance on February 19, 2015. The Condensed Pro Forma
Segment Information has been prepared utilizing historical LabCorp and
Covance financial information and does not reflect what the Company’s
actual results of operations were for the periods ended June 30, 2016
and 2015, nor does it reflect all of the accounting entries that would
normally be presented in pro forma financial statements prepared in
accordance with the guidance contained in ASC 805-10-50 or Regulation
S-X Rule 10-1.

2) The LabCorp Diagnostics segment includes historical LabCorp business
units, excluding its clinical trials operations (which are part of the
Covance Drug Development segment), and including the nutritional
chemistry and food safety operations acquired as part of the Covance
acquisition. The Covance Drug Development segment includes historical
Covance business units, excluding its nutritional chemistry and food
safety operations (which are part of the LabCorp Diagnostics segment),
and including the LabCorp clinical trials operations. Unallocated
corporate expenses represent general management and administrative
expenses that are incurred to support enterprise-wide initiatives. The
cost of all other corporate support functions is charged to the specific
operating segment as consumed.

3) The following table reconciles operating income, as reported by the
Company and by Covance Inc. in their separate filings on Form 10-Q for
the three- and six-month periods ended June 30, 2016 and 2015 and the
Company’s operating income that is expected to be reported in its
Quarterly Report on Form 10-Q for the three- and six-month periods ended
June 30, 2016 and 2015, to total adjusted operating income as presented
below:

  Three Months Ended

June 30,

  Six Months Ended

June 30,

(Dollars in Millions) 2016   2015 2016   2015
 
Covance Inc. – pre-acquisition operating income, as reported $ $ $ $
Operating loss of Covance Inc. for the period January 1, 2015
through February 19, 2015, prepared on its historical basis of
accounting (24.3 )
Add-back restructuring costs and asset impairments 0.9
Acquisition-related costs         53.7  
Covance Inc. – pre-acquisition adjusted operating income,
excluding amortization $ $ $ $ 30.3  
 
LabCorp – operating income, as reported $ 366.9 $ 323.3 $ 668.8 $ 455.7
Acquisition-related costs 4.5 2.9 7.3 116.6
Restructuring and other special charges 6.6 14.3 25.8 33.6
Consulting fees and executive transition expenses 0.4 5.9 4.6 11.6
Wind-down of minimum volume contract operations 1.1 2.7
LaunchPad system implementation costs 1.9 3.4
Amortization of intangibles and other assets   45.3   44.6   89.6   75.7  
LabCorp – adjusted operating income $ 426.7 $ 391.0 $ 802.2 $ 693.2  
 
Total Condensed Combined Non-GAAP Pro Forma Adjusted        
Operating Income, excluding amortization $ 426.7 $ 391.0 $ 802.2 $ 723.5  

Contacts

LabCorp®
Paul Surdez (investors),
336-436-5076
Investor@labcorp.com
or
Pattie
Kushner (media),
336-436-8263
Media@labcorp.com

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