Laboratory Corporation of America Holdings (LH) reported net earnings of $148 million or $1.53 per share in the third quarter of 2012, higher than net earnings of $134.3 million or $1.31 per share in the year-ago quarter. However, after taking into account amortization, restructuring and other special charges, adjusted earnings of $1.76 per share in the reported quarter surpassed the Zacks Consensus Estimate by a couple of cents, and was also higher than adjusted earnings of $1.61 in the third quarter of 2011.
Difficult economic scenario continued to adversely affect LabCorp. Revenues increased 1.1% year over year to $1,419.4 million, but were way below the Zacks Consensus Estimate of $1,440 million. The low-volume-growth environment is reflected in a mere 1.4% growth in testing volume (measured by requisitions), while revenue per requisition dropped 0.3%.
LabCorp’s peer, Quest Diagnostics (DGX) also experienced the brunt of economic challenges with third-quarter testing volume dropping by 1.1% accompanied by a 1% decline in revenue per requisition. Quest Diagnostics reported its third quarter results yesterday.
Gross margin during the quarter declined 130 basis points (bps) to 39.2%. Adjusted operating income declined 1.7% year over year to $258.9 million in the reported quarter, resulting in an operating margin of 18.2%, lower by 60 bps. Lower gross margin along with a 1.3% rise in selling, general and administrative expenses led to a drop in operating margin.
LabCorp exited the quarter with cash and short-term investments of $466 million compared with $159.3 million at the end of December 2011. At quarter end LabCorp had no borrowings outstanding under the $1.0 billion revolving credit facility. Operating cash flow for the quarter was $203.8 million.
The company has been using its cash to make strategic acquisitions as well as reward its shareholders through share repurchases. LabCorp in July 2012 acquired Medtox Scientific, thereby strengthening its foothold in the field of toxicology.
During the quarter, LabCorp repurchased 1.4 million shares for $127.8 million and was left with $204 million of authorization under the previously approved share repurchase plan. A consistent share buyback program led to a 5.3% decline in the outstanding share count, thereby having a positive effect on the earnings per share.
LabCorp updated its guidance for 2012 and expects 2.5% revenue growth (previous guidance of 2−3% revenue growth) resulting in adjusted earnings of $6.88−$6.93 ($6.80−$7.00) in the said fiscal. In addition, guidance for operating cash flow and capital expenditure were lowered to $915 million ($950 million) and $145 million ($155 million), respectively.
We were expecting a subdued quarter from LabCorp as the adverse macroeconomic situation has dealt a blow to industry volumes at large. We remain concerned about pricing going ahead, which might be affected by contract renewals amidst a tough competitive and economic scenario. We nonetheless appreciate the company’s focus on strategic initiatives to spur growth.
The company is focusing more on the high-margin esoteric testing business, which is expected to contribute 45% of total sales in the next 3–5 years. LabCorp is also paying due attention to IT initiatives to improve physician and patient experience.
We currently have a ‘Neutral’ recommendation on LabCorp over the long term. The stock retains a Zacks #3 Rank (‘Hold’) in the short term.
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