Laboratory Corporation of America Holdings LH or LabCorp released consolidated first-quarter 2016 results, including that of Covance, which it acquired in Feb 2015. The company reported a solid quarter with adjusted earnings per share (EPS) of $2.02, up 14.8% from the year-ago quarter. Adjusted EPS also exceeded the Zacks Consensus Estimate by 3.1%.
On a reported basis, LabCorp’s net earnings came in at $160.2 million or $1.55 per share against $3.1 million or 4 cents per share a year ago.
Net revenue for the first quarter increased a significant 29.5% year over year to $2.3 billion, edging past the Zacks Consensus Estimate of $2.19 billion. Apart from strong organic volume growth, price, mix and tuck-in acquisitions, the year-over-year top-line improvement was primarily driven by the Covance acquisition which contributed $687.3 million to LabCorp’s revenues, driving 23.7% year-over-year net revenue growth. However, these positives were partially offset by adverse currency exchange movement.
Quarter Under Review
With the inclusion of Covance, currently, LabCorp reports under two operating segments: LabCorp Diagnostics (LabCorp’s legacy business, except for its clinical trial services business, which is now part of Covance Drug Development; and includes the nutritional chemistry and food safety business, previously part of Covance), and Covance Drug Development (Covance’s legacy business, except for its nutritional chemistry and food safety business, which is now part of LabCorp Diagnostics; and includes LabCorp’s legacy clinical trial services business).
In the reported quarter, LabCorp Diagnostics reported net revenue of $1.59 billion, up 7.2% year over year, fueled by organic volume growth of 3.4% (measured by requisitions), Beacon LBS, price, mix and tuck-in acquisitions, partially offset by unfavorable foreign currency translation. The company reported a 2.7% increase in revenue per requisition in the quarter.
Covance Drug Development, however, reported a 12.6% rise in net revenue to $703.1 million in the first quarter of 2016. According to LabCorp, the strengthening U.S. dollar negatively impacted year-over-year revenue growth by approximately 160 basis points (bps). At Constant Exchange Rate (CER) and excluding the impact of the expiration of the Sanofi site support agreement, net revenue increased 17.9% year over year on increased demand.
Gross margin fell 203 bps to 32.8% in the quarter. Adjusted operating income surged 99.8% year over year to $365.4 million. Accordingly, adjusted operating margin expanded 523 bps from the year-ago quarter to 15.4% on a 6.9% decline in selling, general and administrative expenses to $412 million.
LabCorp exited the first quarter with cash and cash equivalents of $696.3 million compared with $716.4 million at the end of 2015. Operating cash flow for the quarter was $123 million, comparing favorably with an operating cash outflow of $86.9 million in the year-ago quarter. Free cash flow came in at $51.6 million, significantly up from negative free cash flow of $120.7 million in the first quarter of 2015.
LabCorp updated its 2016 financial outlook. Taking into consideration the foreign exchange rates effective as of Mar 31, 2016, net revenue growth expectation has been raised to the range of 8.5% to 10.5% over 2015 (from the earlier expectation of 7.5% to 9.5%). This includes a 40 bps impact from unfavorable foreign exchange headwind (earlier expectation was 100 bps) resulting from the strengthening of the dollar. The current Zacks Consensus Estimate for revenues is pegged at $9.25 billion.
Adjusted EPS guidance for 2016 has also been raised to the range of $8.55−$8.95 (earlier $8.45−$8.85). The current Zacks Consensus Estimate of $8.70 falls above the mid-point of the guided range.
Free cash flow is expected in the band of $900−$950 million (up 24%–31% over the prior year) (unchanged).
LabCorp’s consolidated first-quarter earnings and revenues managed to exceed the respective Zacks Consensus Estimate. This has been a strong quarter with respect to organic volume growth in LabCorp Diagnostics, accelerated revenue growth in Covance Drug Development and operating leverage. We believe that with the integration of Covance, LabCorp is perfectly positioned to drive long-term profitable growth through a combination of world-class diagnostics, drug development expertise and knowledge services. Although the strengthening of the dollar continues to weigh on the company’s year-over-year performance, the raised 2016 outlook is a firm indication that the scenario is going to rebound down the line.
LabCorp currently carries a Zacks Rank #3 (Hold). Some of the better-ranked stocks in the sector are Becton, Dickinson and Company BDX, The Cooper Companies Inc. COO and Henry Schein, Inc. HSIC. All the three stocks hold a Zacks Rank #2 (Buy).
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