LabCorp Earnings Top, View Up; Covance Integration Goes On - Analyst Blog

Laboratory Corporation of America HoldingsLH , or LabCorp, released consolidated second-quarter 2015 results including Covance, which it acquired in Feb 2015. The company reported a solid quarter with adjusted earnings per share (EPS) of $2.09, up 13.6% from the year-ago quarter. Adjusted EPS also surpassed the Zacks Consensus Estimate of $2.03.

On a reported basis, LabCorp's net earnings came in at $168.4 million or $1.64 per share for the quarter against $141.3 million or $1.64 per share a year ago.

Net revenue for the second quarter increased a significant 46.3% year over year to $2.218 billion, almost in line with the Zacks Consensus Estimate. Apart from strong organic volume growth and tuck-in acquisitions, the year-over-year top-line improvement was primarily driven by the Covance acquisition which contributed $620.8 million to LabCorp's revenues, driving 40.9% year-over-year net revenue growth. However, these were partially offset by adverse foreign currency movement.

Organic revenues grew 5.4% year over year, of which Beacon LBS, the company's technology-enabled solution providing point-of-care decision support, contributed 1.1%.

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 $1.58 billion, up 5.4% year over year fueled by organic volume growth (4.7%), measured by requisitions, Beacon LBS and tuck-in acquisitions, and partially offset by unfavorable foreign currency translation. The company reported poor revenue per requisition (up 0.2%) and unfavorable currency impact of 0.7%.

Covance Drug Development, however, reported a 2.7% decline in net revenue to $643.7 million in the second quarter of 2015. According to LabCorp, the strengthening U.S. dollar negatively impacted year-over-year revenue growth by approximately 450 basis points (bps). At Constant Exchange Rate (CER), net revenue increased 1.8% year over year on increased volume, partially offset by mix.

Gross margin fell 336 bps to 34.1% in the quarter. Adjusted operating income increased 41.2% year over year to $382.2 million. Despite that, adjusted operating margin contracted 100 bps from the year-ago quarter to 16.8% due to a 31.7% surge in selling, general and administrative expenses to $392.4 million.

LabCorp exited the reported quarter with cash and cash equivalents of $619 million compared with $580.0 million at the end of 2014. Operating cash flow for the quarter was $396.7 million, a huge 91.2% surge from the year-ago equivalent of $207.4 million, driven by the acquisition of Covance as well as improved earnings and working capital. Free cash flow came in at $327.6 million, up from $159.3 million in the second quarter of 2014.

Outlook Updated

LabCorp announced an update on its earlier provided 2015 financial outlook. Based on the foreign exchange rates effective as of Jun 30, 2015, revenue growth is expected in the range of 40% to 42% (narrower than the earlier guided band of approximately 39% to 42%) over 2014. This includes the 190 bps impact of unfavorable foreign exchange headwind resulting from the strengthening of the dollar. The current Zacks Consensus Estimate for revenues is pegged at $8.462 billion.

Adjusted EPS guidance for 2015 has been increased to the range of $7.75−$8.00 from the earlier provided $7.55−$7.90. The current Zacks Consensus Estimate of $7.76 falls close to the lower end of the guided range.

In addition, operating cash flow, free cash flow and capital expenditures are expected in the bands of $990−$1,015 million (earlier $1,045−$1,070 million), $695−$745 million (unchanged) and $270−$295 million ($325−$350 million), respectively.

Our Take

LabCorp, with its first full quarter of consolidated results since the acquisition of Covance, delivered better-than-expected results with respect to earnings, while revenues just managed to meet the mark. According to the company, this has been a strong quarter with respect to solid organic revenue growth 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. However, strengthening of the dollar continues to weigh on year-over-year revenue performance.

Zacks Rank

LabCorp currently carries a Zacks Rank #3 (Hold). Some of the better-ranked stocks in the sector are AmerisourceBergen Corp. ABC , Cardinal Health, Inc. CAH and DENTSPLY International Inc. XRAY . All the three stocks carry a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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