BURLINGTON, N.C.--(BUSINESS WIRE)--LabCorp® (or the “Company”) (NYSE: LH) today announced results for the second quarter ended June 30, 2017, and increased 2017 guidance.
“We delivered a record quarter of revenue, adjusted operating income and adjusted EPS, led by outstanding growth in the Diagnostics business through a combination of excellent organic growth and strategic acquisitions,” said David P. King, chairman and CEO. “The Drug Development business performed as we expected, highlighted by our third consecutive quarter of robust net orders and improving book-to-bill. We made great progress on our strategic initiatives with use of our combined data, health system partnerships and expansion into the consumer channel, and we are well positioned for growth in the balance of 2017 and in the years ahead.”
Consolidated Results
Second Quarter Results
Net revenue for the quarter was $2.50 billion, an increase of 4.9% compared to $2.38 billion in the second quarter of 2016. The increase in net revenue was due to growth from acquisitions of 3.6%, and organic growth (net revenue growth less revenue from acquisitions for the first twelve months after the close of each acquisition) of 1.9%, partially offset by the impact of foreign currency translation of approximately 60 basis points. In addition, revenue growth was negatively impacted by approximately 1% due to the year-over-year comparison to Leap Year and the timing of the Easter holiday.
Operating income for the quarter was $336.0 million, or 13.4% of net revenue, compared to $365.5 million, or 15.3%, in the second quarter of 2016. The decline in the Company’s operating income was due to restructuring charges and special items of $49.9 million in the quarter, compared to $14.5 million during the same period in 2016. The Company’s operating income benefited from price, mix, acquisitions and productivity, partially offset by higher personnel costs. Adjusted operating income (excluding amortization of $51.4 million, restructuring charges and special items) for the quarter was $437.3 million, or 17.5% of net revenue, compared to $425.3 million, or 17.9%, in the second quarter of 2016. The 40 basis point decline in the Company’s operating margin was due to the impact from the year-over-year comparison to Leap Year and the timing of the Easter holiday.
Net earnings in the quarter were $188.6 million, compared to $204.1 million in the second quarter of 2016. Diluted EPS were $1.82 in the quarter, a decrease of 7.1% compared to $1.96 in the same period in 2016. Adjusted EPS (excluding amortization, restructuring charges and special items) were $2.47 in the quarter, an increase of 4.7% compared to $2.36 in the second quarter of 2016.
Operating cash flow for the quarter was $310.7 million, compared to $349.5 million in the second quarter of 2016. The decline in operating cash flow was due to higher working capital requirements. Capital expenditures totaled $69.3 million, compared to $67.0 million a year ago. As a result, free cash flow (operating cash flow less capital expenditures) was $241.4 million, compared to $282.5 million in the second quarter of 2016.
At the end of the quarter, the Company’s cash balance and total debt were $299.9 million and $6.1 billion, respectively. During the quarter, the Company invested $416.2 million in acquisitions, and repurchased $108.0 million of stock representing approximately 0.8 million shares. The Company had $489.5 million of authorization remaining under its share repurchase program at the end of the quarter.
Year-To-Date Results
Net revenue was $4.91 billion, an increase of 4.9% over last year’s $4.68 billion. The increase in net revenue was due to growth from acquisitions of 3.2%, and organic growth of 2.2%, partially offset by the impact of foreign currency translation of approximately 50 basis points.
Operating income was $668.7 million, or 13.6% of net revenue, compared to $665.0 million, or 14.2%, in the first half of 2016. The Company recorded restructuring charges and special items of $60.9 million in the first half of the year, compared to $43.8 million during the same period in 2016. The Company’s operating income benefited from price, mix, acquisitions and productivity, partially offset by higher personnel costs. Adjusted operating income (excluding amortization of $99.0 million, restructuring and special items) was $828.6 million, or 16.9% of net revenue, compared to $798.4 million, or 17.1%, in the first half of 2016.
Net earnings in the first half of 2017 were $380.8 million, or $3.66 per diluted share, compared to $368.2 million, or $3.54 per diluted share, last year. Adjusted EPS (excluding amortization, restructuring and special items) were $4.69, an increase of 6.3% compared to $4.41 in the first half of 2016.
Operating cash flow was $544.5 million, compared to $477.1 million in the first half of 2016. The increase in operating cash flow was primarily due to higher cash earnings and lower working capital usage. Capital expenditures totaled $141.5 million, compared to $138.4 million in the first half of 2016. As a result, free cash flow (operating cash flow less capital expenditures) was $403.0 million, compared to $338.7 million in the first half of 2016.
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The following segment results exclude amortization, restructuring charges, special items and unallocated corporate expenses.
Second Quarter Segment Results
LabCorp Diagnostics
Net revenue for the quarter was $1.80 billion, an increase of 8.4% over $1.66 billion for the second quarter of 2016. The increase in net revenue was driven by acquisitions, organic volume (measured by requisitions excluding requisitions from acquisitions for the first twelve months after the close of each acquisition), price and mix, partially offset by the impact of foreign currency translation of approximately 30 basis points. Total volume (measured by requisitions) increased by 5.0%, of which organic volume was 1.9% and acquisition volume was 3.1%. Volume was negatively impacted by approximately 1.5% due to the year-over-year comparison to Leap Year and the timing of the Easter holiday. Revenue per requisition increased by 3.6%.
Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $375.0 million, or 20.8% of net revenue, compared to $355.3 million, or 21.4%, in the second quarter of 2016. The increase in operating income was primarily due to strong revenue growth and the LaunchPad business process improvement initiative, partially offset by higher personnel costs. LaunchPad remains on track to deliver net savings of $150 million through the three-year period ending in 2017. The 60 basis point decline in operating margin was due to the unfavorable impact from the year-over-year comparison to Leap Year and the timing of the Easter holiday.
Covance Drug Development
Net revenue for the quarter was $699.7 million, a decline of 3.1% from $722.4 million in the second quarter of 2016. Excluding the negative impact of foreign currency translation of 140 basis points, revenue in the quarter declined by 1.7% year over year. The decline in revenue is primarily due to the previously discussed cancellation by sponsors of two large clinical studies in late 2016.
Adjusted operating income (excluding amortization, restructuring and special items) for the quarter was $95.1 million, or 13.6% of net revenue, compared to $107.6 million, or 14.9%, in the second quarter of 2016. The decline in operating income and margin were primarily due to lower revenue and increased personnel costs, including targeted strategic investments to support growth, partially offset by price, mix, cost synergies, and initial LaunchPad savings. 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.
Net orders and net book-to-bill during the trailing twelve months were $3.44 billion and 1.23, respectively. Backlog at the end of the quarter was $5.53 billion, and the Company expects approximately $2.1 billion of this backlog to convert into revenue in the next twelve months.
